Offshore advantage

As discussed last month, in order for a former Canadian resident to establish a non-resident trust that escapes Canadian taxation, he or she must be a non-resident of Canada for at least five years before the trust is established, and for a period of at least five years before resuming residence in Canada.

There may indeed be people who are ready to leave Canada and take up residence in a low-tax jurisdiction and establish offshore trusts. But what does it take to be a nonresident of Canada? Many believe that as long as you spend less than 183 days in Canada during the year, you’ll automatically be considered a non-resident for income tax purposes.

There may indeed be people who are ready to leave Canada and take up residence in a low-tax jurisdiction and establish offshore trusts. But what does it take to be a nonresident of Canada? Many believe that as long as you spend less than 183 days in Canada during the year, you’ll automatically be considered a non-resident for income tax purposes.

There may indeed be people who are ready to leave Canada and take up residence in a low-tax jurisdiction and establish offshore trusts. But what does it take to be a nonresident of Canada? Many believe that as long as you spend less than 183 days in Canada during the year, you’ll automatically be considered a non-resident for income tax purposes.

There may indeed be people who are ready to leave Canada and take up residence in a low-tax jurisdiction and establish offshore trusts. But what does it take to be a nonresident of Canada? Many believe that as long as you spend less than 183 days in Canada during the year, you’ll automatically be considered a non-resident for income tax purposes.

This means a person who moves out of Canada, but keeps the family cottage so he can return each summer to spend time with his children and grandchildren, may be quite disappointed to find out he’s still considered a resident by the CRA for tax purposes.

And even if a person does not maintain any of these primary residential ties, there may be other connections to Canada that are significant enough to make him technically resident for tax purposes. These could include: maintaining personal property in Canada, such as a car; social ties within Canada, such as club memberships; economic ties including involvement in Canadian business or Canadian investments; provincial medical-insurance coverage; and maintaining a Canadian driver’s licence or passport.

Although it’s unlikely any single factor would be deemed significant enough in determining someone is resident of Canada, if enough of the factors exist, they may point to continued Canadian-resident status after departure.

If your client plans on becoming a non-resident, it’s important to remind him or her to sever as many ties as possible. And if the client does settle an offshore trust after five years for the benefit of Canadian family members, advise him or her to maintain non-resident status. If for some reason, the client returns to Canada within this period–say he or she becomes ill and wants to be with family or be cared for by a certain Canadian physician–the trust will be deemed a Canadian trust from the time first established.

If your client plans on becoming a non-resident, it’s important to remind him or her to sever as many ties as possible. And if the client does settle an offshore trust after five years for the benefit of Canadian family members, advise him or her to maintain non-resident status. If for some reason, the client returns to Canada within this period–say he or she becomes ill and wants to be with family or be cared for by a certain Canadian physician–the trust will be deemed a Canadian trust from the time first established.

The ability to escape Canadian taxation using offshore trusts has become much more difficult. However, there are a number of trust arrangements that continue to provide tax relief. They include: non-resident trusts established by relatives who never were, or plan to be, resident in Canada; non-resident immigration trusts for 60 months after immigration; and a non-resident trust settled by a recent Canadian emigrant for the benefit of non-resident beneficiaries or resident beneficiaries who only have an interest after the death of the contributor.

In addition, an offshore trust created by a Canadian resident solely for the benefit of non-resident beneficiaries can generally escape Canadian taxation by paying the income to the beneficiaries on an annual basis.