Canada-A Tax Friendly Destination For Wealthy Immigrants

Contributed by Michael Atlas Chartered Accountant. [www.TaxCA.com]

Probably more than ever before, Canada is considered to be a highly desirable destination for wealthy immigrants.
Many non-tax reasons can be cited, including Canada’s:

• Healthy diverse economy
• Natural resources that are the envy of the world, including abundant supplies of fresh water, oil and gas, potash, timber and gold
• Banking system that is considered the healthiest in the world
• Stable democratic government
• Highly multi-cultural society that welcomes people of all backgrounds

However, although many people do not realize it, Canada’s tax system is also particularly favourable to wealthy immigrants, for many reasons, including those cited below:

No estate or gift taxes-Canada has not had estate or gift taxes for many years. Accordingly, wealth may be transferred between generations without any taxes. The only time that taxes on transferring assets arises is where such assets have unrealized capital gains. In certain cases, relatively modest probate fees may apply with respect to assets transferred under a will; however, with proper planning, this can usually be avoided.

Stepped-up cost base of appreciated assets-As a general rule, an immigrant’s cost base for Canadian tax purposes of assets owned at the time of relocating to Canada is equal to the fair market value at that time. Accordingly, gains accrued prior to coming to Canada will never be subject to Canadian tax.

Five-year tax holiday on offshore income-Through the use of a so-called “immigrant trust”, it is possible to avoid Canadian taxation on income and capital gains that are earned and accrued on foreign-assets during the first five years of residency.

Permanent exemption from taxation of income in certain offshore trusts-If assets are held in an offshore trust to which no Canadian resident has ever made a contribution, it is possible for a Canadian beneficiary to be totally exempt from taxation on income earned on such assets ad infinitum. This can be the case even if such income is distributed to the beneficiary, as long as it is not paid or payable in the same year that it is earned. This is particularly relevant in connection with both lifetime gifts and inheritances from relatives who remain overseas.

Ability to avoid taxation on income from overseas businesses-In cases where the immigrant maintains an interest in a business carried on outside of Canada, it is possible to avoid Canadian tax on the earnings from that business, even if distributed as dividends, via the use of a holding corporation formed either in Canada or offshore.

Low domestic corporate tax rates-for immigrants who decide to form and operate a business in Canada, Canada offers a very favourable corporate tax regime. The first $500,000 of profits each year are subject to very low corporate tax rates (generally around 15%); income above that is subject to tax rates that have been declining over the years-in the province of Ontario this rate will be as low as 25% starting in 2013.

Exemption on  up to $750,000 of capital gains-Canada offers a complete exemption from capital gains tax on gains derived from the sale of shares of qualifying Canadian private corporations that carry-on an active business in Canada. The exempt gain is limited to $750,000 per person, but can be multiplied by splitting ownership amongst several family members

Unlimited exemption on capital gains on gains on shares in name of overseas family-as a result of changes to Canadian tax laws that went into effect in March of 2010, Canada no longer taxes non-residents on capital gains from the sale of shares of private Canadian corporations, except in very limited circumstances. Generally, Canadian tax will not apply unless more than 50% of the value of such shares is attributable to Canadian real estate, resource properties, or timber limits. Accordingly, if ownership of Canadian corporations that are operated by immigrants to Canada is placed in the name of non-resident family members, tax on capital gains may be avoided.

However, because of the complexity of Canada’s tax system, prospective immigrants should always seek expert Canadian tax advice prior to finalizing their move to Canada.

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