Published: July 5, 2023
Introduction –Influx of Wealthy Immigrants to Canada Continues to Rise
A recent report by Henley & Partners, a U.K.-based investment consultancy specializing in international tax planning and migration services, has cast a spotlight on increasing outflows of “high-net-worth individuals” from developing economies, and more specifically China and India. A high-net-worth individuals (according to Henley & Partners) are those with investable wealth of USD $1 million or more. According to Henley’s Migration Report 2023, it is estimated that over 13,000 high-net-worth individuals will be emigrating from China over the next year to jurisdictions with more favourable tax regimes for their investable wealth. India is expected to lose almost 7,500 high-net-worth individuals to jurisdictions offering favourable tax environments.
Among the target destinations for these wealthy emigrants includes Canada in 5th place, with an expected influx of 1,600 new high-net-worth individuals over 2023. Many of the top countries experiencing inflow of high-net-worth individuals have developed aggressive investment migration programs to encourage foreign direct investment in exchange for residence rights, and Canada is no exception. Under Canada’s Start-Up Visa Program, wealthy entrepreneurs can obtain the right to live and work in Canada and eventually citizenship in exchange for investing in businesses that are expected to create jobs for Canadians and to grow the Canadian economy. There are also many social and political reasons that favour immigration to Canada, given the country’s relatively high standards of living and low rates of crime and corruption.
While Canada may offer many benefits to new wealthy immigrants, planning for such a move is rarely a simple matter. Canadian domestic tax rules can be extraordinarily complex depending on the nature of an individuals’ business and investment activities. There are many tax traps into which an unprepared immigrant can unintentionally fall, and as a result end up non-compliant and facing the full weight of the tax administration and compliance wing of the Canadian government, the Canada Revenue Agency (“CRA”). This article aims to address some of the most immediate and often-times neglected tax considerations for high-net-worth individuals moving to Canada, who may be seeking to move capital to Canada or maintain investments abroad. This article will begin by explain how an individual becomes a resident for Canadian tax purposes, and why planning for establishing tax residence is the first crucial consideration for any high-net-worth individual looking to fast-track a move to Canada. This article will then explore a myriad of compliance and anti-avoidance rules, and planning opportunities, for high-net-worth individuals moving to Canada who may already have investment vehicles set up abroad, or may be looking to move capital to Canada. This article will then conclude with some pro tax tips and some frequently asked questions concerning Canadian tax residence and tax planning considerations.
While this article aims to address a number of important topics, any high-net-worth individual moving to Canada should absolutely retain a Toronto tax law firm to advise on how best to plan for emigrating to Canada, as each situation is unique and will invite new and unique tax considerations. Rarely are two situations identical, and only through proper research in light of an individual’s goals will an appropriate and tax-efficient plan be developed.
A General Summary of Canadian Tax Residence Rules and Considerations
Distinguishing Between Tax “Residence” and Other Forms of Residence and the Canadian Tax Treatment of Each
It is important to distinguish at the outset that residence for immigration purposes (e.g. citizenship, permanent residence, temporary work or study visas) is a distinct concept from the rules under Canada’s tax system that determine whether a person is a “resident” of Canada and therefore subject to taxation as a Canadian tax resident. Unlike an individual’s immigration residence status, with is an administrative title the Government of Canada grants to a person, the concept of “residence” for tax purposes is linked to the extent and permanence of an individual’s connecting ties to Canada. Broadly speaking, an individual with deep ties to Canada enjoys the privileges of benefiting from its public services, and because those privileges make it possible for that individual to earn income. Many other countries adopt a similar distinction between residence for immigration purposes and residence for tax purposes, motivated by similar policy considerations.
Under subsection 2(1) of the Canadian Income Tax Act, the worldwide income of an individual resident in Canada is subject to tax. In contrast, a non-resident individual of Canada is only subject to tax on Canadian-source income under subsection 2(3) and Part XIII of the Income Tax Act (which includes income from employment in Canada, carrying on business in Canada, or a disposition of “taxable Canadian property”). Thus, if an individual is a Canadian tax resident, then Canada will assert its jurisdiction to tax any income including all income earned outside of Canada. This would include, for example, pension income that may not be taxable in the source country. Section 126 of the Canadian Income Tax Act would then permit that individual to take a tax credit against any Canadian tax liability for foreign taxes paid on that foreign income. Canada’s foreign tax credit system helps to ensure that a taxpayer will not be taxed twice on the same foreign income, where that other country may have a stronger claim to that tax base. However, to ensure the tax system remains equitable, foreign tax credits cannot be used to subsidize income taxes from other countries. Foreign tax credits are thus limited to the extent that the taxpayer had pre-credit Canadian taxes owing for that year. Any unused foreign tax credits may be carried forward or back as deductions to offset income taxes paid in other years on a country-by-country basis, but only under limited circumstances.
When is an Individual Treated as a Canadian Tax Resident?
Under subsection 2(1) of the Canadian Income Tax Act, an individual who is a “resident” of Canada is subject to tax on worldwide income. In contrast, a Canadian non-resident individual is only subject to tax on Canadian-source income under subsection 2(3) and Part XIII of the Income Tax Act. An individual may be found to be a resident for Canadian tax purposes in accordance with two distinct rules:
- a taxpayer may be “ordinarily resident” within the meaning of subsection 250(3) of the Income Tax Act; or
- where that taxpayer is not otherwise ordinarily resident in Canada at any point in a given taxation year, that taxpayer may be a “deemed resident” under paragraph 250(1)(a) of the Income Tax Act.
Defining “Ordinarily Resident” in Canada
Under subsection 250(3) of the Income Tax Act, an individual is viewed as a resident of Canada where that individual is “ordinarily resident” in Canada. (“Ordinary residence” is often referred to as “factual residence”.) The Income Tax Act does not define what it means to be “ordinarily resident”, and so Canadian courts have articulated conditions that are to be weighed when determining whether a person is ordinarily resident or not. Broadly speaking, a person’s ordinary residence is “the place where in the settled routine of his life he [or she] regularly, normally or customarily lives.” Other relevant factors for determining somebody’s ordinary residence include a person’s:
- past and present habits of life;
- regularity and length of visits in the jurisdiction asserting residence;
- ties within that jurisdiction;
- ties elsewhere; and
- permanence or otherwise of purposes of stay abroad.
In addition, the CRA has published its own views in Income Tax Folio S5-F1-C1 (“Determining an Individual’s Residence Status”) as to what factors will militate in favour of an individual being a Canadian factual resident. While the CRA’s published views on Canadian tax law do not have force of law in Canada, they have been recognized by Canadian courts as fundamental tools for the interpretation and application of Canada’s tax laws to other taxpayers. Those views should not be ignored when they correctly interpret the law, and in particular, CRA’s Income Tax Folio S5-F1-C1 has been cited with approval by the Tax Court of Canada and reasonably tracks applicable case law concerning Canadian tax residence.
Broadly speaking, when considering both the common law and CRA’s published views, the most significant factors for establishing whether an individual is a Canadian factual resident will include:
- whether that individual has a “dwelling place” (i.e. a home or apartment) available for his or her long-term use in Canada;
- whether that individual has a spouse or common-law partner in Canada; and
- whether that individual has any dependants in Canada.
Other important secondary ties that can influence a finding that an individual is a Canadian factual resident or not include that individual’s personal property (i.e. furniture and vehicles), economic ties (i.e. bank accounts, investments, registered plans, credit cards and other debt), immigration status, government documents (i.e. health insurance, driver’s licence, passport), and social ties (i.e. memberships to professional organizations or unions, or recreational clubs or religious organizations) in Canada.
It bears repeating that an individual’s factual residence remains a purely fact-specific determination. Canadian courts have in certain circumstances found a taxpayer to be a non-resident of Canada, or to have ceased to be a factual resident in Canada, despite maintaining significant ties (i.e. a dwelling, spouse, or dependants) in Canada.
The “Deemed Residence” Rule
Paragraph 250(1)(a) of the Income Tax Act deems an individual to be a resident of Canada throughout a particular tax year if that person “sojourned” in Canada for 183 days or more in that year. This is often referred to as the “deemed residence” rule. The meaning of “sojourning” has been broadly interpreted to mean that the individual was “temporarily resident” in Canada. A commuter can be distinguished from a sojourner, in that a commuter is only present in Canada for purposes of travelling between destinations such as to and from work. A sojourner may stay in Canada, even casually or intermittently, but with some sense of permanence. Whether an individual is a sojourner is a fact-specific analysis similar to the factual residence test.
It is worth acknowledging that an individual can only be deemed resident in Canada where that individual was not otherwise a factual resident of Canada, and so the factual residence test must be considered before the deemed residence rule when determining an individual’s status as a Canadian tax resident.
The Impact of International Tax Treaties on Establishing Canadian Tax Residence
While the Canadian domestic tax system may view an individual as a Canadian tax resident, that is not the end of the taxation story. Canada has entered into a number of bilateral tax treaties with other countries globally (including China and India), in part to help settle what countries’ domestic tax laws will have claim to tax that individual, where that individual is a tax resident of both countries. Most Canadian treaties follow the OECD Model Tax Convention, which provides several standard and sequential tie-breaker rules to determine where an individual is resident. Under the OECD Model, an individual is deemed to be a resident in the jurisdiction:
- in which that the individual has a permanent home available;
- in the jurisdiction of that individual’s “centre of vital interest”;
- in the jurisdiction of that individual’s “habitual abode”;
- in the jurisdiction that individual is a citizen or national; or
- where the above-tests remain inconclusive, whatever mutual conclusion that the competent authorities of each jurisdiction arrive at (that is, the Canada Revenue Agency and the other country’s tax authority will come to an agreement on the issue.)
To give effect to an international treaty determination, under subsection 250(5) of the Income Tax Act, where a Canadian tax resident is deemed a resident of another country under a bilateral tax treaty, then that individual is deemed to be a non-resident of Canada as of that day the treaty applied. In other words, the deemed non-residence rule will only apply where an individual is resident in both Canada and another country, and is not deemed a Canadian tax resident under that treaty.
Thus, where a Canadian tax resident is also deemed to be a Canadian tax resident under a bilateral tax treaty, that individual’s status as a Canadian tax resident will remain untouched. In turn, an individual may be viewed as a factual non-resident where that individual’s ties to Canada are minimal and demonstrate that Canada is not that individual’s settled, normal or customary place of living. While establishing Canadian tax residence under Canada’s domestic rules may seem like a straight-forward affair, ensuring that status is not overridden by a treaty determination under subsection 250(5) presents far more challenges. An immigrant seeking to establish Canadian tax residence must generally sever enough ties to that individual’s home country, while establishing sufficient ties to Canada, to successfully become a Canadian tax resident. Ensuring this transition is successful will often times require involvement of both a Canadian tax lawyer and counsel from that individual’s home country and should be sought as soon as possible to ensure a smooth transition for tax purposes.
Tax Planning Considerations for High-Net-Worth Individuals Immigrating to Canada
Once an individual establishes Canadian tax residence, the full force of Canada’s tax system comes into effect. While this may present new opportunities for wealth and estate planning, wealthy families and high-net-worth individuals immigrating to Canada need to also remain aware of the many anti-avoidance, reporting and compliance rules. Ensuring disclosure and reporting obligations for tax purposes are met can be just as important as proper wealth planning, as failure to comply with Canada’s extensive tax rules can prove to be a very costly mistake. The following sections will explore various anti-avoidance and compliance rules most likely to impact high-net-worth individuals immigrating to Canada.
Foreign Asset and Foreign Affiliate Disclosure Responsibilities – The T1135 and T1134 Information Returns
Canada enforces extensive asset disclosure requirements for wealthy Canadians through sections 233.3 and 233.4 of the Canadian Income Tax Act. The CRA enforces these obligations by imposing on Canadian taxpayers additional filing obligations where that taxpayer owns “specified foreign property” and shares in a “foreign affiliate” above specific thresholds.
Under section 233.3, a Canadian resident taxpayer who owns “specified foreign property” with a total aggregate cost amount in excess of $100,000 CAD at any time in the year is deemed to be a “reporting entity” and is required to file Form T1135 for that taxation year. The Form T1135 is not a tax return in the traditional sense and does not create a tax obligation for a Canadian tax resident filing the T1135. The Form T1135 is used to ensure that Canadian tax residents report the existence of foreign property interests to the CRA, so that those interests can be monitored by the government. Further, an individual who was a non-resident of Canada in a given taxation year and who became a Canadian tax resident in that same year is exempted from filing Form T1135 for that particular. Thus, if a taxpayer has specified foreign property with an aggregate cost exceeding $100,000 CAD, but that taxpayer became a Canadian tax resident in 2023, then that taxpayer will firstbe required to file Form T1135 for the 2024 taxation year.
Not all foreign property needs to be included for T1135 reporting purposes. “Specified foreign property” is a broadly defined term under the Income Tax Act, and includes (but is not limited to):
- real property (land and buildings) located outside of Canada;
- shares in foreign corporations, or Canadian corporate shares held internationally;
- funds and intangible property “situated, deposited or held outside Canada” (i.e. a foreign bank account);
- “indebtedness” owed by a non-resident person (e.g. a mortgage or loan taken overseas); and
- An interest in or a right under contract to property that is specified foreign property, or property that is convertible or exchangeable for property that is specified foreign property.
It is worth noting that cryptocurrency such as Bitcoin and Ethereum will normally be included in the definition of specified foreign property and will need to be reported on Form T1135.
The Income Tax Act specifically excludes from the definition of specified foreign property any property held “exclusively in the course of carrying on an active business.” Generally speaking, a foreign tax jurisdiction is considered to have the right to tax the active business income-earning activities of Canadian tax residents in that jurisdiction, because that business benefits from local laws and economic conditions. A Canadian tax resident holding property passively in a foreign tax jurisdiction continues to benefit from Canadian laws and economic conditions but may be at an advantage to engage in unfair tax avoidance compared to other Canadian tax residents, or inappropriate tax evasion and income sheltering from Canadian tax authorities. The “active business” exception to T1135 reporting requirements makes it clear that the goal of Canadian tax authorities is not to overburden Canadian business operating internationally, but to prevent inequality among taxpayers who hold certain properties in other tax jurisdictions.
Similarly, subsection 233.4 requires that a Canadian taxpayer with a qualifying interest in a “foreign affiliate” corporation is obligated to file a T1134 information return with that tax year’s income-tax return reporting that interest. A foreign affiliate is defined as any foreign (i.e. non-resident) corporation in which the reporting entity owns at least a 1% equity interest, and in which the reporting entity and related persons own a combined 10% or greater equity.
The T1135 and T1134 information returns often pose a challenge for high-net-worth individuals living in Canada. Many high-net-worth individuals moving to Canada may own assets or property through an interposed entity (i.e. a corporation, partnership or a trust) as a means to ensure anonymity or privacy with respect to ownership of those assets, or to obtain additional protection from arbitrary expropriation by a foreign government. The T1135 and T1134 information returns clearly compromise those goals. Ignoring these obligations as well can carry stiff penalties. Late-filing or failing to file a T1135 or T1134 information return as required can accumulate a penalty of up to $2,500 for every year each return is not filed, in addition to interest and other possible penalties the CRA deems appropriate. Additional penalties may exist where property is misreported or underreported on a T1135 or T1134 information return. It is worth bearing in mind though that the T1135 and T1134 information returns do not create a tax obligation, and are simply a mechanism by which the CRA can observe and account for foreign asset ownership, and to ensure the Canadian tax base is not unduly eroded. Given that penalties for non-filing are strict and unforgiving, and failure to file may attract more attention than necessary, it is worth discussing these obligations with Canadian tax counsel proactively to determine what your obligations are, if any.
Passive Income Pitfalls – “Foreign Accrual Property Income” (“FAPI”)
The foreign affiliate regime of the Canadian income tax system aims to mitigate indefinite tax deferral available for Canadian residents through use of foreign corporations or trusts, in jurisdictions with favourable tax rules. Under section 91 of the Canadian Income Tax Act, the “foreign accrual property income” (or “FAPI”) of a “controlled foreign affiliate” is imputed on a Canadian resident shareholder of that controlled foreign affiliate in cases where that income is not actually distributed to the shareholder. As discussed above, a foreign affiliate is a foreign corporation that: (1) a Canadian resident, alone or together with other persons (who may or may not be Canadian tax residents) own at least 10% of the shares of a class or series of shares in that corporation; and (2) the Canadian resident owns at least 1% of those shares. A controlled foreign affiliate is defined under subsection 95(1) of the Canadian Income Tax Act as a foreign affiliate where a particular Canadian taxpayer holds control in fact over the corporation (i.e. a majority of voting shares), or that Canadian in combination with up to four other Canadian residents hold control in fact over the corporation.
The definition of FAPI is extraordinarily nuanced, and explaining the full scope of these rules is well outside the scope of this article. But in a broad sense, FAPI includes the following type of income:
- Income from property or an investment business;
- Canadian-source business income that is deflected to a foreign corporation resident in a low-tax jurisdiction;
- Income from services by members of a related corporate group; and
- Income and gains from disposition of capital property (unless that property is used to produce business from an active business, or that property includes shares of a corporations where substantially all of the fair market value of that corporation’s property is itself excluded).
Where a controlled foreign affiliate earns FAPI in a given tax year, section 91 of the Canadian Income Tax Act will require that the Canadian resident taxpayer holding shares in the corporation include a percentage of share of that FAPI in personal income for the year. That amount of FAPI attributable to a particular taxpayer is determined by that taxpayer’s participation in the capital stock of the corporation. Section 113 provides an extra layer of relief for shareholders who pay tax on FAPI, by exempting part or all of dividends paid out of that income from taxation.
The FAPI regime is particularly relevant for the high-net-worth individual who migrates to Canada with a foreign corporation holding investments or property that earn passive income. Without appropriate planning and due diligence, a new Canadian tax resident may be forced to recognize substantial income earned by that corporation personally, without actually receiving the cash generated by those passive investment activities. The Supreme Court of Canada in Canada v. Loblaw Financial Holdings Inc., 2021 SCC 51, recognized that the FAPI regime is one of the most complicate statutory regimes in Canadian law. It is extraordinarily important when immigrating to Canada that foreign investment structures be reviewed for any potential conflict with the FAPI regime so as to avoid the risk of running afoul of it.
Foreign Corporations Becoming Canadian Tax Residents – The “Central Management and Control” Test
Under Canadian domestic law, a corporation incorporated in a foreign jurisdiction may be treated as a Canadian tax resident and thus taxed in Canada on its worldwide income, where the central management and control of that corporation occurs in Canada. The question of where the central management and control of a corporation is exercised is a pure question of fact, but is generally considered to be the place where its board of directors meet. A similar rule applies to foreign trusts, where the consideration is the place where the trust is actually managed.
Central management and control will typically exist with the board of directors, even if the directors are under significant influence from shareholders or other third parties. However, it is possible for a board of directors (and by extension, a sole director) to be viewed as “nominee” decision-makers, such that central management and control does not follow from the powers exercised by that board. This will be the case where the corporation’s local board of directors stand aside and do not exercise any of their powers to govern the corporation, and instead a non-board member “dictates” the decisions taken by the corporation.
For a high-net-worth individual immigrating to Canada who also operates a business overseas through a corporation, there is a risk the business may be viewed as a Canadian tax resident for Canada’s domestic tax law purposes. Canada’s bilateral tax treaties occasionally include tie-breaker provisions for corporations similar to the tie-breaker rules that apply to determine an individual’s tax residence where Canada’s domestic system conflicts with that other country’s domestic rules. However, not all of Canada’s tax treaties include these provisions, and so the risk of a corporation becoming a Canadian tax resident will depend not only on how the corporation operates, but also the country or countries in which it operates.
Taxation of Foreign Pension Income
High-net-worth individuals immigrating to Canada may hold an interest in a tax-deferred pension plan in a home country. While contributions to, accumulations and distributions from those pensions may benefit from preferential tax status under that home country’s domestic laws, that same tax-deferred treatment may not carry through to the Canadian tax system. Foreign qualifying pension plans may have no special status in Canada, and those contributions and distributions made from a foreign pension plan must be considered in the context of the Canadian tax system.
As discussed above, under subsection 2(1) of the Canadian Income Tax Act, an individual who is a resident of Canada at any time during a taxation year is subject to tax in Canada on worldwide income for that year. Under subparagraph 56(1)(a)(i) of the Canadian Income Tax Act, amounts received from a “superannuation or pension benefit” form fully taxable income in Canada. Broadly speaking, a superannuation or pension fund or plan an arrangement that involves payment of regular post-retirement income to employees and which is paid in accordance to the terms of the plan and not at the beneficiary’s discretion. The Canadian Income Tax Act does not distinguish between superannuation or pension income according to the origin of payments, and subjects every Canadian resident taxpayer to the same liability for Canadian income taxes on payments received.
This blanket taxation of pension funds can create an inequitable situation for immigrants to Canada, as any portion of the pension plan that reflects a return of the pensioner’s capital contributions to the plan will remain fully taxable. Without additional relief under a bilateral tax treaty, an individual immigrating to Canada may face full taxation of foreign pension income received. And under most of Canada’s bilateral treaties, Canada’s right to tax foreign pension benefits is preserved. Provisions of Canada’s bilateral treaties may set a maximum rate that a contracting state may tax pensions and annuities arising in that state. For example, under the Canada-Australia Tax Treaty, Article 18 allows Australia to tax pensions and annuities at a rate of 15% of the income received in a year. If a Canadian resident were to receive that income, then the taxpayer would be entitled to claim a foreign tax credit in Canada on those taxes paid in Australia, but would still be liable for full tax on that income in Canada. Finally, payments made out of a “foreign retirement arrangement” are excluded when calculating income for tax purposes in Canada, but only if the amount “would not be subject to income taxation in the foreign country if the taxpayer were resident in that country”. For the purposes of the Canadian Income Tax Act, the definition of a “foreign retirement arrangement” is prescribed under the Income Tax Regulations is a United States Individual Retirement Account (“IRA”). As a consequence, it is extraordinarily unlikely that any relief from Canadian taxes will be available for foreign pensions received. To avoid the worst of these tax rules, you should speak with a Canadian tax lawyer to determine if any options exist to re-structure your pension plan or transfer your pension to Canada. Appropriate planning with a tax expert can go a long way to mitigating Canadian taxes you may owe following your immigration to Canada.
Non-Arm’s Length Transactions and Transfer Pricing
If you maintain an offshore business that interacts with a Canadian business that you own, then transfer pricing rules cannot be ignored. In a closely-held group of corporations, those corporations may not always be affected by market considerations when interacting with each other, even though they are technically separate entities. That is to say, some corporations belonging to a multinational business family and under common control may act for the benefit of the family and for non-commercial purposes when trading with each other. For example, a Canadian company may sell a commodity or provide a service to a foreign subsidiary for its own consumption. That Canadian company may provide that commodity or service at a value lower than what it would be valued at on the open market to benefit the subsidiary. Consequently, the Canadian company will recognize lower taxable income than it presumably would have had it transacted with a party at non-arm’s length over the open market. A multinational business family can end up distorting Canada’s tax base by shuffling profits and expenses between entities in various jurisdictions, where income may be taxed at lower rates or to generate higher expenses for a paying corporation.
Canada’s transfer pricing rules aim to prevent these distortions when non-arm’s length cross-border entities contract with each other. In principle, the CRA is granted the right to adjust the Canadian taxpayer’s transfer prices or cost allocations where they do not reflect the terms and conditions that arm’s length entities on the open market would have arrived at. Transfer pricing is not an exact science, and there are many methods endorsed by the CRA that can be used to arrive at an appropriate valuation of the transaction.
Where entities fail to use an appropriate transfer pricing method to value a transaction or a series of transactions, then section 247 of the Canadian Income Tax Act grants the CRA the right to adjust either the quantum or the nature of the amounts under review. Where entities entered into a contract that would have been entered into on the open market, but because of common control income was re-directed, the CRA is given the opportunity to adjust the price or amount related to the character of the transaction. Where entities entered into an arrangement that would not have been made on the open market, and was made primarily for a tax benefit, the CRA is entitled to find an appropriate market analogue to adjust the price or amount for the transaction. The CRA is not granted the right to recharacterize the transaction wholesale, but is given the power to substitute an alternative transaction under the terms and conditions that would have been made, and to levy tax according to that alternative transaction.
The CRA is granted extensive rights to investigate and review transfer pricing decisions made by multinational corporate entities. Paragraph 247(4)(a) of the Canadian Income Tax Act imposes further requirements on a Canadian entity to provide complete information on the circumstances for choosing a transfer pricing method. Section 231.5 allows the CRA further extensive rights to access documents, including foreign-based information, when evaluating an entity’s transfer pricing methodology. The threshold for demanding this information is extraordinarily low, and failure to comply with CRA’s request for documents can prejudice that entity’s rights to later raise that evidence in a dispute or later litigation against the CRA. Compliance with transfer pricing rules can be extraordinarily onerous on a Canadian entity, and non-compliance can prove disastrous. A high-net-worth individual immigrating to Canada and migrating business operations to Canada should be well-appraised of transfer pricing rules by an expert Canadian tax law firm to avoid running into conflict with them.
Pro Tax Tip: Incoming Mandatory Disclosure Rules will Place Even More Burdens on High-Net-Worth Individuals to Ensure Compliance with Canada’s Tax Regime
The 2023 Federal Budget has introduced long-considered and expanded tax reporting requirements for tax planning structures that are particularly relevant for high-net-worth individuals. IAs of June 22, 2023, when the 2023 Federal Budget received Royal Assent, a new class of “notifiable transactions” carrying disclosure obligations has been created to supervise Canadian taxpayers engaging in tax planning structures with uncertain tax treatments. Whether a transaction would be classified as a notifiable transaction would be subject to determination by the Minister of National Revenue with the Minister of Finance. However, the Ministry of Finance received a number of sample arrangements that could be designated under the new regime, including:
- manipulation of CCPC status to avoid anti-deferral rules applicable to investment income;
- avoidance of the 21-year deemed disposition rule for trusts;
- “back-to-back” arrangements designed to circumvent thin capitalization rules.
This new regime is highly relevant for high-net-worth individuals immigrating to Canada, as it may implicate any tax planning arrangements pursued after entering Canada. And while section these reporting obligations do not impose tax obligations and would only apply to transactions taking place after June 22, 2023, the Income Tax Act would impose serious penalties for late filing or failure to file a required information return. Specifically, for transactions, individuals who file late are subject to a maximum penalty of the greater of $25,000 and 25% of the tax benefit obtained from the transaction, while corporations with asset ownership over $50 million may be subject to a penalty of the greater of $100,000 or 25% of the tax benefit. And most importantly, the period of reassessment for a notifiable transaction remains live under the new regime as long as a taxpayer has failed to file an information return where required. A Canadian taxpayer who files their tax returns diligently begins the normal tax reassessment period under subsection 152(3.1) of the Income Tax Act. Once the normal tax reassessment period has passed, the CRA is prevented from reassessing a taxpayer’s tax assessments for that year except under limited means, including where the CRA can demonstrate there was “negligence, carelessness, or wilful neglect” by the taxpayer in filing taxes for that year. Thus, while compliance with the new regime may be exposing a tax planning arrangement to the CRA for an immediate audit, reporting the matter to the CRA ensures that they must meet the burden of proof to reassess you for those transactions should they take too long to do so in the normal course of their operations. It is in your best interests to make sure you report your transactions correctly. This also further emphasizes the need to speak with an expert Canadian tax lawyer before contemplating immigration to Canada for tax purposes, as both current and future rules will need to be considered when arriving at an appropriate plan for any individual’s particular circumstances.
FAQs:
How does an individual become a resident of Canada for tax purposes?
The concept of residence can be distinguished from citizenship or nationality, in that it consists of an individual’s various ties to Canada as opposed to that individual’s Canadian administrative (i.e. immigration) status. A Canadian taxpayer can become a resident for tax purposes where that taxpayer becomes a factual resident of Canada, such that Canada is that individual’s settled, normal or customary place of living. As well, a taxpayer may be deemed a resident of Canada under subsection 250(1) of the Income Tax Act by spending 183 days or more “sojourning” in Canada. As well, under subsection 250(5), where a Canadian tax resident is resident in both Canada and another country, and under an applicable bilateral tax treaty that individual is deemed a resident of the other country and not Canada, then that individual is deemed to be a non-resident of Canada as of that day the treaty applied. Thus, successfully becoming a Canadian tax resident will not only require establishing significant ties to Canada, but also ensuring that Canada’s bilateral treaties will not view that individual as a resident of another country.
What is Form T1135, and when do I have to file it?
Under section 233.3, a Canadian resident taxpayer who owns “specified foreign property” with a total aggregate cost amount in excess of $100,000 CAD at any time in the year is deemed to be a “reporting entity” and is required to file Form T1135 for that taxation year. “Specified foreign property” is defined by the Income Tax Act to include types of investments and property held abroad, including publicly traded securities of a non-Canadian corporation or cryptocurrency that are generally not involved exclusively in earning income from an active business, or which is used for personal use.
An individual who was a non-resident of Canada in a given taxation year and who became a Canadian tax resident in that same year is exempted from filing Form T1135 for that particular. Thus, if a taxpayer has specified foreign property with an aggregate cost exceeding $100,000 CAD, but that taxpayer became a Canadian tax resident in 2023, then that taxpayer will only be required to file Form T1135 as of the 2024 taxation year.
What is a “notifiable transaction” for purposes of the Income Tax Act?
Under the newly-proposed section 237.4 of the Income Tax Act, the Minister of National Revenue in concurrence with the Minister of Finance would be granted the power to designate a transaction or series of transactions as a “notifiable transaction”. Under the proposed amendment, a Canadian taxpayer who accrues or expects to accrue a tax benefit, an agent or promoter, or any person not dealing at arm’s length with an advisor or promoter working for a fee concerning the transaction would be obligated to report on that tax planning structure to the Canada Revenue Agency (“CRA”). The Ministry of Finance has released a sample list of notifiable transactions that may be designated now that the 2023 Federal Budget received Royal Assent on June 22, 2023, including: (1) manipulating CCPC status to avoid anti-deferral rules applicable to investment income; (2) avoidance of the 21-year deemed disposition rule for trusts; and (3) “back-to-back” arrangements that circumvent thin capitalization rules.
Disclaimer:
“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a Canadian tax lawyer.”
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
About the Author
