Canada’s 2014 Federal Budget Proposes Elimination of the 60-Month Residency Exemption for Immigration Trusts

Canada’s February 11, 2014 federal budget eliminated the tax benefits of immigration trusts for new residents of Canada. This is a radical change to Canada’s tax regime in regard to immigration trusts which could have adverse tax consequences for many recent and prospective immigrants to Canada and returning non-resident citizens of significant financial means.

Individuals resident or deemed resident in Canada are subject to Canadian income tax on all of their worldwide income. Although the rules involved are complex, Canada does not in general tax non-residents who are Canadian citizens on their worldwide income. Conversely, Canada’s non-resident trust rules result in many offshore trusts having deemed residency in Canada for tax purposes, although there is not sufficient space here to outline the legal tests used to distinguish between resident and non-resident trusts. Notwithstanding this general principle, a specific exemption has been provided for immigration trusts.

Before the 2014 federal budget, an individual relocating to Canada, whether as an immigrant or as a Canadian citizen who had been non-resident in Canada for a substantial period of time,  could reduce Canadian tax by using an immigration trust. An individual who immigrated to Canada could establish an immigration trust to legally avoid liability for Canadian tax on income generated on the trust assets for up to 60 months.

An immigration trust could be established either before an immigrant (or returning non-resident Canadian) became a Canadian resident, or within 60 months after that date. The trust must be a non-resident of Canada, which means that the trust must be settled in a non-resident jurisdiction and control of the trust must be in the hands of a non-resident.  Generally, the non-resident trustee would be a financial institution domiciled in a low-tax jurisdiction.

If the new Canadian resident transferred their income-producing assets to the immigration trust, income and capital gains generated by those assets were exempt from Canadian income tax for up to 60 months after Canadian residency was established.  This had the twin advantages of tax savings during the 60 month terms and more time to organize their affairs in the most tax-efficient manner possible for a Canadian resident in light of their own situation.

However, under the new federal budget, the non-resident trust rules are amended so as to remove the 60-month exemption for immigration trusts for taxation years ending after February 10, 2014. This will result in an immigration trust being deemed resident in Canada and subject to taxation on its worldwide income. Limited relief is available only for immigration trusts established and funded before February 11, 2014 in that the trust could continue to benefit from the exemption until December 31, 2014 if no contributions were made to the trust after February 10, 2014. The trust would then become subject to income taxation in Canada on its worldwide income effective January 1, 2015.

Immigrants to Canada as well as returning Canadian non-residents may find these changes will cause significant upset to their financial and tax planning, and are encouraged to seek qualified legal, tax and accounting advice concerning their own particular situation.