High-Tax Country Resident Planning To Go Offshore: Canada

With a view to deterring tax exiles, the Canada Revenue Agency imposes a departure tax on individuals (including expatriates) seeking to change residence. Individuals who have been resident in Canada for less than 5 years are exempt from departure tax. Under the departure tax all the individual's capital assets are deemed sold at a fair market value on which capital gains tax is payable. In Canada an individual's capital gains are included as part of his annual assessment to income tax.

There must be some permanence to losing your Canadian residence. This permanence is more akin to surrendering your "domicile" under tax law of some other countries. Loss of Canadian residence almost indicates never intending to return to Canada. A Canadian resident is deemed non-resident from the date of his departure if he can show he "severed all residential ties with his country". This test is considerably more severe than the test of residence applicable in the UK and is satisfied if the applicant does the following:

• Applicant sells his Canadian Home and Repays his Mortgage: The maintenance of a physical dwelling (or even a short-term rental lease for year round occupancy) indicates the retention of residency.
• Applicant Spouse and Dependants do not remain in Canada: If the applicant spouse and dependants remain in Canada this would indicate that the applicant intended to return to his country with the consequence that he is not deemed to have given up his Canadian residence.
• Applicant breaks all his Ties in terms of Personal Property: If the applicant is not going to be returning to Canada presumably he would sell or transfer abroad all his furniture (as opposed to putting it into cold storage), close all his Canadian bank accounts (other than non resident bank accounts), exchange his Canadian driver's license for a driving license in his new country of residence, sell his Canadian car and boat, resign all his club and professional memberships and cancel his Canadian life and medical insurance since if he is genuinely not going to return he would not need to retain any of these links. Thus the maintenance of a postal address and telephone listing in Canada may together with other factors be fatal to an application to be deemed non-resident.
• Applicant's return visits to Canada are Occasional and not Regular or Significant. If the return visits are regular and lengthy such that it can be shown that he has not developed strong ties abroad then this may assist a finding that he has retained his links with Canada and is therefore resident.

Once a Canadian individual has achieved non-residence, tax will be levied on Canadian-source income only. Payments (other than remuneration) made to non-residents for services rendered in Canada are subject to a 15% withholding tax at the federal level, and to an additional 9% withholding if the services are rendered in the province of Quebec.

If however a double taxation treaty is in place with the country in which these individuals reside then the withholding tax rate drops - but this will hardly ever apply to an offshore resident, since few offshore jurisdictions have double tax treaties with Canada. Offshore trust income will be excluded provided that:

• The trust is non-resident
• The beneficiaries are non-resident
• The settlor has been non-resident in Canada for at least 5 years prior to the creation of the trust.
• Trust income arises outside Canada

A trust is deemed non-resident if both :

• None of the trustees reside in Canada and
• Where management or control rests with persons other than the trustees (e.g. the settlor or the beneficiaries) then these persons must be non-resident in order for the trust to be non-resident. (This second test was included in an inland revenue bulletin and is not supported by case law).

Where foreign source income is taxed the foreign accrual property income rule applies ("FAPI").

There are a number of circumstances in which Canadian non-residents may be required to report assets or transactions to the Inland Revenue. These include:

• receipt of rentals from Canadian real estate;
• sale of shares in Canadian private corporations;
• surrender of life insurance policies;
• employment income earned for a temporary assignment in Canada;
• consulting income earned by a non-resident where the payor has withheld 15% income tax and issued a Form T4A-NR.

Offshore Investment Opportunities

It will be seen from the above that offshore trusts are of limited use to an emigrating Canadian; however there has traditionally been one major exception, being the 'emigrant trust'. Canadian residents, who are otherwise taxable on their worldwide income, may establish a non-resident trust in a low-tax offshore financial centre before leaving Canada and name their children as beneficiaries of the trust.

In this case, the trust will be taxable on its income in Canada during the first 18 months after the settlor of the trust gives up his Canadian residence. After the 18-month period, however, the trust is no longer subject to tax in Canada and the income of the trust can accumulate tax-free in the tax haven. The income of the trust is added to the capital of the trust and the capital of the trust can be paid to the Canadian beneficiaries on a tax-free basis.

Other types of offshore asset can be acquired once non-residence has been established, and provided that the emigrant lives in a low-tax country, the income and capital growth will likely be free of tax or nearly so. Offshore investment prior to establishing non-residence is perhaps more questionable, due to the FAPI rules (see above), the possibility of double taxation, and the fact that disclosure will have to made to the Canadian authorities.

Once a firm decision to move offshore has been made, careful thought should also be given to existing Canadian capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax (probably not)? Is it desirable to move them early and pay the tax anyway (maybe)? These are complex questions, and the answer will depend on individual circumstances, but for some individuals there may be interesting tax planning possibilities.

It is reasonably sure at any rate that the exit capital tax plus the continuing withholding tax mean that continued investment into Canadian assets by someone planning to move offshore is unlikely to be the most tax-efficient strategy.

www.lowtax.net has full details of the offshore investment, taxation and legal regimes in 35 of the main offshore jurisdictions.

Individuals who have significant 'active' non-Canadian business income may be able to make use of offshore corporate tax shelters, and need to give careful thought to how to structure this income once emigration has taken place, to ensure that it will not remain within the grasp of the Inland Revenue.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.