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The Federal Budget 2014: A Hidden Trap for High-Net-Worth Immigrants

13/02/2014


For a long time, Canada has been a welcoming place for high-income immigrants. With the 2014 budget, that environment has changed significantly.

Immigrant Investor Program (IIP)

The IIP was a program created in 1986 to attract wealthy foreigners to Canada, on the premise that their presence would create jobs for Canadians. The idea was for immigrants to make an investment of $800,000 or more, as an interest-free loan to the government. In return, the investor would be granted permanent residency status (eventually leading to citizenship, it was hoped).

It was a very successful program. 130,000 people have used it to date, and there were many more in the queue.
Just before the budget was released, Citizenship and Immigration Canada scrapped the program. The government decided it smacked of selling citizenships and that offended its notion of citizenship standing for something more.

News flash:  Canada has reintroduced this program - see my blog January 14

New citizenship requirements
According to the current Citizenship Act, applicants must have resided in Canada for three out of four years (1,095 out of 1,460 days), yet ‘residence’ is not defined. It was not the same definition used for income tax purposes. As a result, it has been possible for individuals who have spent little time in Canada to acquire citizenship. Many individuals could become citizens without being residents for tax purposes.

In the past, there was no tax requirement for citizenship, and CIC and the Canada Revenue Agency (CRA) did not communicate effectively. In the end, they got Canadian citizenship privileges without accepting one of the more significant obligations.

Henceforth, an applicant will have to be physically present for four years (1,460 days) in a six-year period and for at least 183 days per year in four of the six years. They would be required to file Canadian income tax returns, if required under the Income Tax Act. It is possible, but hard, to spend the newly-required amount of time in Canada without becoming a resident of Canada for tax purposes.

However, the overwhelming majority of immigrants planning to become Canadian citizens will now be required and inclined to file returns. Most of these people will file as Canadian residents.

Canada taxes residents on their worldwide incomes. People on the road to citizenship will have an incentive to file returns, those returns will mostly report worldwide income, and that income will be subject to Canadian tax.

Immigration Trust
If they hold assets in offshore trusts, partnerships or corporations, passive income from those assets is still generally taxable in Canada. Passive income typically includes interest, dividends, rents, royalties and capital gains.

Since at least 1972, in order to attract wealthy foreigners, Canada has allowed immigrants to place their assets in a foreign trust, called an ‘immigration trust.’ The income earned inside this trust would be exempt from Canadian tax for the first five tax years the immigrant was a resident of Canada for tax purposes.

This exemption made Canada competitive with places like the United Kingdom. There, one can be a ‘non-domiciled’ resident and offshore income can be tax-exempt.

In the 2014 budget, this exemption was eliminated. New trusts will not qualify and existing trusts will lose their protection from Canadian tax beginning with the first tax year ending in 2015. Most trusts have a calendar tax year, so the effective end date will be December 31, 2014.

What does this mean?

Canadian individual income tax rates are high compared to those of most other countries. Combined, these measures send out a message to potential high-net-worth immigrants: “If you really want to come here, we’re going to make it hard and you’re going to have to pay.”

The above measures will not really affect low- and middle-income people because they wouldn’t have used these tactics anyway. Since there are a lot more people in this average net worth category, the changes will be politically popular. Whether it is to Canada’s advantage to hold up a ‘STOP’ sign to wealthy immigrants is a different question.

With thanks to Tim Bloos.

To read MNP's summary of the 2014 Federal Budget, please click here.