Canada: A Wonderful Destination (and an Unlikely Tax Haven!)

David S. Lesperance, Barrister & Solicitor specializes in the integration of immigration/ citizenship, offshore structures and tax planning to assist individuals to acquire residence and citizenship to fulfil tax or estate planning objectives. He works closely with banking, accounting and related professionals on behalf of his clients.

Canada is renowned worldwide for its beautiful scenery, clean environment and enviable quality of life. It is often ranked first in annual UN polls that evaluate the quality of life in member states. These factors, along with highly developed infrastructure, low crime rates, universal medical coverage, proximity to the U.S., and relatively low cost of living make it an attractive place to live, work or purchase a vacation/retirement home.

Whenever I mention to Canadians that I bring people to Canada as a tax haven, they shake their heads in disbelief. After all, Canada has a well-deserved reputation for having some of the highest marginal tax rates amongst industrialized nations. What most Canadians do not realize is that Canada has a well-established regime of tax sheltering to attract new residents that it does not offer to its indigenous population.

With proper tax planning, individuals can move to Canada and legally avoid income and capital gain tax on their non-Canadian source income and capital gain producing assets. In addition, since Canada does not have a gift or estate tax, it is often considered as a favorable destination, for those individuals who wish to escape from the onerous gift and estate taxes of their current country. With more sophisticated tax planning, the five-year tax holiday given the well-established standard immigrant trust; can be extended to even beyond the lifetime of the individual.

Furthermore, while Canada does not have an instant citizenship program, it does allow those who have been Permanent Residents for three years to acquire Canadian Citizenship and a passport. Being one of the most treasured travel documents in the world, the Canadian passport provides visa-free travel to most countries and allows the holder to take advantage of the North American Free Trade Agreement to gain preference in living and working in the United States and Mexico. Finally, as a result of the recent decline in the Canadian dollar, residents can enjoy an excellent lifestyle, with all the infrastructure of living in the United States, at only two thirds of the cost.

In looking at Canada as a possible destination, there are two main considerations, immigration and tax planning.

A person interested in Canada must first understand the various immigration possibilities, and then acquire the single status or combination, which best suits their situation. The various immigration statuses are as follows:

1. Visitor Status: Visitor Status allows an individual to visit Canada for a finite period of time. During their Visitor Status, the individual has no right to work or study and has no entitlement to benefits such as social or medical services, driver’s licenses etc. Visitor Status is granted at a Canadian entry point for up to six months upon each entry. It is possible for a person to have a Visitor Status for more than six months, by either applying to extend their original status or by securing a new status upon re-entry. For nationals of some countries, there is a requirement to first secure a Visitor Visa from their local Canadian Embassy before approaching a border. Visitor Status is appropriate for 1) short vacations; 2) to occupy vacation properties; or 3) to explore Canada as a precursor to a further status. While Visitor Status is easily and cheaply sought, there is no guarantee that it will be granted on any particular entry. This reality may render a decision to buy a vacation property or business in Canada an imprudent one if this is the only status, which they intend to secure.
2. Work and Student Permits: Work and Study Permits allow an individual to either work or study in Canada for a fixed period of time. Generally granted in one or two year increments, the individual has the right to remain in Canada for the entire term of the permit. It is also renewable by either an extension of the original permit or the issuance of a new permit. While there is generally no limit on the number of renewals, there is also no guarantee that the extension or new permit will be granted. Work or Study Permits do entitle the holder to secure items such as driver’s licenses and possibly medical benefits. While there are some "work" situations that are exempted from the requirement to secure a Work Permit, an individual should seek proper legal advice if they wish to enter Canada for any reason other than a pure vacation. Many executives have missed important meetings because they were refused entry for what they assumed to be normal "business visitor" activities. If they also lied about their purpose for entering Canada, they may compound their misery by adding a future ban on visiting. Work and Study Permits are a useful bridge between Visitor Status and Permanent Residence, by allowing the holders to move and establish themselves in Canada at an early date.
3. Permanent Residence: Also known as Landed immigrant status, Permanent Residence allows an individual to live, work, and study in Canada permanently. This status is a precursor to Canadian citizenship and may be secured in a variety of ways.

After a major overhaul of Canada’s immigration laws in 2002, the qualifications for the various means of securing Permanent Residence have changed dramatically and are much more fluid. Therefore, if an individual is considering Permanent Residence, they should seek qualified legal advice as to their current eligibility. Furthermore, if they do qualify, the individual should apply immediately, as they may not meet future constantly changing criteria. Until the Permanent Residence application is finalized there is at risk of disqualification by new qualifications. As the processing time of applications can vary from 6 months to 6 years, proper legal advice should be obtained to ensure all possible strategies to process applications quickly are explored. The categories of Permanent Residence are as follows:

a) Refugee Program: This category is for individuals who have a well-founded fear of persecution in their home country. As the refugee process is long, uncertain and involves the extensive examination of past horrific events, many potential refugees use this program as the "path of last resort".

b) Skilled Worker or Independent Category: This category involves an examination of the individual’s qualifications to fit into the Canadian work force. Areas such as education, occupation, work experience, age and language ability is reviewed to determine if the applicant meets the current eligibility threshold. Given massive processing backlogs, the threshold is currently quite high with a resulting significant drop in the number of applicants who meet the threshold. Individuals are encouraged to check their eligibility by visiting http://www.globalrelocate.com and using the on-line eligibility test.

c) Business Immigration Program: This category is designed to encourage and facilitate the immigration of experienced business people. In order to make a successful application, a person must demonstrate that they possess certain asset levels and business experience. The three categories available under the Business Immigration Program are the Investor, Entrepreneur and the Self-Employed.

i. Investor Category: The Investor category is designed for the high net worth businessperson who wishes to invest in a larger business venture but is prepared to rely on others to oversee his investment. The Investor category allows for an investment by a businessperson that possesses a net worth of approximately $500,000 USD and makes a substantial investment in an approved "investor fund". The required investment period is five years, and the investment amount is approximately $300,000 USD. The actual out-of-pocket investment may be reduced to approximately $75,000 USD by using available financing options. An Investor does not need to live in the province in which they make their investment. Nor do they need to become actively involved in the management of a Canadian business.

ii. Entrepreneur Category: The Entrepreneur category is for the businessperson who has the ability to establish, purchase, or make a substantial investment in a business venture in Canada. This venture, must be actively managed and result in employment for one or more Canadians. The Entrepreneur category accommodates experienced businesspeople whose background is oriented towards the management of small to medium sized business ventures. To ensure that the Entrepreneur carries out these obligations they (and their families) are granted conditional Permanent Residence. The "terms and conditions" must be met within three years of arriving in Canada. Entrepreneurs are also required to continually report to officials during the three-year period. Conditional visas are designed to provide all Entrepreneur applicants with an opportunity to establish in Canada and to consider a number of business ventures. Once an Entrepreneur has fulfilled the terms and conditions, they may be removed. However, if the terms and conditions are not met the Entrepreneur and their family may be stripped of their Permanent Residence status and deported. The condition to be "full-time actively managing only the Canadian business" may be unattractive to individuals who spend a significant amount of time abroad.

iii. Self-Employed Category: The Self-Employed category is for those individuals who have the ability to create employment for themselves and will make a significant contribution to the cultural or artistic life of Canada. Self-Employed applicants are those persons who are likely to be successful in Canada in a particular cultural field as artists, singers, writers, musicians, athletes, etc. Successful applicants of this kind would normally have achieved a degree of success in their home country and have the necessary skills to allow them to pursue a career in Canada.

d) Family Class: Citizens and Permanent Residents may be eligible to "sponsor" certain foreign relatives including: fiancées/spouses (including same sex couples), parents, grandparents, unmarried children up to the age of 22, certain unmarried children over the age of 22, and certain grandchildren. To qualify as a sponsor it is necessary to be over the age of 18, to be resident in Canada, and to have proof of sufficient income.

e) Provincial Nominee Programs: Although Permanent Residents have a constitutional right to move about and live anywhere in Canada, those Skilled Workers and Entrepreneurs who indicate a preference to live in a particular province, may be able to qualify for one of that province’s "provincial nominations". Provincial Nominations are a recent innovation in Canada and the criteria and application procedures vary significantly between each province. A provincial nomination is useful to significantly speed up an application for Permanent Residence and to secure a Work Permit to allow the applicant and their family to move to Canada quickly. As the proper use of provincial nominations is very complicated, interested applicants are strongly encouraged to seek advice from a lawyer who is familiar with every province’s particular program.

4. Canadian Citizenship: Permanent Residents who secure three years of "residence" in Canada are eligible to apply for Canadian citizenship. Canadian citizens are given an expanded set of rights beyond those of a Permanent Resident including passports, voting rights, certain government pension benefits, and the right to hold certain government jobs and elected offices. Canadian citizens permanently secure these rights until their death, even if they chose to move out of Canada for extended periods of time. "Residence" is accumulated by either physical presence or absence with the continuation of various "indicators of residence". As the later criteria are quite complex, those individuals who anticipate significant absences from Canada for business, study or pleasure should seek proper immigration and tax legal advice in order to ensure that they develop an integrated strategy to meet the residence criteria for citizenship, while minimizing the effects of Canadian taxation. It is also worth noting that there have been several failed attempts by recent Canadian citizenship Ministers to introduce changes to the residency rules. All the more reason to seek qualified legal advice to stay abreast of on-going legislative initiatives.

Tax planning is often a critical part of the process. If appropriate steps are taken, the impact of Canadian taxation can be legally minimized or effectively eliminated.

The two fundamental concepts of Canadian tax are:

1. Canada taxes its "tax residents" on their worldwide income. Canada does not tax Citizens if they are not tax resident in Canada. An individual is "tax resident" if they either:

A Canadian citizen who departs Canada and becomes a "non-resident" for tax purposes will no longer be subject to Canadian taxation other than as described for non-residents above. Neither the Canadian federal government nor any of its provincial governments impose any gift or estate taxes.

The income is computed at a personal level after the usual deductions and credits. Once taxable income has been determined, the "marginal tax rate" will apply. Capital gains are taxed at fifty percent of full rates. The maximum combined federal-provincial rates range from thirty nine percent to forty-eight percent depending on the province of residence.

Canada allows a new tax resident to shelter non-Canadian source income and capital gain for a period of up to sixty months by the use of an "immigrant trust(s)". The sixty-month period commences on January 1 of the calendar year during which the person becomes tax-resident. Typically, income/capital gain-producing assets that are situated outside of Canada are transferred into a trust. A non-resident financial institution is used as trustee. All income and capital gains that are earned by the immigrant trust escape Canadian tax. This "tax holiday" expires at the end of the sixty-month period. If the trust continues in place thereafter and the person remains tax-resident, the trust itself will become a tax-resident and liable for Canadian taxation on its worldwide income.

However, if the Permanent Resident obtains Citizenship within the five year tax holiday window and then departs Canada, the income and capital gain produced by the trust will never be taxed in Canada. If still tax-resident beyond the five-year period, the person can reacquire the assets from the trust at a "stepped up" basis equal to the fair market value of the assets at the end of the five-year period.

Another attractive strategy for those individuals who either a) anticipate remaining in Canada beyond five years; or b) who wish to secure Canada as a permanent "domicile of choice" in order to escape foreign gift and estate taxes is to establish a "wrap structure". While more complex than a standard "immigrant trust" the wrap structure also has additional benefits such as the ability to borrow for Canadian business activities from the assets in the structure and expatriate to the structure some profits from the Canadian business tax-free.

In conclusion, Canada is a very attractive destination. One must be aware that it is a potentially high tax country where improper or absent tax advice can result in high worldwide tax liability. As Canadian officials are neither qualified nor obligated to provide you with any advice relating to immigration statuses, categories, processing efficiencies or the structuring of your financial affairs, I recommend that you receive proper legal advice. Along with tax structuring, this advice should also set out your ability to qualify for residence, and help you set up a strategy to ensure that you qualify for citizenship. If properly done, establishing residence and domicile in Canada may be a more appropriate solution for a client who for business or family reasons cannot live in an island tax haven. It is not just for clean air, mountains and efficiency that Canada can be called "The Switzerland of the North".