The federal government’s decision in the 2014 budget to eliminate so-called “immigrant trusts” came as an unexpected surprise, removing a decades-old tax-planning option used to attract affluent foreigners to Canada.

But when Ottawa’s other recent steps to tighten immigration and tax rules affecting wealthy newcomers are considered, the proposed elimination of the five-year tax break on assets held in an offshore trust should not come as a complete shock.

“[Recent immigrants] were getting a tax holiday that other Canadian residents who aren’t new immigrants don’t have access to,” says Angela Ross, a principal in the tax services practice with PricewaterhouseCoopers LLP in Toronto. “This could be perceived to be unfair.”

Generally, if a Canadian resident contributes assets to a trust held in a foreign tax jurisdiction, that non-resident trust would be considered to be a Canadian resident trust under the deemed residence rules in the Income Tax Act and, thus, taxable under Canadian law.

However, newcomers who have been resident in Canada for less than 60 months are able to hold assets in a non-resident trust without having that trust being considered a Canadian resident trust.

In most cases, an immigrant trust would be set up in a no-taxation jurisdiction, such as the Cayman Islands – and income generated in such a trust could be free of any taxation for up to five years. There are significant annual administrative costs involved in establishing these trusts – typically, in the tens of thousands of dollars – so they are useful only for individuals with at least $1 million in assets.

The immigrant trust rules were originally introduced in the 1970s to encourage foreign executives to come to Canada, perhaps to help to run Canadian firms for a temporary period, without having to worry that they were exposing all their worldwide assets to Canadian taxes.

“Executives could come here to work,” Ross says, “pay taxes on the employment income earned here, but otherwise not to be subject to Canadian taxes on their personal wealth.”

However, in the intervening years, immigration trusts have been more commonly used by wealthy immigrants who are looking to move to Canada, sometimes permanently, while simultaneously receiving the advantage of a five-year tax holiday on their personal wealth. The Canadian government argues that the exemption has raised issues of tax fairness, tax integrity and tax neutrality.

The proposed elimination of non-resident trusts is not the only change the government is making that affects wealthy newcomers to Canada. In the federal budget, Ottawa also pulled the plug on the immigrant investor program [IIP].

“[The IIP] has significantly undervalued Canadian citizenship in exchange for a guaranteed loan that’s significantly less than our peer countries require,” according to the budget documents. “There’s also little evidence that immigrant investors, as a class, are maintaining ties to Canada or making a positive contribution to the country.”

The government also says it will introduce a replacement program that will provide greater economic benefit to Canada.

Finally, the government introduced a bill in Parliament in early February that would see changes made to the Citizenship Act that, among other things, would require permanent residents to meet the “physical presence” test in Canada for four years out of six rather than the current three out of four before becoming eligible for citizenship.

These changes indicate that the government is reassessing its wider approach to immigration, including the incentives it offers to wealthy newcomers.

“The policy seems to be shifting,” says Dave Walsh, a tax partner with Ernst & Young Global Ltd. in Toronto, “whereby the government is not really looking for ways to give immigrants tax benefits for coming here.”

Whatever the government’s intentions may be, there’s disagreement among tax experts about how the government is handling the transition period for immigrant trusts. In the budget, the government stated that existing trusts could continue to be exempt, under certain conditions, until the end of 2014. That means that these trusts would have only one year of exemption from taxes remaining.

This is unfair to new Canadians who may have just established one of these trusts, at a significant cost, to take advantage of a tax-planning opportunity that was not a loophole but a legitimate program established by the government to attract wealthy newcomers to Canada, says Jamie Golombek, managing director of tax and estate planning for Canadian Imperial Bank of Commerce’s wealth advisory services division in Toronto: “In my opinion, any immigrant who moved here with the understanding that they would receive the tax break should be given the remaining portion of their five-year exemption.”

Other tax professionals are less inclined to believe the transition rules are unfair; some argue that if the trust holds significant assets, even one year’s worth of the tax savings realized could easily cover the administrative costs of setting up the trust.

Some also argue that the program’s unfairness as a matter of tax policy had to be addressed.

“I have some sympathy for the argument that there should be a longer notice period to unwind these things – but not much,” says Robin MacKnight, partner specializing in tax law with Wilson Vukelich LLP in Markham, Ont. “Why should immigrants get a break that’s not available to Canadian residents? Answer that question first, and then we’ll talk about fairness.”

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