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My colleague Vitaly Timokhov is a Canadian lawyer practicing taxation in Toronto, Canada. Below is a guest posting from Vitaly about Immigration Trusts. Taxation is an important component of the immigration process. We are asked about cross border tax issues all the time.
Newcomers to Canada, including executives, relocated employees for multinational companies or permanent residents, often use so called immigration trusts to structure their tax affairs. In general, the income of an immigration trust established for the benefit of a new immigrant to Canada may be exempt from taxation in Canada for up to five years. As such, an immigration trust is an effective tax planning tool that allows new immigrants and their families to benefit for up to 5 years from income earned in the home country without paying Canadian taxes. Even after the five year exemption is over and the immigration trust becomes subject to tax in Canada, it may continue to serve as an asset protection trust for the benefit of multi-national families residing in and outside Canada.
However, in order to qualify for the exemption, the immigration trust should be properly implemented and maintained. In particular, the entity used as an immigration trust should meet the definition of a trust for Canadian tax purposes.
If you have an immigration or asset protection trust set up as a private foundation in one of the European countries, including in particular Austria, Luxembourg, or Switzerland, you might now have to revise your pre-immigration tax planning.
The Federal Court of Appeal recently ruled in The Queen v Sommerer that a private foundation may not qualify as a trust for Canadian tax purposes. In Sommerer, the court dealt with an Austrian private foundation established by an Austrian resident for the benefit of his son, who was resident in Canada. This decision effectively puts in doubt the current assessment policy of the Canada Revenue Agency regarding private foundation and causes significant uncertainty about the Canadian tax status of existing immigration and asset protection trusts organized in Europe.
From the practical perspective, the danger is that if a particular private foundation serving as an immigration trust for a new Canadian immigrant no longer qualifies as a trust for Canadian tax purposes, the five year exemption from Canadian taxation may no longer apply. As the result, the income of the immigration trust may be taxed in Canada. If the immigration trust does not pay Canadian tax liability, Canada Revenue Agency may collect the taxes and relevant penalties from the beneficiaries who are reside or have assets in Canada.
Given the pending uncertainty about the legal characterization of private foundations, the newcomers to Canada would be well advised to organize an immigration trust in common law jurisdictions, such as, for example, Barbados or Channel Islands. Further, an existing private foundation serving as an immigration trust for newcomers to Canada or its assets may be reorganized or be moved to a common law jurisdiction as to ensure the continuing availability of the five year Canadian tax exemption.
If your immigration or asset protection trust was established as a private foundation in Europe or Caribbean and this trust involves a Canadian resident in any way, both the Canadian resident and the foundation itself may be at risk. We highly recommend procuring a new Canadian legal and tax opinions regarding the status of these private foundations and available tax planning options.
Vitaly Timokhov is a Canadian lawyer practicing taxation in Toronto, Canada. Vitaly is a founding member of TaxChambers, a Toronto based tax law firm, and practises exclusively in the area of Canadian federal income taxation and tax planning, with an emphasis on international taxation. Vitaly is a principal author and Canadian editor of the Tax Advisor’s Guide to the Canada – U.S. Tax Treaty, a 2-volume loose-leaf published in Canada and the U.S. by Carswell Thomson. Vitaly has also taught international taxation as an adjunct professor at the Osgoode Hall Law School (Toronto).
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