Immigration Trusts
TAX HOLIDAY
Non-residents relocating to Canada can enjoy tax savings and other benefits for up to five years.
On becoming a resident of Canada, an individual’s worldwide income becomes automatically subjected to Canadian tax. However, there is a specific exception when an immigration trust is used to hold investment assets. An immigration trust set up before establishing residence in Canada will not be taxable in Canada for the first five calendar years of Canadian residency. This type of trust can provide significant benefits to an affluent individual who is relocating to Canada.
Within the past few years, significant tax changes have been proposed in relation to foreign investment entities, including non-resident trusts. However, the protected status enjoyed by immigration trusts has survived, offering new residents to Canada a significant tax saving opportunity in their transition to Canadian tax residency.
TYPE OF TRUST
An immigration trust is simply a non-resident discretionary trust established in a foreign tax jurisdiction to hold assets. A trust is an arrangement among:
The settlor (generally the immigrating individual or a non-Canadian resident relative or friend) who creates the trust by making the initial contribution;
The trustee (generally an offshore trust company) who manages the property for the benefit of the ultimate recipients; and
The beneficiaries (the immigrating individual and his or her family) who are the ultimate recipients of the assets.
LOCATION: BARBADOS
In order for the trust to qualify as a non-resident of Canada, its central management and control must be exercised outside Canada. An offshore trust company is often used to act as trustee of immigration trusts. The immigrating individual must refrain from exercising control over the trust.
Although an immigration trust enjoys a period of tax-free status in Canada, the tax regime in the trust’s country of residence must be considered. Generally, immigration trusts are established in jurisdictions that do not impose taxes on income or capital gains. In addition,the jurisdiction's political stability and accessibility of the jurisdiction are important factors to consider.
A trust established under the International Trusts Act of Barbados is not subject to any form of taxation in Barbados and therefore constitutes an appropriate immigration trust vehicle.
In addition, Barbados offers quality providers of trust services, political stability, a sound banking system, a low crime rate as well as modern communication and airport infrastructures. Its warm climate, welcoming people, gourmet restaurants, acclaimed golf courses and beautiful beaches make you want to visit your trustee more often. Barbados also enjoys excellent relations with Canada and a broad tax treaty network.
FUNDING
Once the trust is established, the immigrating can transfer various foreign assets to the trust, including investment portfolios and real estate. During the first five calendar years of the immigrant’s Canadian residency, income and capital gains can accumulate tax-free in the trust. At the end of this period, if the trust still exists, it loses its tax-free status and is treated in substantially the same manner as a Canadian resident trust.
In consideration of the transfer of his or her assets to the trust, the immigrant may take back a demand promissory note that can be repaid without adverse Canadian tax consequences over the years whenever the immigrant needs funds.
TIMING
An immigration trust can be established prior to the individual becoming a resident of Canada or at any time within the first 60 months of Canadian residency. However, because the 60-month tax-free period commences at the beginning of the year in which Canadian residence is established, the tax-free accumulation of income and capital gains in the trust is maximized when the trust is set up prior to or at the time of becoming a resident of Canada.
TAX-FREE CAPITAL ACCUMULATION
The tax-free income and capital gains earned from assets in the trust are added to the trust capital at the end of the year and may be distributed, together with the original capital, to Canadian beneficiaries in subsequent years, without attracting any Canadian income tax. This can result in substantial investment capital growth over the five-year period.
For example, if $10 million earns 7% annually in an immigration trust, then the capital accumulated after five years will be approximately $14 million. Compare this with the same investment that is taxed annually in Canada at a rate of 48%, which will only grow to approximately $12 million after five years. In this example, the trust allows the immigrant to save approximately $2 million in Canadian taxes.
In addition to the tax savings, immigration trusts can provide other benefits, including creditor protection for trust assets, reduction of taxes and probate fees upon death, as well as privacy and confidentiality of personal financial information.
POST 5-YEAR PLANNING
At the expiration of the tax holiday period, the trust is generally wound up or moved to Canada in order to provide a full step up in the cost basis of the underlying assets. Once this cost step up is accomplished, other estate planning strategies can be explored, such as the purchase of an exempt life insurance policy.
As long as it meets the exempt policy test, a life insurance policy allows for the tax-free accumulation of funds within the policy and entitles the beneficiary to tax-free proceeds on the death of the insured. During the existence of the policy, the policyholder may borrow against the policy without adverse tax consequences and arrange for the loan to be repaid with the death benefit.
COSTS
The legal fees associated with the creation of an immigration trust vary depending on the complexity of the trust and the tax rules of the countries where the assets transferred to the trust are located. Legal fees for setting up the trust and providing Canadian and Barbados opinions generally are in the $15,000 to $25,000 range.
Trustee fees are generally comprised of a setup fee and an annual trust administration fee. Each trust company has its own scale of fees. Setup fees tend to range from $3,000 to $10,000 while minimum annual administration fees tend to range from $2,500 to $10,000. In addition to the minimum administration fee, the trust is generally charged for the time spent by internal and external professionals on the administration and management of its affairs.