Category Archives: Nonresident taxation

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 in Canadian corporations (“Canco”) that might be established by the immigrants.

Little did I know that, six months later, there would be proposals for major changes to our tax system that would add even more weight to the thesis in that article.

In particular:

Taxation of Dividends

The July 18 proposals will often have the effect of increasing the tax rate that will be applied to dividends paid to family members resident in Canada from Canco after 2017.

In contrast, the tax rate payable under Part XIII of the Income Tax Act (“the Act”) should remain at a maximum of 25% and can be lower if a tax treaty applies.

This would be the case regardless of whether the non-resident family member held real equity shares, or just so-called “dividend sprinkling shares”.

Taxation of Capital Gains

The July 18 proposals will often have the effect of limiting the ability of the family members in Canada to access to the “capital gains exemption” applicable to “qualified small business corporation shares”.

In contrast, unless the shares of Canco are “taxable Canadian property” (“TCP”), non-residents can realize unlimited amounts of capital gains from the disposition of Canco shares without liability for Canadian taxes.

As a result of changes that came into effect in 2010, the shares of Canco will generally not be TCP unless most of their value is derived from Canadian real estate.

Taxation of Compounding Income

The July 18 proposals will often have the effect of subjecting income earned by a Canadian resident, from the reinvestment of dividends received from Canco shares, to very high tax rates.

In contrast, that would not be an issue if the dividends are received by non-residents.

Taxation on Death

The July 18 proposals will often have the effect of increasing the tax burden faced by the estate of a Canadian resident who dies holding Canco shares.

In addition to the fact that there may be a capital gain that is taxed on death, there may now be an additional tax cost associated with obtaining funds from Canco to pay that tax. This is because of the fact that proposed amendments to section 84.1 of the Act will have the effect of eliminating the ability to create a “pipeline” to withdraw such funds from Canco on a tax-free basis.

In contrast, unless the shares of Canco are TCP, the estates of non-residents will not face any income tax burden as a result of the death of the shareholder.

Of course, as suggested in my original article, this type of planning is not necessarily restricted to recent immigrants to Canada when they form Cancos. Rather, any Canadian resident with a Canco could consider the possibility and benefits of reorganizing its share structure so that non-resident family members are now included. I have no doubt that the July 18 proposals will provide an impetus for such exploration in cases where it might not have been considered previously.

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 5

In the last article in this series, I reviewed the basics of the dreaded Canadian “departure tax”. The purpose of this article is to discuss some special considerations applicable to expats with investment or real estate holding companies. I will outline these special considerations in point form below. 1) As I indicated in the last… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 4

In the last article in this series, I explained what I call my “Guaranteed No-Fail Recipe for Becoming a Non-Resident”. Assuming that the expat is successful in becoming a non-resident, there is often a significant cost and hurdle in the form of the so-called “departure tax”. If ridding oneself from the ongoing burden of Canadian… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 3

In the last article in this Blog, I provided an overview of how Canada’s tax treaties can help a Canadian seeking to become a non-resident, particularly in the wake of the July 18, 2017 release from the Ministry of Finance. Canada currently has tax treaties in force with 93 countries in various parts of the… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 2

In the last article in this Blog, I predicted that, “After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside.” Feedback from my contacts suggest that my prediction was quite accurate. The purpose of this article is… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 1

After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside. First it was an additional 4% in personal income taxes.  That was a little present from Justin Trudeau’s government shortly after he took office. Now, there is… Continue Reading

INTERNATIONAL TAX ASPECTS OF CANADIAN TAX PROPOSALS RE PRIVATE CORPORATIONS

On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies. This was no surprise-the Minister had hinted at this some months ago at a tax conference. In a nutshell, the Minister, and his many left-leaning… Continue Reading

CANADIANS MOVING TO U.S. WITH CANCOS SHOULD CONSIDER “S CORP. BAILOUT”

Many Canadians who move to the U.S. are the sole shareholders of a Canadian corporation (“Canco”) that is either used for investment purposes, or which has substantial retained earnings generated from an active business. In such cases, they will generally face a Canadian tax hit when they leave (“departure tax”) in the form of a… Continue Reading

CANADIAN EXPATS CAN RECEIVE SALARIES FROM CANADA TAX FREE

Often, a Canadian expat will continue to receive salary payments from a Canadian corporation (“Canco”) after he or she ceases to be a Canadian resident for tax purposes. This can apply to a situation where the sole shareholder of Canco emigrates and still continues to operate Canco. It can also apply to a situation where… 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