Canada: Canada’s 2014 budget eliminates tax benefits of immigration trusts
The government announced in Canada's 2014 budget that it would be introducing new measures to further prevent the use of non-resident trusts to avoid Canadian income tax, notably the proposed elimination of the Canadian tax benefits of immigration trusts. Where a Canadian resident contributes property to a non-resident trust, the trust may be deemed to be a resident of Canada for Canadian tax purposes. Before the budget, an exemption from the deemed-resident trust rule was available where the contributor was an individual who had resided in Canada for a total period of not more than 60 months; non-resident trusts which fell within this exemption were referred to as immigration trusts. Where a trust qualified for the 60-month exemption, it would not be subject to Canadian tax on its foreign-source income for the relevant period. Whereas individuals resident in Canada are normally subject to tax on their worldwide income, the 60-month exemption essentially allowed individuals immigrating to Canada to shelter their foreign source investment income from Canadian tax for up to five years by establishing a non-resident trust and transferring their income-producing assets to the trust prior.
As a result of the 60-month tax exemption, Canadian resident beneficiaries of immigration trusts indirectly obtained a tax benefit that was not available to other Canadian residents not earning income through immigration trusts. The Canadian government stated in the budget, "the 60-month exemption raises tax fairness, tax integrity and tax neutrality concerns".
The proposal amends the non-resident trust rules to remove the 60-month exemption for immigration trusts, generally for taxation years ending on or after February 11 2014. Consequently, an immigration trust will be deemed resident in Canada and subject to taxation on its worldwide income starting in 2015. Limited relief phase-in rules apply in particular circumstances. Individuals who immigrated to Canada and established an immigration trust arrangement should revisit their tax planning in light of the proposed measures.
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