3. CANADA: SELF-EMPLOYED CATEGORY
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.
ABILITY TO QUALITY FOR PERMANENT RESIDENCE
There are several paths leading to Permanent
Residence in Canada. the rights, privileges, and obligations
of the status received are the same, no matter which category
the application is made under.
Self-Employed
Self-Employed applicants are those who have the ability
create employment for themselves and will make a significant
contribution to the cultural or artistic life of Canada.
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.
If you have any specific questions send email to mmclellan@GlobalRelocate.com
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
b) Canadian Income tax rules and rates. Canada does not
tax Canadian Citizens if they are not resident in Canada.
c) 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 favor-able 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. The alternative
is that 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".
David S. Lesperance Barrister & Solicitor
©COPYRIGHT 1999-2007
DAVID S. LESPERANCE
