Category Archives: Estate planning

WEALTHY IMMIGRANTS TO CANADA SHOULD CONSIDER FOREIGN OWNERSHIP OF CANCOS

Many wealthy (as well as not so wealthy) immigrants to Canada will establish very successful Canadian corporations (“Cancos”) that will ultimately become extremely valuable.

In many cases, those immigrants to Canada will still have family abroad, and might be happy to have equity interests in Canco owned by those family members.

In such cases, there can be significant Canadian tax benefits, which are often overlooked, resulting from such foreign ownership of Canco.

If shares in Canco are owned by a Canadian resident, capital gains on those Canco shares (including deemed capital gains on death or emigration) will be subject to tax in Canada except to the extent that they might be eligible for a limited amount of exemption[1].

On the other hand, if shares in Canco are owned by non-residents, capital gains will generally be exempt from Canadian tax, regardless of the amount, unless the shares in Canco are “taxable Canadian property” (“TCP”). As a result of changes to the Act that came into effect in 2010, the shares of Canco will generally not be TCP unless the value of those shares is primarily derived from Canadian real estate or resource properties. Shares of normal operating companies would generally not be TCP.

As such, if Canco grows in value, the equity accruing to non-resident family members would not be subject to Canadian tax. Furthermore, such shares could be inherited by Canadian family members on the death of the holder at a stepped-up cost basis that would reflect any gains accruing at the date of death, without any Canadian tax applying.

In addition, dividends paid by Canco would be subject to Canadian tax at a maximum rate of 25%; on the other hand, dividends received by a Canadian resident could be subject to Canadian tax at a substantially higher tax rate.

Even if foreign family members hold a majority of the equity shares of Canco, it could be possible for it to still qualify as a “Canadian controlled private corporation” (“CCPC”), if desired, by ensuring that at least 50% of the voting power is in the hands of Canadian residents.

Obviously, tax considerations in the country of residence of the foreign family members have to be considered.

In theory, similar benefits could be achieved if shares in Canco were owned by a trust established by a foreign settlor that is resident outside of Canada.

However, from a tax perspective, direct ownership by foreign family members would always be safer because of the high degree of risk that a non-resident trust owning shares of Canco can inadvertently become a deemed resident trust[2].

In situations where Canco has already been established with only Canadians as shareholders, it should be possible to introduce foreign family members as shareholders, for whom further increases in value would accrue, without triggering any gain in the hands of the current shareholders[3].

[1] Under subsection 110.6(2.1) of the Income Tax Act (“the Act”), capital gains of up to $800,000 (indexed for inflation-about $825,000 in 2016) arising on the disposition of “qualified small business corporation shares” may be effectively tax exempt.

[2] For example, the acquisition of shares of a Canadian corporation from treasury by a trust is deemed to be a “transfer” of property to the trust by the corporations (see subparagraph 94(2)(g)(i) of the Act). In addition, the payment of a dividend by the corporation would also be a “transfer”. This could result in the trust being deemed resident in Canada, for many purposes of the Act, under subsection 94(3) of the Act.

[3] By exchanging the common shares owned by the Canadian resident(s) for fixed value “freeze type” shares. This would normally be a tax-free exchange under section 86 of the Act. New common shares could then be issued for nominal consideration to the non-resident(s). Voting control could remain in the hands of the Canadian residents via voting rights attached to the “freeze type” shares.

CANADIAN TAXATION OF DEATH BENEFITS FROM A U.S. IRA

A Canadian resident would not normally expect to pay any Canadian income tax on an inheritance received from a family member living in the U.S. However, that is exactly what can happen if a Canadian resident receives a payment as a beneficiary of a (conventional) Individual Retirement Account (“IRA”). That is because of the fact… Continue Reading

BE WARY OF PITFALL WHEN DOING POST-MORTEM “PIPELINE” PLANNING FOR ESTATES WITH NON-RESIDENT BENEFICIARIES

The use of post-mortem “pipeline” planning is a popular technique aimed at avoiding double taxation in situations where there is a capital gain recognized on the death of a taxpayer who held a significant interest in the shares of a Canadian private corporation at the time of death. It can also apply in situations where… Continue Reading

CANADIAN TAX ISSUES WHEN TRUSTS DISTRIBUTE “CAPITAL DIVIDENDS” TO NON-RESIDENT BENEFICIARIES

Under subsection 83(2) of the Income Tax Act (“the Act”) a Canadian private corporation (“Canco”) can pay special dividends out of its “capital dividend account” (“CDA”). The CDA of a corporation may be derived from any of the following four sources: The tax-free portion of capital gains The tax-free portion of proceeds from the sale… Continue Reading

DEALING WITH 21 YEAR DEEMED DISPOSITION ISSUES FOR CANADIAN TRUSTS WITH NON-RESIDENT BENEFICIARIES

As a general rule, trusts resident in Canada are deemed to dispose of all of their assets every 21 years for proceeds equal to the fair market value of such assets at that time[1]. The end result is that if appreciated assets are in the trust at the end of the relevant deemed disposition date,… Continue Reading

SPECIAL RULES IN THE CANADA-US TAX TREATY APPLY TO CROSS-BORDER DEATH TAX ISSUES

Canada and the United States have very different regimes for imposing taxes on death. The United States imposes a Federal Estate Tax; however, Canada has not imposed any Estate Tax since 1971. Rather, Canada taxes accrued, but unrealized, capital gains on death, as part of its income tax system. Most tax practitioners are not aware… Continue Reading