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Canada The Tax Efficient Choice
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Canada – The Tax Efficient Choice For Wealthy Families

By Peter Scarrow - Email Editor

Date : February 4, 2010

For wealthy global families seeking new passports, Canada is the world’s best kept secret. Although top marginal tax rates are a bit higher than the U.S., there are significant planning opportunities for wealthy immigrants. In some cases, wealthy families can legally acquire and, generation after generation, maintain Canadian citizenship without any substantial tax exposure. A summary of Canada’s advantages:

TAX
  • The “Immigrant Trust” – Wealthy immigrants can settle an “immigrant trust” the income and capital gains of which are legally tax free for a period of 5 years after the settlor (“grantor” in U.S. parlance) becomes a tax resident;
  • There are no estate taxes in Canada;
  • There are no gift taxes in Canada;
  • Where the settlor of a trust does not accumulate 5 years of tax residency status in Canada, the tax free period of the trust lasts in perpetuity. In Canada this is called a “Granny Trust”, the notion being that if you have an offshore Granny who never becomes a tax resident then the trust, and its Canadian tax resident beneficiaries vis-à-vis trust assets, have no obligations to pay tax in Canada on income, capital gains or distributions -- in perpetuity;
  • If the settlor of the trust is an immigrant/citizen of Canada but never accumulates 5 years of tax residency status then he/she is like the “Granny” who never immigrates. The trust is tax free in perpetuity;
  • Personal and corporate tax rates have been trending downward in recent years. U.S. tax rates are trending upward;
  • Canadian citizens, unlike citizens of USA, can shed their Canadian tax residency status and still keep their Canadian passports merely by moving offshore.

IMMIGRATION
  • Many U.S. persons are qualified to immigrate to Canada as “skilled workers”. For wealthy business people there are a number of options including the “investor” category wherein CAD $400,000 is lent to the government or a qualified financial institution at 0 percent interest on a completely no-risk basis for a period of 5 years. One variation permits the immigrant to borrow the $400,000 by prepaying $120,000 interest for the 5 year period. The $120,000 is the cost of immigration for a whole family;
  • Immigrants, known as “Permanent Residents” (the equivalent of a U.S. “Green Card”) are not necessarily tax residents. Again this is quite unlike the USA where all citizens and all green card holders are deemed to be tax residents. In Canada only those people whose home base is Canada are regarded as tax residents;
  • The immigration process takes between 1-2 years to complete.

CITIZENSHIP

  • Immigrants to Canada will qualify for citizenship after residing in the country for 3 years. This usually requires 1095 days of physical presence in the 4 year period prior to the application for Canadian citizenship;
  • A Canadian passport is one of the safest and most widely accepted in the world;
  • It is possible, therefore, to acquire citizenship (3 years residence) before the tax free period of the trust (5 years) expires;
  • Unlike the U.S., Canadian citizens are not necessarily tax residents. In fact it is estimated that nearly 10 percent of Canada’s citizens are non-tax residents of Canada living in other jurisdictions, including tax havens.

CULTURE AND LIFESTYLE

Canadians (at least English-speaking ones) and Americans share a common language and popular culture. Nonetheless there are important differences.

While generally having enormous respect for the stunning economic, cultural, social, technological and even military achievements of our American brothers, Canadians are a bit smug about having declined to participate in many of the seriously odd chapters in U.S. history (eg. slavery, Civil War, prohibition, McCarthyism, the Vietnam war, S&L insolvencies, the Iraq War, sub-prime mortgage lending, massive taxpayer funded bailouts of well-connected financial institutions). Canadians are cautious and conservative. The upshot is that Canada now has the strongest economy and likely best prospects of all OECD countries. It has the best banking system in the world. It is in a strong fiscal position. It is geographically isolated from the world’s trouble spots. And it is a resource and energy superpower (the leading exporter of oil, natural gas, uranium and hydroelectric power to the USA) in a world that is running out of energy and resources.

As for lifestyle, three of Canada’s cities (Vancouver, Toronto and Montreal) are among the most cosmopolitan urban centers anywhere. Vancouver is often rated (see, for example, the Economist Intelligence Unit) as the number one city in the world in terms of lifestyle.

CONCLUSION

In conclusion, wealthy global families are increasingly aware of their need for a carefully crafted citizenship and residency strategy to protect family assets and enhance mobility in what may be a troubled future. In this context Canadian citizenship should be given serious consideration.

Feel free to email us at info@trustmakers.com or call to discuss your options.

Taking Action

If you have a company, foundation or trust outside the US borders and want to know if you have correctly set it up for structural and/or tax purposes our advisors are now handling these cases. Please reply to info@trustmakers.com.


By Peter Scarrow
TrustMakers.com

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ABOUT THIS EDITOR:

Peter Scarrow practices immigration law in Vancouver, providing integrated advice on Canadian immigration, citizenship and tax matters to high net worth immigrant clients.

Full Bio - Email Peter Scarrow