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 https://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.
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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.
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).