Category Archives: Foreign investment in Canada

NEW CANADIAN TAX REGIME FOR COMBATING INCOME SPLITTING DOES NOT APPLY TO PAYMENTS TO NON-RESIDENTS

Effective 2018, there is a totally new set of rules aimed at curtailing the ability of Canadians to shift business income to family members in lower tax brackets.

This is an extension of the “kiddie tax” regime that has been in place for many years. However, this “tax on split income” (“TOSI”) regime is far more extensive than the “kiddie” tax. It can apply to amounts received by family members of all ages.

Most commonly, it will apply to dividends received from private corporations carrying on a business in which a family member is involved. However, it can also apply to capital gains on shares in such companies.

Where TOSI applies, income will be taxed at the highest tax rates.

However, TOSI only applies to income taxed under Part I of the ITA. A dividend paid to a family member who is not resident in Canada will be taxed under Part XIII. In the absence of a tax treaty applying, the rate will be 25%-this is considerably lower than the rate on TOSI. In cases where the recipient is resident in a country with which Canada has a tax treaty, the rate will generally be reduced, most commonly to 15%.

It should be possible to introduce non-residents family members as shareholders without too much difficulty. One way would be to do a typical “freeze” and issue some of the new Common shares to them. However, this would not always be necessary. Usually, “discretionary” or “dividend sprinkling” shares can be created and issued for nominal consideration without implementing a freeze.

Similarly capital gains realized by non-residents from the disposition of shares in private Canadian corporations will generally not be subject to Canadian tax unless most of the underlying value is derived from Canadian real estate. In the case of normal operating corporations, gains will generally not be subject to Canadian tax.

Similar considerations will generally apply where the non-resident is a beneficiary of a Canadian trust that receives dividends from the family company. Dividends passing through the trust, and out to the beneficiary, will be taxed under Part XIII of the ITA, not Part I, so TOSI will not apply

Of course, in all cases, tax implications in the non-residents country of residence will have to be considered.

TAX CONSIDERATIONS FOR NON-RESIDENTS USING CANADIAN LPs

In the past year, I have had a number of inquiries from non-residents looking to register a Limited Partnership (“LP”) in a Canadian province-generally Ontario. The motivation for doing that is to have an entity that they can use for banking or credit card processing purposes that benefits from the “clean” reputation of Canada. One… Continue Reading

JULY 18 TAX PROPOSALS WILL ENCOURAGE FOREIGN OWNERSHIP OF CANADIAN CORPORATIONS

On January 15 of this year, I published an article, as part of this Blog, entitled “Wealthy Immigrants to Canada Should Consider Foreign Ownership of Cancos” (see http://taxca.com/blog-2017-1/). The thrust of that article was that better tax treatment of dividends and capital gains might result if family members, who were resident outside of Canada, held shares… Continue Reading

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… Continue Reading

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