Canadian Conservatives? -- Not Hardly

In 2006, after 12 years of government by the dominant Liberal Party, during which Canada experienced remarkable economic growth as the only G-7 nation to consistently register both a trade and a budget surplus, Canadian voters got tired of government corruption scandals and voted the Liberals out.

But when Stephen Harper, the leader of the Conservative Party was sworn in as Canada's Prime Minister as head of a coalition government, he knew that Canadians didn't really vote for his Conservatives, but against the Liberals. The Conservatives didn't win even a single seat in the country's three major urban centers, Montreal, Toronto or Vancouver, only getting a plurality of the overall vote with 36.3%, while the Liberals and the National Democratic Party (also a left-leaning party) actually won a combined 47.9% of the vote. Rather than face another immediate election, the Conservatives formed a minority government.

Now this "conservative" government has pushed a radical tax proposal, Bill C-10, that would impose new tax rules for investments in "non-resident trusts." The bill has passed the House of Commons and is currently before the Senate, which usually rubber stamps tax bills, but is hesitant about this one.

Pierre Lemieux, economist, author and professor at the Université du Québec en Outaouais (Canada), and a member of the Sovereign Society Council of Experts,  says the legislation  "...doesn’t surprise me. What the Conservative government has been generally doing over the past two years is, first, to keep all the laws and regulations adopted by the former [Liberal] government on the books and, second, to add its own layer of new regulations and controls."

Radical Trust Change

But this proposal would go along way towards radicalizing Canada's tax system. The government has argued it is needed to curb offshore tax evasion.

Canadian taxes, up until now, are largely “territorial” – meaning taxes are levied for the most part only on earnings from within the country, not on offshore income. Although residents get hit with stiff taxes, unlike the U.S., Canada does not tax the worldwide income or foreign assets of its nonresident citizens. Canada taxes only the worldwide income of its resident citizens and resident aliens who live in Canada at any time during the calendar year. “Residents,” by law, include individuals, corporations and trusts located in Canada.

One of the basic concepts in Bill C-10, virtually unseen in any other country, is that Canada will tax all of the income of a foreign trust that has no connection to Canada other than a living Canadian person who has transferred to it any portion (no matter how small) of the trust assets. This potentially could turn any U.S. trust (including a U.S. business trust) into a Canadian taxpayer.

Separately, there has been a concerted outcry, ignored by Department of Finance, that this rule, ostensibly aimed at Canadians who squirrel away money offshore, can punitively tax a Canadian who has a mere remote possibility of benefiting from a trust established and entirely funded by a foreign-based family.

Repeals a Major Benefit

Up until now, through the application of proper pre-immigration tax planning, it has been possible for wealthy foreign individuals to establish residence in Canada and avoid income and capital gains tax on their non-Canadian sourced income and capital gain producing assets for up to five years after emigrating to the country.

The rule applies back dated to the 1st of January in the year in which you move to Canada. Moving any income generating non-Canadian assets into an offshore trust for example, could make the most of this five-year tax free shelter period.  Any income earned or capital gains accrued on these assets in trust would be free from Canadian capital gains taxation for the full five year period.

If after five years the assets remain in the trust and you remain a Canadian citizen, the trust itself becomes a Canadian resident taxpayer.,  This simply means that the trust is liable for Canadian taxation on its worldwide income from this date foreword.  This five year rule used in this way would allow non Canadian assets to be protected from Canadian taxation for a period of at least five years.

The clincher in the current system is that if you acquire Canadian citizenship during the five year period, then emigrated away from Canada before the five year period expires, any income and capital gains earned by the Canada offshore trust would actually be totally free from Canadian taxes.

Bill C-10 proposes new tax rules for investments in "non-resident trusts" and it appears it would remove the five year grace period for new citizens with trusts. The fate of the Bill C-10 is unknown, but currently before the Senate, major tax exempt charities are objecting since it would disrupt their income from offshore trusts. It would also disrupt many American trusts with Canadian ties, theoretically turning them into unwilling Canadian taxpayers.

We will keep an eye on this and report further. In the meantime, to learn more about emigration to Canada as a way to end America tax obligations, I have a full chapter on this in my latest edition of Tax Havens of the World. Click here: http://web-purchases.com/190STHOW/W190H723/