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| Canada:
A Non-Traditional Tax Haven - Information Series on Second Passports &
Economic Citizenship |
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| 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. |
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| 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. |
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| Finally,
as a result of the recent decline in the Canadian dollar, residents can
enjoy an excellent lifestyle with all of the infrastructure of living in
the United States at almost two thirds of the cost. |
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| 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. |
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| ABILITY
TO QUALIFY FOR PERMANENT RESIDENCE |
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| 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. |
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| Family
Sponsorship Category |
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| Certain Canadian
citizens and Permanent Residents are entitled to "sponsor" certain foreign
relatives for Permanent Residence in Canada. |
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| 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. |
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| Independent/Assisted
Relative Category |
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| Individuals
who fall into this category base their applications on personal skills
and 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 who 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. |
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| Self-Employed
Category |
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| Self-Employed
applicants are those who have the ability to establish or purchase a business
in Canada that will create employment for themselves 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. |
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| 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. |
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| 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. |
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| Business
Immigration Program |
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| 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, an applicant 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. |
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| Entrepreneur
Category |
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| An Entrepreneur
applicant is someone who has the ability to establish, purchase, or make
a substantial investment in a business venture in Canada. |
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| 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. |
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| 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. |
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| 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. |
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| Investor
Category |
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| 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 $250,000 USD. |
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| The actual
out-of-pocket investment may be reduced to $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". |
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| Once permanent
residence is secured, then an immigrant can apply for naturalized Canadian
citizenship after three years of residence. |
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| Canadian
Tax Issues During and After Three Year Naturalization Period |
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| Tax planning
for new Permanent Residents 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: |
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| (a)
Canada taxes its residents on their world-wide income using Canadian Income
tax rules and rates. Canada does not tax Canadian Citizens if they are
not resident in Canada. |
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| (b)
Canada taxes non-residents of Canada (including Canadian Citizens who are
not resident in Canada) only on: |
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| (i) any
employment income earned in Canada; |
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| (ii)
any business income earned from carrying on a business in Canada; |
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| (iii)
capital gains primarily attributable to Canadian real estate and shares
in private Canadian companies; and |
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| (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. |
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| 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 or any of its provincial
governments impose any estate taxes or succession duties on death. |
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| 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. |
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| 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 world-wide income. |
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| 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. |
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| 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 world-wide 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". |
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