The federal government is taking off the table a generous tax break with the federal budget delivered on Tuesday that had, until now, been available to wealthy newcomers to Canada, eliminating the five-year exemption from the deemed resident rules relating to non-resident trusts.
Under existing tax rules, newly resident Canadians are able to contribute property to non-resident trusts for a period of 60 months without that trust being deemed a tax resident in Canada. The foreign-source income generated in such a non-resident trust, therefore, would not be taxable in Canada. Typically, a wealthy newcomer might set up such a non-resident trust in a low- or no-tax jurisdiction.
Absent this exemption, if a person resident in Canada were to contribute property to a non-resident trust, the deemed residence rules could apply, resulting in that non-resident trust being considered resident in Canada, with any income taxable in Canada.
Ottawa is proposing to eliminate the 60-month exemption from the deemed residence rules, including related rules that apply to non-resident trusts, contending that exemption raises concerns over tax fairness, tax integrity and tax neutrality.
“Canadian-resident persons who are beneficiaries under, or contributors to, these trusts obtain indirect tax benefits as a result of the non-imposition of Canadian tax in these circumstances,” say budget documents. “These benefits are not available to Canadian-resident persons who earn similar income directly or through a Canadian-resident trust.”
The timing of the proposed change may cause controversy, however, as the government says it will be eliminating the exemption for all non-resident trusts set up after budget day and eliminating the exemption at the end of 2014 for all existing non-resident trusts that had qualified for it under the existing rules.
“While the government certainly has the right to change tax law it deems no longer appropriate, it’s quite shocking to me that it wouldn’t have provided full grandfathering for existing structures set up before this proposed change in policy,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s private wealth-management division.
Wealthy immigrants that had gone through the trouble and expense of setting up non-resident trusts to take advantage of this exemption would be out of luck, he says: “This was not some mere loophole that immigrants were taking advantage of but rather a widely promoted incentive program.”
In budget documents, the government estimates it will realize a savings of $110 million over the next five fiscal years.