The advantages of private foundations

The advantages of private foundations

A private foundation is a corporate entity with separate legal personality, but which has no owners, and therefore does not issue shares or other ownership interests. It is established by a founder who contributes initial funds or assets to the foundation.

The foundation is governed by its constitutional documents, which typically consist of a charter and bylaws, and a governing body called directors or council members. There will typically also be a guardian or enforcer who is empowered to supervise the directors to ensure they are complying with the foundation charter and bylaws, and with their duties as directors under applicable law.

The foundation’s charter or (more likely) bylaws will identify the foundation’s beneficiaries, if any, or its purpose, along with all other rules by which the foundation and its directors are to be governed. Those rules may include, for example, guidance as to how the foundation is to invest and manage its assets, how it is to distribute them to beneficiaries through generations or otherwise use them towards the foundation’s stated purpose, and how decisions are to be made by the foundation’s directors, among other things.

Private foundations have a long history in the civil law world as useful vehicles for family wealth management, estate planning and asset protection across multiple generations. They are used for many of the same purposes as trusts in the common law world, and are indeed sometimes viewed as trust substitutes.

A private foundation offers certain advantages over a trust structure which make them very useful in the context of wealth and succession planning, which include:

  • A foundation is a corporate entity with legal personality, which can own its own assets, contract in its own name, and which enjoys limited liability, but can carry out the functions of a trust, including a purpose trust. In order for a trust structure to achieve a similar result, a holding company is required in addition to the trust itself, resulting in a greater administration burden.
  • Foundations are more readily recognized and accepted by financial institutions, asset registries (land registries), and contractual counterparties in many more parts of the world than trusts (including Europe, Asia and the Middle East). There is also growing formal recognition of private foundations in common law jurisdictions, some of which have introduced their own foundation laws.
  • Beneficiaries are not required to have rights to receive information from the foundation, allowing for much greater confidentiality than a typical trust structure.
  • There is very limited, and sometimes no, publicly available information regarding a private foundation. The foundation’s bylaws typically contain the detailed terms governing the foundation, and the bylaws need not be filed with any regulatory body.
  • Foundations are not burdened by the often antiquated and seemingly arbitrary legacy of common law rules that afflict trusts, such as the rule against perpetuities or the right of beneficiaries to collapse a trust under what is known as “the rule in Saunders v. Vautier”.
  • The directors of the foundation are not subject to the equitable common law duties to which trustees are bound. They owe no fiduciary obligation to beneficiaries, only to the foundation itself. Similarly, beneficiaries need not be given any standing to enforce the terms of the foundation, and need not have any rights or entitlements from the foundation whatsoever.

Because of their corporate status and limited liability, foundations are useful for holding higher risk assets which may attract claims. A trustee, by contrast, may be wary about accepting such assets or may charge greater fees to hold and manage them.

Foundations offer the same, or potentially greater, asset protection benefits as trusts. Since claims must be made against the foundation itself (as opposed to a trustee), there is less direct concern around liability of directors (as opposed to trustees who do have that concern).  Also, civil law jurisdictions may not recognize the existence of a trust and simply attribute trust assets to the settlor for purposes of, for example, a divorce settlement.

Foreign private foundations for Canadians

In view of the above, a Canadian may wish to consider a private foundation where there is a desire not to extend information and enforcement rights to beneficiaries, minimize potential for claims, where the foundation will be investing, banking, or holding assets outside of the common law world, or where a founder and founder’s family resides in a civil law jurisdiction.  As discussed below, a foundation may also be useful in a tax planning context.

While the benefits of private foundations are compelling in the right circumstances, it is important to consider how the Canadian courts view foreign private foundations, and consequentially how they are viewed from a Canadian tax perspective. As noted, private foundations do not exist in Canadian law.

The approach taken by the Canadian courts when faced with a foreign legal entity which does not exist under Canadian law is a two-step approach, whereby it first examines the characteristics of the entity as defined under the applicable foreign laws and the entity’s own constitutional documents, and then compares those characteristics with those of entities recognized under Canadian law. The foreign entity will be treated as the type of Canadian entity it most closely resembles. Using that type of analysis, a Canadian court will treat a foreign private foundation as either a corporation or a trust.

There are many potential factors that will influence a court’s and the Canada Revenue Agency’s (CRA) determination that any particular foreign private foundation is more analogous to a corporation or a trust. These include such things as how the foundation is controlled, any rights reserved by the founder, who can enforce the foundation’s terms, the nature of beneficiary rights, duties of directors, how the foundation is described under local laws, and how the foundation actually functions in practice.

The CRA has stated expressly that the most important attributes to consider are the nature of the relationship between the various parties and the rights and obligations of the parties under applicable law and the foundation’s constitutional documents. The Canadian courts, in the very limited jurisprudence that exists on the subject, have also focused on the nature of the relationships and the respective rights and duties among the parties to the foundation in order to arrive at their determination.

The hallmarks of a trust relationship will include such things as a trustee’s fiduciary duty towards beneficiaries, the existence of beneficiary rights, and a beneficiary’s ability to enforce its rights against the trustee (among other things).

A foreign private foundation can be structured in a manner that creates similar relationships to a trust, or in a manner that does not. Since it will be a case-by-case analysis, it is not possible to achieve absolute certainty as to whether any particular foreign private foundation will be treated as a corporation or a trust by a Canadian court (or the CRA).

The analysis, however, can be predictably and materially influenced by how the foundation is structured. The Canadian legal and tax treatment of a foreign corporation (and a Canadian shareholder) is materially different from the legal and tax treatment of a foreign trust (and a Canadian beneficiary).  Therefore, thoughtful structuring of the foundation is key from a Canadian planning perspective.

With the right planning at the outset, a foreign private foundation can be part of a stable, efficient and effective wealth management, protection, and succession plan for Canadians. Private foundations are available under the laws of several jurisdictions worldwide, including notably Liechtenstein, The Netherlands, The Cayman Islands, Panama and the UAE. Specialist advice is essential.

Source article

If you would like to discuss whether a private foundation structure is right for you, please contact us. 

private foundation

James Bowden

Afridi & Angell
Tax planning and moving to Canada

Tax planning and moving to Canada

The Importance of Tax Planning when moving to Canada

For anyone planning to immigrate to Canada, or former Canadian residents preparing to return after a period of non-residency, it is worth taking the time to do some pre-immigration tax planning. It may well be that the Canadian tax environment is a lot more aggressive than where you’re coming from. If you wait until after you arrive to start arranging your affairs, it will be too late. Each personal or family situation will be unique and will benefit from bespoke professional advice, but this note will outline a few things that a prospective new/returning Canadian should bear in mind before making their move.

Canada imposes tax on the basis of residency, so once you become a Canadian resident you will be subject to Canadian taxation on your worldwide income, including foreign investments, foreign trusts, foreign rental properties, proceeds of the sale of foreign properties, and any other income from any source, anywhere in the world.  Foreign tax credits may apply to reduce your Canadian tax burden to some extent on foreign sources of income to avoid “double” tax on such amounts.

The Canada Revenue Agency (CRA) actively investigates foreign income and has information exchange treaties with many other countries (including automatic exchange of information treaties that provide for easy, fast, automated sharing), so your assumption should be that the CRA will be able to find or verify any foreign income you may have. It is your responsibility under Canadian law to voluntarily report it – if the CRA has to seek it out, you will be subject to interest and penalties.

Certain income earned before you arrive in Canada, but which you receive after you arrive (i.e., become “resident” in Canada) are taxed in Canada, so make sure you receive as much income as possible prior to your arrival and do not leave amounts accrued and unpaid.

The deemed tax cost (i.e., the adjusted cost base) of your capital assets (worldwide) for Canadian tax purposes will be their fair market value as of the date you become a Canadian resident. This is a benefit because when you dispose of any such assets, you pay tax only on the capital appreciation over and above the adjusted cost base of the asset, so the higher it can be, the better. You should obtain third-party valuations of your material capital assets shortly before or after you become a resident and keep this information on file, as you will need it.

Consider arranging for the establishment of one or more trusts which can help reduce your Canadian tax burden during life and upon succession. Canadian tax laws apply various so-called attribution rules and deemed residency rules for non-Canadian trusts, which operate to severely restrict offshore planning opportunities. Other rules do the same for corporate entities that hold property for a Canadian resident (attributing passive income directly to the individual shareholder). There is greater opportunity to implement effective structures without falling afoul of these rules prior to becoming a Canadian resident.

The same is true of a restructuring of existing trusts, that will become Canadian resident trusts when you move to Canada. The rules are complex and professional advice is necessary before attempting to implement any structures or changes.  The consequences of poor planning can be disastrous from a tax perspective, and such consequences are often avoidable.

Note in particular that even some actions taken prior to residency will come under the scrutiny of the CRA. For instance, if a foreign trust has been settled, or contributed to within the 5-year period prior to Canadian residency, the trust could be deemed to be Canadian resident, including retroactively to the time of the contribution. It depends on who made the contributions and how.

For trusts which do become Canadian resident when you do, note that those trusts will be taxable from January 1 of that year (even if you only became resident later in the year). If you can arrange for those trusts to receive payments prior to January 1 of the year you will become a Canadian resident, you should do that (such as paying out dividends to the trust on shares it holds).

Where a Canadian resident is a beneficiary of an offshore trust, and if the trust has been established in a manner that successfully avoids application of the Canadian attribution or deemed trust residency rules, it is possible to receive payments from such trusts on a tax-free basis. To achieve this, payments need to be made out of trust capital, not income, but this is not difficult to arrange with trusts that are established in jurisdictions that do not impose income tax on trusts. Such payments still need to be reported to the CRA as income received from a foreign trust on form T1142, but Canadian income tax is not payable on such amounts.

Even after Canadian residency is obtained, there remains many very good tax and non-tax reasons to make use of trusts in estate and succession planning, and they remain a central tool to the Canadian wealth planning community. However, there are unique and potentially very beneficial opportunities available to non-residents; be sure to take full advantage of them. http://www.afridi-angell.com

private foundation

James Bowden

Afridi & Angell
International Estate Administration from a Canadian perspective

International Estate Administration from a Canadian perspective

International Estate Administration for Canadian executors or beneficiary

The administration of an estate can be a complex and intimidating process at the best of times. If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential. This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

There are a number of things that can make an estate administration “international”. These include:

  • foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile* of the deceased at the time of death or at the time of making his/her will
  • a foreign executor
  • or some combination of the foregoing. When an estate has one or more of these characteristics, there are certain questions that need to be addressed. The remainder of this article will be guided by these key questions and answers.

What laws apply to the estate?

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.

The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements.

The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.

Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).

The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

Where should you apply for probate?

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located. Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange). As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.

Those requirements will be one of the following:

  • a certified copy of the will; a fully attested copy of the will (possibly translated) 1
  • a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.

Note that assets that do not require probate in Canada may require it in other jurisdictions. If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor. In the context of an international estate administration this should be a material consideration for any executor.

Are there special tax issues with an international estate?

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements. Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country. If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate).

Note  this  is  different  from  the  clearance  certificate  that  the executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically. 2

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself. However, an information return may still need to be filed with the CRA 3. If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA 4.

Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward. It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.

If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death 5, then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.

The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever. The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).

The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

What should you do to plan your international estate in advance?

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

  1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.
  1. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.
  1. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.
  1. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the lawyers or other professionals who were involved in their preparation or other estate planning.
  1. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

Source

private foundation

James Bowden

Afridi & Angell
  1. The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.[]
  2. Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.[]
  3. Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).[]
  4. Form T1135 (Foreign Income Verification Statement).[]
  5. Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months[]
Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).

In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.

The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000). 1

The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings. 2

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.

International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

  • Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
  • Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
  • Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
  •  Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
  • Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
  • Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us.

private foundation

James Bowden

Afridi & Angell
  1. There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.[]
  2. For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  Https://Www.Henleyglobal.Com/Publications []
What tax matters are important when emigrating?

What tax matters are important when emigrating?

What tax matters are important when emigrating from Canada?

When you take up residence in another country, have you obtained advice on tax matters both on departure and on any risks of having continuing connections with your former residence?

While it is possible with proper planning to minimize tax on expatriation to another country, it is equally important to reduce exposure to the risk of continued residence-based taxation in the former country.

When my client Michael told me he was planning to leave Canada and needed tax advice, I prepared to give him some advice he was not expecting. He had heard from some friends that they had emigrated to The Bahamas because there is no income or estate tax there. But Michael’s wife was pushing him to go to England where their teenage children might get a superior education.

He was surprised to find out that on leaving Canada he will be deemed to have disposed of all of his assets, subject to certain exceptions, for proceeds of disposition equal to the then fair market value of each such asset, resulting in capital gains tax (at a rate of 25%, effectively).  Some have called this Canadian rule, “Golden handcuffs”. Several other countries have adopted similar departure taxes, including Spain and South Africa.

When Michael explained that he wanted to support the arts from his new home, I suggested a plan that could accomplish his goal and save tax on departure. I suggested we register a private charitable foundation with the Canada Revenue Agency, which he could run from his new home.

The object of this charity to support the arts was one that the CRA has found acceptable in the past. He could then make a tax-free gift of his publicly-listed securities to this foundation, which would reduce the value of his assets on departure. He would also be entitled to a donation tax credit based on the value of the donated securities, which in turn could be used to shelter taxable income for his year of departure.

While he liked the idea of going to The Bahamas and not to have to worry about paying local income tax or estate tax, I explained that he should not forget about his connections with Canada and the special risks associated with those continuing connections. When Michael said that he liked the summers in Canada and so would retain his cottage here, I cautioned him about his Canadian tax exposure.

The Income Tax Act (Canada) (the “ITA”) would deem Michael to be a resident of Canada if he sojourned in Canada for more than 183 days in any year, even though he may have acquired a residence for tax purposes elsewhere.

Under Canada’s tax treaties with ninety-four other jurisdictions, including the U.K. but not with The Bahamas, 1 there is a set of “tie-breaker rules” to determine if a person is a dual-resident, and which jurisdiction has the right to tax him/her on worldwide income on the basis of his/her having the closer connection with that jurisdiction.

In addition, I explained that the courts have broadly interpreted the rule in the ITA that a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada. In other words, the question is where the person in his/her settled routine of life regularly, normally or customarily lives.

One must consider the degree to which the person in mind and fact settles into, maintains, or centralizes his/her ordinary mode of living, with its accessories in social relations, interests and conveniences, at or in the place in question.

I told Michael that if he keeps the cottage in Canada and habitually returns to it from a non-treaty jurisdiction like The Bahamas, he is likely to be found to be a resident of Canada. In contrast, if he lives in England and maintains his “centre of vital interests” there and not in Canada, he is likely not to be found to be a resident of Canada under the Canada-U.K. Income Tax Convention.

In the end, Michael moved to England; we set up the foundation; and he uses the liquid funds in the charity to support the arts in Canada and elsewhere. https://www.grllp.com

  1. As Canada considers The Bahamas to be a tax haven, it does not have a double tax treaty with that country, but it does have a Tax Information Agreement that provides for tax information to be exchanged between The Bahamas and Canada.

    In addition, the Agreement provides that a Canadian multinational with a subsidiary that carries on an active business, such as a hotel, in The Bahamas, is able to repatriate profits by way of tax-free dividends.

    However, the Agreement does not provide Bahamian individuals with relief in the area of exposure to Canadian tax residence. []