Category Archives: Foreign investment in Canada

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.

NON-RESIDENTS INVESTING IN CANADIAN REAL ESTATE CAN CUT TAXES ON CAPITAL GAINS BY PROPER USE OF FORCO

In this troubled, chaotic world we are living in, Canada remains a politically and financially stable locale that is an attractive destination for foreign investment. I have little doubt that, in the years ahead, investment in Canadian real estate by non-residents will continue to be quite substantial. Over the years, I have found that most… Continue Reading

MARCH 22, 2016 CANADIAN FEDERAL BUDGET TARGETS TREATY SHOPPING AND OTHER PERCEIVED ABUSES

For many years now, the Canada Revenue Agency (“CRA”) and the Ministry of Finance seem to have been fighting a losing battle to combat what they perceive to be the abusive use of tax treaties to reduce Canadian taxes. In recognition of the concern regarding this area, the “General Anti-Avoidance Rule” (“GAAR”), found in section… Continue Reading

CANADA’S “BRANCH” TAX ON FOREIGN CORPORATIONS-AN OVERVIEW

A corporation that is not resident in Canada may still be subject to corporate income tax in Canada if it has income from carrying on business in Canada. Such tax is levied under Part I of the Income Tax Act (“the Act”) and if the corporation’s profits are attributable to a permanent establishment (“PE”) in… Continue Reading

CANADIAN TAX ISSUES WITH CROSS-BORDER SHARE EXCHANGES

As a general rule, where a Canadian resident exchanges shares of a corporation for shares of another corporation, that exchange will constitute a “disposition” of the original shares for the purposes of the Income Tax Act (“the Act”), and the “proceeds of disposition” will be equal to the fair market value of the shares received… Continue Reading

HOLDING CANADIAN VACATION PROPERTIES IN A US ENTITY AVOIDS EXPOSURE TO CANADIAN TAXES ON DEATH

Many Americans hold interests in vacation or recreational properties in Canada. Often such properties are intended to be passed on from generation to generation. Canada taxes U.S. residents on capital gains from the sale or other disposition of Canadian real estate, even if such real estate is held for recreational or vacation purposes. Canada’s ability… Continue Reading

HOW CANADA TAXES REAL ESTATE GAINS OF NON-RESIDENTS

  Like many countries. Canada taxes non-residents who realize gains on real estate located within its borders[1]. This will be true whether the real estate is capital property that is held for the purposes of earning from rental or a business; capital property held for personal use; or inventory of a business (e.g. where it… Continue Reading

THE TAX-EFFICIENT WAY FOR FOREIGN BUYERS TO ACQUIRE CANADIAN CORPORATIONS

Envision a situation where a foreign corporation (“Forco”) buys all of the shares of a private Canadian corporation (“Canco”) for $10 million. What happens if Canco generates profits, and Forco would like to use those profits to recover the $10 million cost of its investment in Canco? Can Forco just take funds from Canco up… Continue Reading