The Canada Revenue Agency confirmed that new immigrants to Canada would be taxed on the investment income generated in pre-existing non-resident trusts (NRTs) starting at the beginning of a given taxation year, typically January 1 for a living trust, even if they only first become a Canadian resident later that same year.
Such a scenario would be created when the draft proposal to eliminate the exemption on so-called immigrant trusts, introduced in the 2014 federal budget, is enacted into law, as is expected. Previous to the announcement, new immigrants to Canada were eligible for a five-year exemption on the deemed residency rules, and therefore taxation, of their NRT.
“That isn’t, from a tax policy perspective, really a departure [from the existing deemed residency rules],” said Phil Kohnen, manager of the trusts section of the Income Tax Rulings Directorate of the Canada Revenue Agency. “What shines the light on it now, obviously, is the proposal to do away with the exemption itself.” Kohnen was speaking at the national conference of the Canadian arm of the Society of Trust and Estate Practitioners (STEP Canada) in Toronto on Tuesday as part of a panel discussion.
Tax practitioners on the panel took issue with the implications of the proposed elimination of the immigrant trust exemption on new immigrants to Canada.
“If somebody moves to Canada in August 2015, and they have a pre-existing trust, that trust will be deemed resident on Jan. 1, 2015 onwards,” said Michael Cadesky, managing partner of tax accounting firm Cadesky and Associates LLP, and vice president of STEP Worldwide, in an interview. “That person may have not taken Canadian [tax planning] advice [on the NRT], may have no idea that there would be any Canadian tax implications, because how would one reasonably think there would be. You wouldn’t think you would be taxable in some way in Canada going back to before you arrived.”
In general, if a Canadian resident contributes assets to a trust held in a foreign jurisdiction, that NRT would be considered to be a Canadian resident and, thus, taxable. However, newcomers who have been resident in Canada for less than five years are able to hold assets in a NRT without having that trust be considered a Canadian resident trust.
Often, such an “immigrant trust” is set up in a no-taxation jurisdiction and income generated could be free of any taxation whatsoever for up to five years. In this year’s budget, the federal government announced it was eliminating the exemption, arguing that it had raised issues of “tax fairness, tax integrity and tax neutrality.” The government is proposing to allow existing trusts to continue to be exempt, under certain conditions, until the end of 2014.
Some tax practitioners have argued that the government should have grandfathered in the exemption for existing immigrant trusts, rather than allowing the exemption only until the end of this year, arguing that new Canadians may have made the signficant decision to immigrate to Canada believing that the exemption would be available.
“Somebody may have made plans and arrangements to come to Canada and organized their affairs on the basis that they had a 60-month exemption on the immigrant trust, and they did at the time, and they’ve now been told that 60-month period is going to be cut short and end basically Dec. 31, 2014,” Cadesky says. “They may have had two or three more years [of tax exemption] to go, and they found that what essentially they were bargaining for, what was promised, was not going to be delivered because the rules are changing mid-stream.”