Custom planning

They come to Canada with jumbo dreams—bigger homes, better education, improved lifestyles for their kids, and ample dough. Gradually, reality dribbles in—steep real estate prices, soaring education costs, complex estate planning issues, and stringent tax laws. For some the dream turns nightmarish when they stumble upon a financial regime irreconcilably different from the one they left behind.

Often immigrants don’t even realize the economic implications of their move. “In my experience, almost 99% have no financial plan,” says Girish Agrawal, senior executive financial consultant with Investors Group in Calgary. “FFCM: Friends, family, colleagues and media are their sole circle of reference.”

Depending on the country they come from, crossborder taxation issues tend to be one of the trickiest aspects of immigration. Vancouver-based Irene Jacob, CA, TEP, executive director of Ernst & Young LLP, cites Americans as the perfect example. They are taxed on the basis of citizenship in the United States, and on the basis of residency in Canada. As a result they have to balance both sides of the border, and may end up being subject to taxation in both jurisdictions.

Jacob sometimes meets with people who are considering immigration, but decide not to after they hear about the stringent tax rules.

While the Americans juggle two inflexible tax regimes, people from countries such as Dubai, which has no taxes, or India, where people routinely evade taxes, don’t realize how rigorous Canadian tax laws are. “When they come here, they feel they can dance around the rules,” Agrawal says. And then they get hit hard by penalties.

Culture Clashes While immigrants come to Canada with their own culture- specific notions of financial planning, they also bring some very unique societal and personality traits.

Dorothy Chan, CFP, CIM, FCSI, a senior investment executive with ScotiaMcLeod in Vancouver who has a sizable Chinese clientele, recalls when the first wave of the Hong Kong rich hit Vancouver in the ’90s—“they were aggressive, and always demanding high returns.”

Coming from one of the freest economies in the world, they arrived in Vancouver with similar expectations. “In Hong Kong they could enter a bank and demand to withdraw $50,000 and be serviced the same day. In Canada, there were compliance issues. They had to wait till certain procedures were completed,” Chan says. “They had expectations, which were sometimes very hard for advisors to manage.”

They were also extremely speculative as investors— trading so frequently they almost seemed to be churning mutual funds. “In our financial world long-term means seven years or above,” Chan says. “In their world it means one or two years. For us short-term planning entails at least three years, for them it’s just three months.”

With their wayward attitudes, these clients were a compliance nightmare— a learning experience for bank staff, investment companies, and compliance officers. To deal with their fitful trading habits, Chan notes the firm she was with in the 1990s actually introduced a 2% penalty on frequent redemption of mutual funds.

But advisors in Vancouver now face a new challenge—the Mainland Chinese.

Unlike the Hong Kong Chinese, immigrants from the Mainland often aren’t as educated. Communication is an ordeal. They demand financial literature in Mandarin and can adopt an “it’s my way or no way” attitude, says Chan.

And they too are a compliance challenge. Chan recalls one client who pulled out a cash box with $50,000 from under his chair. “I was shaking with fear. I refused to take cash. The client wouldn’t have it any other way. He withdrew his account.”

Another of her clients, who came to Vancouver nine months ago from Mainland China, decided to dabble in real estate. She actually bought a house over the Internet. But when she visited the location, she didn’t think it looked too grand. Another time, she was out walking on Gravel Street and saw a character house she really liked. She walked in and bought it, just like that, for $1.8 million in cash.

She was also heavily invested in speculative stocks back home. Now, with the collapse of global markets, her net worth has shrunk by one-third. She can’t find buyers for her properties, and is now living on the margin.

With experience, Chan has become much more careful dealing with such clients. For every unsolicited trade she makes them sign a form. She also documents them thoroughly and is upfront talking about fees, upsides, downsides, and tax implications.

And no matter how high their net worth, Chan says she has learned to say no to clients with an attitude. “Once you take them on as clients, you can’t get rid of them because it’s difficult for them to find other Mandarin-speaking advisors,” she adds.

Worldwide Disclosure And it’s not just the Chinese. Most immigrants are stumped about being taxed on their worldwide incomes in Canada.

Offshore assets worth more than $100,000 have to be divulged to the CRA. Penalties for not doing so can be heavy.

Agrawal says immigrants often don’t realize the importance of disclosing their overseas assets. But by not doing so they sometimes miss out on the benefits of certain taxation treaties Canada might have with their countries of origin. And in some cases, if real estate prices were to drop in their own countries, they’d actually be eligible for tax benefits in Canada provided they declare that property.

For its part, the Canadian government allows newcomers some bit of time to get financially organized by not requiring them to file the foreign assets information form in their first year as tax residents. Immigrants who spend 183 days or more in a year in Canada are deemed tax residents.

Offshore Havens For people with significant overseas assets, Jacob suggests setting up offshore immigration trusts. Canada permits a 60-month tax holiday on income for new residents who place their offshore assets in an immigration trust. However, tax laws can be complex, and advisors need to consider both Canadian and foreign tax laws before pushing clients into setting up trusts that may not work in their best interests.

For example, transferring certain assets, such as shares of foreign companies, to an immigration trust could have complex tax implications, Jacob says, because many countries may levy a fairly heavy tax on assets that are transferred out of the individual’s account.

Terry Ritchie, a cross-border financial planner with expertise in both American and Canadian tax regimes, stresses when locking assets into trusts, advisors must make clear the trust will impose certain handcuffs on the availability of those resources for five years. “They must also determine cost versus benefit before setting up these trusts.”

Immigrants who wish to set up trusts in their countries of origin could end up mired in the intricate tax rules of that country. Jacob advises clients who wish to use offshore trusts to set them up in tax havens that do not tax such trusts, such as Jersey and Guernsey, islands in the English Channel, or other similar jurisdictions.

Clients who’ve previously been tax residents of Canada, even if it was 20 years ago, aren’t eligible for these immigration trusts.

For those who do qualify, Ritchie’s advice: “If the plan is for a short stay in Canada, it makes sense to keep it at five years or less.” Not only do immigrants enjoy tax-free income on offshore trusts for 60 months, they also avoid the deemed disposition tax on assets they brought to Canada if they leave within five years.

Therein, however, lies the catch. The tax holiday is deemed over the very first month of the calendar year in which the 60-month period ends. For example, if your client sets up an offshore trust in August of 2008 it will be taxable in Canada in January of 2013, not August. A lot of immigrants unaware of this fine print end up without a plan in the fifth year, and don’t realize the trust has become taxable in Canada. For trusts that haven’t filed tax returns once the tax holiday is over, Jacob suggests a voluntary disclosure might be the best way to avoid penalties before the CRA orders an inquiry.

The good news is: When a person or trust becomes a tax resident of Canada, the assets are deemed disposed at fair market value at the time; and taxes accrue only on an increase in the value of assets after arrival in Canada.

Do You Have an RRSP Yet? This is the first question that gushes out of any well-meaning Canadian advisor. But advisors need to understand the unique circumstances of immigrants before saddling them with RRSP accounts.

First off, newcomers have no contribution room in their first year (because contribution room depends on income during the previous year), so advisors could end up with angry clients who got penalized for over-contributing.

Secondly, while RRSPs are a great tool for people in the highest tax bracket, Jacob says they might not be the best tax-saving vehicle for immigrants starting out in new or low-salaried jobs.

Once implemented in 2009, Tax Free Savings Accounts (TFSAs) would be an invaluable addition to the advisor toolkit. Tax deferral with these accounts goes all the way, they even remain active after a client is no longer a Canadian resident, and the money is easily accessible and can be withdrawn tax-free.

But certain jurisdictions such as the United States, Ritchie warns, don’t recognize TFSAs. The account will be taxed in the U.S. as a foreign grantor trust. For such clients Ritchie recommends equity index funds.

In most countries, married couples file jointly to save taxes. The Canadian tax regime, where couples are taxed separately, is also a huge departure for most immigrants. Ritchie says advisors should encourage clients to reallocate their income assets and investment portfolios. “Shifting income from a high-rate taxpayer to a lower-rate taxpayer such as a spouse can save a lot in taxes.”

Estate Planning A lot of unsuspecting immigrants have no idea estate planning in Canada is very different from what they were used to. A will drafted in their countries of origin will not hold good in Canada. “They don’t know they need as many wills as the number of jurisdictions they have their wealth in,” Agrawal says.

It’s an advisor’s responsibility to revisit their clients’ existing wills, powers of attorney, or health directives, and encourage them to draft fresh documents that adhere to Canadian regulations.

For example, in India, Agrawal says, doctors can be much more flexible about making medical decisions for relatives. But in Canada a legal will guides action.

Guardianship issues also need to be sorted out for parents with kids who are minors. In case of a casualty where both parents die, a minor child could end up in foster care in the absence of proper documentation. Grandparents or relatives might not be able to claim the child.

The Chinese generally have an aversion to any conversations about wills or estate planning. Chan, who was with TD Asset Management in 1995, conducted a lot of seminars to educate this group. TD created the first Asian hotline providing Cantonese and Mandarin phone service where people could call and seek financial help.

But attitudes have gradually changed. Immigrants who’ve been in Canada for four-to-five years now want stable incomes, not windfalls. “They’re more willing to listen,” Chan says.

Most immigrants, according to Agrawal, also don’t know much about testamentary wills, and with their “ordinary will” could end up losing wealth to people outside the family tree. “Say A and B are married and have kids, C and D. A dies. B then remarries E. Then B dies. If the will doesn’t specify otherwise, the money may bypass C and D and flow to E,” he explains.

In order to avoid such cruel surprises, newcomers need to diligently seek professional help. As Agrawal puts it, “They must first understand they have limited knowledge about the Canadian regime. And then they must learn the laws in order to grow and protect their wealth.”

For their part, advisors need to stop planning for immigrants as they’d traditionally do for their Canadian clients. Varied global contexts and individual circumstances warrant customized advice for people from multiple regimes and tax jurisdictions.