CANADA:
A NON-TRADITIONAL TAX HAVEN
Presented
aT
The Oxford Club & The Sovereign Society
International Investment
Seminar
Bermuda Brain Trust, Bermuda |
 |
In the new John LeCarre book, Single
& Single, the character Alfred Winsor is noted for his
expertise in "legal second passports, alternative citizenships
and non-obligatory residence in more than a dozen climatically
and fiscally attractive countries". While the popular
culture always thinks of small tropical islands as tax havens,
there are several G9 countries, which offer attractive tax
sheltering vehicles to entice businesspeople to reside there.
In the first of a series of articles for Private Wealth
Manager, international immigration lawyer David S. Lesperance
Barrister and Solicitor will examine the use of Canada as
a tax haven.
Whenever I mention to Canadians that
I bring people to Canada as a tax haven, they shake their
heads in disbelief. After all, Canada has a well-deserved
reputation for having some of the highest marginal tax rates
amongst the OECD countries. What most Canadians do not realize
is that Canada has a well-established regime of tax sheltering
to attract new residents that it does not offer to its indigenous
population. With proper pre-immigration tax planning, wealthy
individuals can move to Canada and avoid income and capital
gain tax on their non-Canadian source income and capital
gain producing assets. In addition, since Canada does not
have an estate tax, it is often considered as a favorable
domicile of choice. Furthermore, while Canada does not have
an instant citizenship program it does allow those who have
been permanent residents for three years to acquire a Canadian
passport. Being one of the most treasured travel documents
in the world, the Canadian passport provides visa-free travel
to most countries and allows the holder to take advantage
of the North American Free Trade Agreement to live and work
in the United States. Finally, as a result of the recent
decline in the Canadian dollar, residents can enjoy an excellent
lifestyle, with all the infrastructure of living in the
United States, at only two thirds of the cost.
In looking at Canada as a possible destination,
there are two main considerations; qualifying for permanent
residence and tax planning. I will look at each in turn.
ABILITY TO QUALITY FOR PERMANENT RESIDENCE
There are several paths leading to Permanent
Residence in Canada. Aside from the comments that follow
relating to Entrepreneur Category applicants, the rights,
privileges, and obligations of the status received are the
same, no matter which category the application is made under.
However, the out-of-pocket expense, level of financial disclosure,
and speed of application processing varies greatly amongst
the categories.
a) Family Sponsorship Category
Certain Canadian citizens and Permanent
Residents are entitled to "sponsor" certain foreign
relatives for Permanent Residence in Canada. Relatives that
can be sponsored under the Family category include: fiancées/spouses,
parents, grandparents, all unmarried children up to the
age of 19, certain unmarried children over the age of 19,
and grandchildren (note that grandchildren can only be sponsored
if they are orphaned and the grandparents have custody of
the children in question). To qualify as a sponsor it is
necessary to be over the age of 18, to be resident in Canada,
and to have proof of income sufficient to look after all
of those being sponsored.
b) Independent/Assisted Relative Category
Individuals who fall into this category
base their applications on personal skills and their ability
to contribute to the Canadian economy. Applications are
made according to a point system. The system is designed
so that a twenty-eight year old applicant with five years
experience in computer software design and with employment
already arranged would be assigned more points than a fifty-five
year old factory laborer with no employment arranged. If
the applicant has a close relative that is a Permanent Resident
of Canada or a Canadian Citizen he would be considered an
Assisted Relative and would receive bonus points. The Assisted
Relative category includes brothers/sisters, uncles/aunts,
and nephews/nieces.
c) Self-Employed Category
Self-Employed applicants are those who
have the ability to establish or purchase a business in
Canada that will create employment for them and will make
a significant contribution to the economic, cultural or
artistic life of Canada. There are two types of Self-Employed
applicants. First are those who, on the basis of their managerial
skills, proven business experience, and financial status,
intend to provide employment opportunities for themselves.
The second type of Self-Employed applicants are those persons
who are likely to be successful in Canada in a particular
cultural field as artists, singers, writers, musicians,
athletes, etc. Successful applicants of this kind would
normally have achieved a degree of success in their home
country and have the necessary skills to allow them to pursue
a career in Canada.
WORD OF CAUTION: There are continual
rumors that the Self-Employed category will be eliminated
in the future. Those applicants who may fall into this category
are advised to move swiftly before the door closes.
d) Business Immigration Program
Canada's Business Immigration Program's
main objective is to encourage and facilitate the immigration
of experienced business people. In order to make a successful
application under the Business Immigration Program, a person
must demonstrate that they possess certain asset levels
and business experience. The two categories available under
the Business Immigration Program are the Entrepreneur and
the Investor.
i) Entrepreneur Category
An Entrepreneur applicant is someone
who has the ability to establish, purchase, or make a substantial
investment in a business venture in Canada. This venture,
which the person will manage on an active basis, must result
in the creation or maintenance of employment for one or
more Canadians. The Entrepreneur category accommodates experienced
business people whose background is oriented towards the
management of small to medium sized business ventures. Although
neither the Act nor the Regulations stipulate exact business
investment capital amounts, a minimum net worth of $250,000
USD is usually required to qualify as an Entrepreneur. The
bulk of this net worth must be easily transferable to Canada,
as a minimum of $150,000 to $200,000 USD is required to
provide for capital for the business venture.
In the past, some Entrepreneur applicants
who made their investment prior to landing received unconditional
visas. It is now the policy of Canadian Immigration officials
to apply the "terms and conditions" mentioned
previously to all Entrepreneurs (and accompanying dependants).
These terms and conditions must be met within two years
of arriving in Canada. Entrepreneur Applicants also have
the additional condition of continually reporting to officials
during the two-year period. Conditional visas are designed
to provide all Entrepreneur applicants a chance to establish
in Canada and to consider a number of investments. Once
an Entrepreneur applicant has fulfilled the terms and conditions,
he may then apply to have them removed. However, if the
terms and conditions are not met the Entrepreneur applicant
and his family may be stripped of their Permanent Residence
status and deported. The Entrepreneur condition to be "full-time
actively managing only the Canadian business" may be
unattractive to applicants who wish to spend a significant
amount of time outside of Canada.
ii) Investor Category
The Investor category is designed for
the high net worth businessperson who wishes to invest in
a larger business venture but is prepared to rely on others
to oversee his investment. The Investor category allows
for an investment by a businessperson who possesses a net
worth of approximately $500,000 USD and makes a substantial
investment in an approved project. While the minimum investment
period is five years, the minimum investment amount is approximately
$300,000 USD
The actual out-of-pocket investment may be reduced to
approximately $70,000 USD by using available financing options.
An Investor applicant does not need to live in the province
in which he makes his investment. Nor does he need to become
actively involved in the management of the business venture
to be issued an unconditional Permanent Resident Visa. This
avoids any problems associated with "terms and conditions".
Once permanent residence is secured,
an immigrant then can apply for naturalized Canadian citizenship
after three years of residence.
CANADIAN TAX ISSUES DURING AND AFTER
THREE-YEAR NATURALIZATION PERIOD
Tax planning for new Permanent Residents
of Canada is often a critical part of the process. If appropriate
steps are taken, the impact of Canadian taxation can be
legally minimized or effectively eliminated. The two fundamental
concepts basic to Canadian tax planning are as follows:
a) Canada taxes its residents on their
worldwide income using Canadian Income tax rules and rates.
Canada does not tax Canadian Citizens if they are not resident
in Canada.
b) Canada taxes non-residents of Canada
(including Canadian Citizens who are not resident in Canada)
only on:
i) any employment income earned in Canada;
ii) any business income earned from carrying on a business
in Canada;
iii) capital gains primarily attributable to Canadian real
estate and shares in private Canadian companies; and
iv) certain types of Canadian source investment income such
as interest, rents, dividends and royalties. This is done
by the imposition of a withholding tax at a statutory rate
of twenty-five percent, which may be reduced under applicable
income tax agreements.
A Canadian citizen who departs Canada
and becomes a "non-resident" for tax purposes
will no longer be subject to Canadian taxation other than
as described above. Neither the Canadian federal government
nor any of its provincial governments impose any estate
taxes or succession duties on death.
The income tax imposed on Canadian taxpayers
is computed at a personal level. The Income Tax Act (Canada)
provides for all the usual deductions and credits recognized
in most industrial countries. Business losses and carry
forwards are allowed in calculating "taxable income".
Once taxable income has been determined, the "marginal
tax rate" will apply. The tax rates are progressive
with maximum rates varying from province to province. Capital
gains are taxed at only seventy-five percent of full rates
and dividends received from Canadian corporations by individuals
receive favorable treatment. However, the maximum combined
federal-provincial personal income tax rates generally range
from fifty percent to fifty-eight percent depending on the
province of residence at the end of the calendar year.
The Income Tax Act does allow an immigrant to shelter non-Canadian
source income and capital gain for a period of up to sixty
months after their arrival in Canada. The sixty-month period
commences on January 1 of the calendar year during which
the taxpayer becomes resident in Canada for tax purposes.
Typically, income/capital gain-producing assets that are
situated outside of Canada are transferred into an "offshore
trust". A non-resident financial institution is used
as trustee. All income and capital gains attributable to
such assets that are earned by the trust, escape Canadian
tax during the period that the individual is a Permanent
Resident of Canada and is in the qualification period of
Canadian Citizenship. This "tax holiday" expires
at the end of the sixty-month period. If the trust continues
in place thereafter and the person remains resident in Canada
for tax purposes, the trust itself will become a resident
taxpayer and liable for Canadian taxation on its worldwide
income.
If, however, the Permanent Resident
obtains Canadian Citizenship within the five-year tax holiday
window and then departs Canada after obtaining Canadian
Citizenship, the income and capital gain produced by the
offshore trust will never be taxed by the Canadian government.
Those who choose to remain resident in Canada as Canadian
residents and citizens beyond the five year period, may
choose to reacquire the assets from the offshore trust at
that point for a "stepped up" tax basis. They
will then have a new basis equal to the fair market value
of the assets at the end of the five-year period. In addition,
they may wish to explore one of several other strategies
to extend the "tax holiday" period.
In conclusion, Canada is a very attractive
destination. One must be aware that it is a potentially
high tax country where improper or absent tax advice can
result in high worldwide tax liability. As Canadian Immigration
officials are neither qualified nor obligated to provide
you with any advice relating to the structuring of your
financial or tax affairs, I recommend that you receive proper
written legal advice. Along with tax structuring, this advice
should also set out your ability to qualify for residence,
and help you set up a strategy to ensure that you maintain
your permanent residence and qualify for citizenship. If
properly done, establishing residence and domicile in Canada
may be a more appropriate solution for a client who for
business or family reasons cannot live in an island tax
haven. It is not just for clean air, mountains and efficiency
that Canada can be called "The Switzerland of the North".
