When my friend from the private banking division called to refer a new immigration tax client to me and said it was important to make time to see him within 24 hours because he was only here a short time before returning home, I sensed an upcoming formidable challenge.
I met with Ricardo and his wife, Maria, that afternoon to discuss their desire to immigrate to Canada from Europe. Ricardo was concerned about the high taxes in Canada and how to minimize them, while still being free to return to run his European business. Maria had misgivings about the risks, both financial and personal, facing the family on immigration to a new country.
I started by explaining that with proper planning these concerns could be met and the exposure to taxes and other costs minimized. I recommended that before leaving Europe, Ricardo and Maria should consult with a tax expert in their home country regarding exit taxes. Just as in Canada, some countries like the U.S., France and the Netherlands impose departure taxes of one kind or another. It may also be important to time the departure and any asset transfers after the tax return filing date, such as in the case of the U.K. to minimize inheritance tax.
Next, I pointed out that acquiring residence in Canada for tax purposes has important implications for the new immigrant, including the requirement to become taxable on worldwide income regardless of citizenship. While that prospect can be daunting, I explained that with tax holidays and taking advantage of lawful opportunities, the tax burden can be significantly minimized.
For example, because Ricardo and Maria’s home country has a tax treaty with Canada for the avoidance of double taxation (under which both countries agree that if an immigrant develops closer ties with the new country of residence and eliminates or, at least significantly reduces, ties with the country of departure) only the new country of residence, in this case Canada, will have taxing jurisdiction over the immigrants. This news came as a relief to Ricardo, but I cautioned he should confirm with my immigration law partner that he would not thereby jeopardize his Canadian immigration status.
I then introduced the jewel of Canadian tax holidays: the five-year immigration trust.
By establishing a discretionary, family trust in a tax-favoured jurisdiction, an immigrant to Canada can avoid tax on investment income and capital gains from trust assets for up to 60 months after immigration. The following considerations should be made before proceeding:
- timing so as to maximize the tax holiday;
- structure so as to avoid unintended consequences; and
- proper choice of assets to be held in the trust (which generally means liquid assets).
I suggested Ricardo and Maria weigh the costs of set up and maintenance against the benefits of the tax holiday.
Once Ricardo and Maria become Canadian residents, I stressed to them the importance of proper planning for domestic and international assets and income. A key tax consideration for an immigrant while he or she lives in Canada is that there will be a deemed acquisition of assets on acquiring Canadian residence – this resets the cost of assets for Canadian tax purposes.
The immigrant should become familiar with Canadian rules, and seek opportunities to minimize tax lawfully, for example:
- Claiming a corporate tax credit for the Small Business Deduction. A Canadian-controlled private corporation may claim a tax credit on income up to $500,000 to reduce the regular corporate rate from 26.5% to 15.5% (for example, in Ontario);
- Claiming tax deductions and credits for Scientific Research and Experimental Development Expenditures. Eligible R&D expenses can be deducted currently in computing income and generate tax credits of 35% for Canadian-controlled private corporations, including refundable cash credits of up to $3,000,000;
- Participating in lawful tax shelters. For example, individuals can contribute tax-deductible funds for retirement to a registered retirement savings plan. Companies can make tax deductible contributions to registered pension plans for employees, including plans for the owner/manager. In addition, a Canadian resident taxpayer can deduct the cost of his/her investment in certain common shares of resource companies and companies incurring renewable energy and conservation expenses;
- Family discretionary trusts can be used to own shares of business corporations and lawfully defer tax on capital gains. On the sale of certain qualified small business corporation shares, an individual can shelter up to $750,000 from capital gains tax, and through using the family trust can multiply the foregoing exemption. Capital gains generally are only taxed to the extent of one-half; thus, at the top personal marginal tax rate of 46% the net tax rate on capital gains is 23%; and
- Consideration should be given to holding shares of foreign corporations, including those in the country of departure, through a Canadian holding company to minimize Canadian tax on international income.
At the end of the meeting, Ricardo and Maria seemed relieved but somewhat fatigued from the volume of facts and figures. I put all this advice into a written planning memorandum for which they expressed their gratitude as they headed off to pack their bags for the flight home.
Lorne Saltman is a tax partner with the Toronto-based law firm, Cassels Brock & Blackwell LLP. Lorne has been an instructor in the Taxation Section of the Bar Admission Course for the Law Society of Upper Canada. He is a past member of the Executive of the Taxation Committee of the International Bar Association and is currently a member of the Fellows of the American Bar Foundation. He is the Canadian contributor to the book “International Taxation of Electronic Commerce”, published by Kluwer Law International. Lorne has advised clients on, and frequently spoken and published papers on, diverse tax matters, including wealth preservation for high-net worth clients, corporate tax planning, corporate mergers and acquisitions, cross-border financing, captive insurance companies, real estate taxation and the establishment of offshore trusts and private foundations for the Law Society of Upper Canada, the Canadian Bar Association, the American Bar Association, the International Bar Association and other continuing education institutions.