On becoming a resident of Canada, an individual’s world income is automatically subjected to Canadian tax. However, there is a specific exception, when an immigration trust is used to hold foreign investment assets. For many years, Canada has been a tax haven for high net worth individuals who chose to immigrate to Canada through the establishment of so-called “immigration trusts”.

The Income Tax Act (Canada) allows a new resident of Canada to establish an offshore trust for up to five taxation years during which time the income earned within the immigration trust structure escapes Canadian taxation even if capital distributions are made back to the immigrating settler of the trust. This has been a very attractive vehicle for wealthy individuals to utilize in order to come to Canada to obtain a Canadian passport since the residency requirement for such a passport is only three years.

However, the protected status enjoyed by immigration trusts has survived, offering new residents to Canada a significant tax-savings opportunity in their transition to Canadian tax residency. An immigration trust is simply a non-resident trust, established in a foreign tax jurisdiction that holds foreign investment assets.

An immigration trust can be established prior to the individual becoming a resident of Canada or at any time within the first 60 months of Canadian residency. However, because the 60-month tax-free period commences at the time Canadian residency is established, the tax-free accumulation of income and capital gains in the trust is maximized when the trust is set up prior to becoming a resident of Canada.

Even after the five year exemption is over and the immigration trust becomes subject to tax in Canada, it may continue to serve as an asset protection trust for the benefit of multi-national families residing in and outside Canada.

Once the trust is established, the immigrating individual can transfer various foreign assets to the trust, including an investment portfolio or real estate. During the first five years of the immigrant’s Canadian residency, income and capital gains can accumulate tax-free in the trust. At the end of this period, if the trust is still in existence, it loses its tax-free status and is treated in the same manner as a Canadian resident trust.

In addition to the tax savings, immigration trusts can provide other benefits, including creditor protection for trust assets, reduction of taxes and probate fees on death, and privacy and confidentiality of personal financial information.

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