Tax Insights: 2014 federal budget: The demise of immigration trusts

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Issue 2014-17

Canada’s February 11, 2014 federal budget proposes to eliminate the tax benefits of immigration trusts. If you have relocated to Canada, this change could have adverse tax consequences.

Individuals resident in Canada are subject to Canadian income tax on worldwide income. Before the 2014 federal budget, an individual relocating to Canada could reduce Canadian tax by using an immigration trust.

An individual who immigrates to Canada can set up an immigration trust to avoid Canadian tax on income generated on the trust assets for up to five years.

An immigration trust could be established either before an immigrant becomes a Canadian resident or within 60 months after. The trust must be a non resident of Canada, which means that the trust must be settled in a non-resident jurisdiction and control of the trust must be in the hands of a non-resident.

This generally requires the trustees to reside outside of Canada. Often they are financial institutions in a low-tax country.

Canada’s non-resident trust rules deem many offshore trusts to be resident in Canada. However, a specific exemption is provided for immigration trusts, but only for the 60-month period.

If the new Canadian resident transfers his or her income-producing assets to the immigration trust, income and capital gains generated by those assets can be exempt from Canadian tax for up to 60 months after he or she becomes a resident of Canada.

This can result in significant tax savings during this period. It also gives the individual lots of time to make his or her affairs tax-efficient for Canadian tax purposes.

The proposal amends the non-resident trust rules to remove the 60-month exemption for immigration trusts, generally for taxation years ending after February 10, 2014. As a result, an immigration trust will be deemed resident in Canada and subject to taxation on its worldwide income.

Limited relief is available for immigration trusts established and funded before February 11, 2014. The trust can continue to benefit from the exemption until December 31, 2014, if no contributions are made to the trust after February 10, 2014.

The trust will become subject to worldwide income taxation starting January 1, 2015.