Canada proposes substantial changes to non-resident trust and foreign investment entity legislation effective January 1, 2003
Significant changes will mean that effective January 1, 2003, any contribution by a Canadian resident to a trust that is not resident in Canada will cause that trust to be a deemed resident of Canada for income tax purposes, subjecting the trust to Canadian tax on all of its income. This will be the case even if there are no Canadian resident beneficiaries.
Note that these changes do not affect the following:
Non-Resident Trusts set up by Non-Residents of Canada for the benefit of Canadian residents – These trusts will still be considered to be non-resident of Canada as long as no Canadian resident has made a contribution to the trust.
Immigration Trusts – Under current Canadian tax law and the proposed changes, a non-resident trust is not deemed to be a resident of Canada until the individual who has contributed the property to the trust has been resident in Canada for 5 years. This important planning tool for immigrants to Canada remains.
If you have clients which have non-resident trusts where contributions have been made by Canadian residents, you should seek Canadian tax advice.
2. Foreign Investment Entities (FIEs)
Effective January 1, 2003, a new regime for FIEs was introduced. This regime will ensure that a Canadian resident who has a participating interest in a FIE will be subject to Canadian tax annually by deeming this person to have received investment income from the FIE each year.
A FIE is very broadly defined to include any type of foreign entity (except partnerships). As the rules are intended to catch offshore investments, however, certain non-resident entities will not be considered a FIE. Entities where the carrying value of its investment property does not exceed 50% of the carrying value of all of its property is excluded as is an entity where the principal business is not an investment business. However, you should not assume that a person qualifies for one of these exceptions without getting Canadian tax advice. For example, an investment business, which is caught by the new rules, includes a business, the principal purpose of which is to earn dividends, interest, rents or royalties, or certain other types of income such as income from the insurance or reinsurance of risk, the factoring of accounts receivable and the profits from the disposition of investment property. In addition, under these rules, it is possible that an entity that is involved in rental or development of real estate outside of Canada would be considered to be an investment business and therefore the entity would be a FIE.
People who are Canadian residents should look for the following and seek Canadian tax advice where appropriate:
Investments in offshore investment funds where the fund is not widely held and not traded on a prescribed stock exchange.
Investments in offshore investment funds where the fund is resident in a country that does not have a tax treaty with Canada (for example, the Cayman Islands or Bermuda) even if the fund is widely held and traded on a prescribed stock exchange.
Investments in any entity that is involved in the rental or development of real estate outside of Canada, unless the management of the properties is primarily supplied by employees of the entity or related entities. Note that it is common for the management of real estate investments to be subcontracted out to third parties which will almost certainly mean the investment will be subject to the new rules.
Canadians who have set up offshore insurance policies, particularly individuals who have moved to Canada from other countries and had life insurance policies already in place when they moved here.
These rules will not catch common foreign investments such as:
Investments in foreign investment funds where the fund is resident in a country which has a tax treaty with Canada and the fund is widely held and traded on a prescribed stock exchange (for example, an interest in a US based mutual fund).
- Shares held in publicly traded foreign companies where the company is involved in an active business.
Letzte Änderung am 13.12.2004