Jonathan Garbutt, Barrister and Solicitor at Dominion Tax Law
Canada is a diverse, multi-ethnic democracy that is safe both physically and from an overall crime perspective. The process of obtaining a visa, then permanent residence and then a passport is relatively easy for wealthy individuals. However, UK non-doms (many of whom are now perhaps considering their options) may not immediately think of Canada as a potential alternative due to our relatively high tax rates on income and capital gains. While Canada's tax regime may create barriers to building wealth, it is very tax-efficient for those who arrive in Canada already wealthy. Indeed, Henley’s, a law firm focused on immigration for High-Net Worth individuals and families, projects that 4200 individuals with assets over US$1m will move to Canada in 2024, putting it fourth on their list behind the UAE, USA and Singapore.
With the right planning, a non-dom family moving to Canada could pay less tax in Canada on their worldwide assets and income than when they were in the UK. The five core tax-saving mechanisms in Canada that are relevant to wealthy UK non-doms are:
stepped-up assets on immigration;
no estate tax;
capital distributions from granny trusts are not taxable;
non-taxation of non-Canadian active business income; and
the ability to shield passive income with life insurance.
1. Assets are Stepped-Up on Immigration
When an individual immigrates to Canada, their worldwide assets receive a “step-up” to fair market value (“FMV”). Consequently, any asset gains from the time of acquisition up to the individual’s immigration to Canada are not taxable in Canada. Worldwide assets are only taxable in Canada based on the increase of the asset’s FMV while the individual is a tax resident in Canada. Note, that when emigrating from Canada, an individual is deemed to dispose of all their worldwide assets. Capital gains tax may be payable upon departure; however, in some cases, security can be provided instead. Careful tax planning prior to arrival in Canada can limit asset gains without giving up on distributions.
2. No Estate Tax
Canada does not have an estate tax. Let’s repeat that. Unlike the US and the UK, there is no estate tax in Canada. Rather, the assets of the deceased taxpayer are subject to deemed disposition. The taxpayer’s estate will then be responsible for paying the tax on the latent gains of the disposed assets. However, if one is a citizen of Canada but not a resident, then there would only be a deemed disposition on Canadian-situs assets in the absence of proper planning.
3. Capital Distributions from Non-Resident Trusts are not Taxable
A so-called ‘Granny Trust’ is created when the settlor, generally a relative who is a non-Canadian resident (e.g. the Matriarch or Patriarch of the family), contributes all of the assets that make up a trust situated offshore. If said trust is not resident in Canada because its trustees are not resident, it can capitalize income earned in a year and distribute capital tax-free to Canadian residents in the following year. It is important to note that if anyone who is or becomes a Canadian resident makes a contribution to a trust, then the trust will be deemed resident in Canada, and the planning will not work. However, this creates significant opportunities for families where the wealth is still technically owned by their parents.
4. Active Business Income of Controlled Foreign Affiliates
Canadian tax law allows for inter-corporate dividends to be tax-free between treaty country subsidiaries and Canadian parent corporations if the profits are “Exempt Surplus” from Active Business Income (“ABI”). Specifically, Canada’s tax regime does not require the return of profits or deem profits of controlled foreign affiliates to be taxed in Canada on their ABI. Canada is a party to 94 bilateral tax treaties, making it very tax-efficient to supervise a global business empire from Canada.
5. Passive Income in Life Insurance
A Canadian-Compliant International Private Placement (IC2P2) life insurance policy can effectively protect assets generating passive income from taxation. Once in an IC2P2 life insurance policy, the policyholder can effectively borrow against the policy, generating debt rather than income. Benefits paid out by an IC2P2 life insurance policy are held in the capital dividend account of a corporation. This allows for the benefits to be paid out to shareholders tax-free.
Overall, Canada offers a great opportunity for non-dom families looking to protect their wealth and enjoy the global mobility. If you know a UK non-dom or other individuals who may want to benefit, we at Dominion Tax Law are always happy to consult with them to ensure that they can get the most out of their wealth.
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