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Exploring Relocation to Canada? Income Tax for Wealthy Immigrants with Permanent Residence

posted 11 months ago

Introduction: Sure in Wealthy Immigrants Choosing Canada as Their Destination

Henley & Partners, an investment consultancy based in the UK specializing in international tax planning and migration services, has recently shed light on a growing trend: the increasing emigration of high-net-worth individuals from developing economies, particularly China and India. High-net-worth individuals, as defined by Henley & Partners, are individuals with investable wealth amounting to USD $1 million or more. According to Henley’s Migration Report 2023, it is projected that over the next year, more than 13,000 high-net-worth individuals from China will migrate to jurisdictions that provide more favourable tax frameworks for their wealth. Similarly, India is expected to witness the departure of nearly 7,500 high-net-worth individuals seeking jurisdictions that offer advantageous tax environments.

Canada ranks fifth among the preferred destinations for these wealthy emigrants, with an anticipated arrival of 1,600 new high-net-worth individuals in 2023. Like many other countries experiencing an influx of high-net-worth individuals, Canada has implemented proactive investment migration programs to attract foreign direct investment in exchange for residence rights. One such program is Canada’s Start-Up Visa Program, which offers wealthy entrepreneurs the opportunity to reside, work, and eventually gain citizenship in Canada by investing in businesses expected to generate employment opportunities for Canadians and contribute to the growth of the Canadian economy. In addition to economic incentives, there are numerous social and political factors that make immigration to Canada an appealing choice, including the country’s high standard of living, low crime rates, and minimal levels of corruption.

While Canada presents numerous advantages for wealthy immigrants, it is crucial to acknowledge that planning for such a relocation is far from straightforward. Canadian domestic tax regulations can be remarkably intricate, particularly depending on an individual’s business and investment endeavours. Unprepared immigrants may unknowingly encounter various tax pitfalls, which can result in non-compliance and subject them to the full scrutiny of the Canada Revenue Agency (“CRA”), the tax administration and compliance arm of the Canadian government. This article seeks to discuss important but often overlooked tax considerations for high-net-worth individuals relocating to Canada. Specifically, it focuses on individuals who are interested in transferring capital to Canada or managing investments outside the country. The first important factor for any high-net-worth individual wishing to expedite a transfer to Canada is preparation for establishing tax residence, which will be covered at the beginning of this article. This article will also examine various compliance, anti-avoidance, and planning requirements for high-net-worth individuals migrating to Canada who already have investment vehicles established abroad or may be intending to move capital to Canada. The final section of this article will include some tax pro tips as well as frequently asked questions pertaining to Canadian tax residence and tax planning issues.

While this article attempts to cover a number of significant issues, any high-net-worth individual relocating to Canada should definitely consult with knowledgeable Canadian tax lawyers in Toronto for advice on how to effectively prepare for emigrating to Canada. This is because every circumstance is different and will necessitate new and different tax considerations. The development of a suitable and tax-efficient plan requires careful investigation in light of the aims of the individual because no two situations are ever exactly alike.

An Overview of Canadian Tax Residence Rules and Factors to Consider

Differentiating Tax “Residence” from Other Residence Forms and Canadian Tax Implications

It is crucial to clarify that residence for immigration purposes, such as citizenship, permanent residence, temporary work or study visas, is separate from the rules governing tax residence in Canada. While the Canadian government grants immigration residence status as an administrative designation, tax residence status is determined by an individual’s connections and ties to Canada, specifically regarding his or her extent and permanence. Tax residence is based on the privileges and benefits an individual enjoys in Canada, including access to public services and the ability to earn income. This distinction between immigration residence and tax residence is not unique to Canada, as many other countries follow similar policies by differentiating between these two forms of residence.

According to subsection 2(1) of the Canadian Income Tax Act, individuals who are considered residents of Canada are subject to tax on their worldwide income. Conversely, non-residents of Canada are only liable for tax on income derived from Canadian sources, as outlined in subsection 2(3) and Part XIII of the Income Tax Act. This includes income earned through employment in Canada, conducting business in Canada, or disposing of “taxable Canadian property. Therefore, if an individual is classified as a Canadian tax resident, Canada will assert its jurisdiction to tax all of that individual’s income, regardless of its country of origin. This means that even income, such as pension income, that may not be taxable in the source country could still be subject to Canadian taxation. However, Section 126 of the Canadian Income Tax Act allows individuals to claim a tax credit for foreign taxes paid on that foreign income, offsetting their Canadian tax liability. This ensures that taxpayers are not subjected to double taxation on the same foreign income, especially when the source country has a stronger claim to tax that income. It’s important to note that the foreign tax credit system in Canada has limitations to maintain fairness. Foreign tax credits cannot be used to subsidize income taxes owed to other countries. They are restricted to the extent that the taxpayer had Canadian tax liability before applying the credits for that particular year. Any unused foreign tax credits can be carried forward or back as deductions to offset income taxes paid in other years on a country-by-country basis, but only under specific circumstances as defined by the tax regulations.

What are the Criteria for Considering an Individual as a Canadian Tax Resident?

The Canadian Income Tax Act’s subsection 2(1) states that a person who is a “resident” of Canada is liable for tax on his or her worldwide income. A Canadian non-resident individual, on the other hand, is only charged tax under Section 2(3) and Part XIII of the Income Tax Act on income from Canadian-sources. For Canadian tax purposes, an individual may be determined to be a resident under one of two different rules:

  1. a taxpayer could be “ordinarily resident” as defined by paragraph 250(3) of the Income Tax Act; or
  2. according to paragraph 250(1)(a) of the Income Tax Act, a taxpayer may be considered a “deemed resident” if he or she are not otherwise ordinarily resident of Canada at any point during a specific tax year.

Understanding the Concept of “Ordinarily Resident” in Canada

According to section 250(3) of the Income Tax Act, a person is considered to be a resident of Canada if he or she is an “ordinarily resident” there. The Income Tax Act does not define what it means to be “ordinarily resident”, so Canadian courts have outlined conditions that are to be taken into account when assessing whether a person is ordinarily resident or not. (“Ordinary residence” can often be referred to as “factual residence”). In general, a person’s ordinary residence is “the place where in the settled routine of his life he [or she] regularly, normally or customarily lives.” Other pertinent considerations for identifying someone’s ordinary residence include a person’s:

  1. current and former life habits;
  2. frequency and duration of visits to the jurisdiction where the residence is asserted;
  3. connections within that jurisdiction;
  4. other connections; and
  5. determination of the permanence or purpose of a stay abroad.

Additionally, the CRA has expressed its own opinions about what elements will favor a person being a Canadian factual resident in Income Tax Folio S5-F1-C1 (“Determining an Individual’s Residence Status”). Although the CRA’s published opinions on Canadian tax law are not binding in Canada, Canadian courts have acknowledged them as essential resources for the interpretation and application of Canadian tax legislation to other taxpayers. In particular, the Tax Court of Canada has cited and approved CRA’s Income Tax Folio S5-F1-C1 as it reasonably tracks relevant case law regarding Canadian tax residence, so such opinions shouldn’t be disregarded when they correctly interpret the law.

In general, taking into account both the common law and the CRA’s published views, the most important elements for determining whether a person is a Canadian factual resident will be:

  • the availability of a “dwelling place” (such as a home or apartment) for long-term use in Canada;
  • the presence of a spouse or common-law partner in Canada; and
  • the existence of dependents in Canada.

In determining an individual’s Canadian factual residency status, several additional factors can be influential, including the individual’s personal property (such as furniture and vehicles), economic ties (such as bank accounts, investments, registered plans, credit cards, and debts), immigration status, possession of government documents (such as health insurance, driver’s license, and passport), and social ties (such as memberships in professional organizations, unions, recreational clubs, or religious organizations) within Canada.

It is important to emphasize that the determination of an individual’s factual residence is based solely on the specific facts of each case. Canadian courts have, in certain situations, ruled that a taxpayer is a non-resident of Canada or has ceased to be a factual resident in Canada, even when significant ties (such as a dwelling, spouse, or dependents) are maintained in the country.

The Rule of “Deemed Residence”

Paragraph 250(1)(a) of the Income Tax Act establishes a provision known as the “deemed residence” rule. According to this rule, if an individual “sojourns” in Canada for 183 days or more during a specific tax year, that individual is considered a resident of Canada for the entirety of that year. The term “sojourning” has a broad interpretation, indicating that the individual is temporarily residing in Canada. It is important to differentiate between a commuter and a sojourner. A commuter is only present in Canada for the purpose of travelling between destinations, such as commuting to and from work. In contrast, a sojourner may stay in Canada, even casually or intermittently, but with a sense of permanence. Determining whether an individual qualifies as a sojourner requires a fact-specific analysis similar to the factual residence test.

It is important to recognize that the deemed residence rule in Canada only applies to individuals who were not already factual residents of the country. Therefore, when determining an individual’s status as a Canadian tax resident, the factual residence test should be considered before applying the deemed residence rule.

The Influence of International Tax Treaties on Determining Canadian Tax Residence

Even if the domestic tax system in Canada may regard a person as a Canadian tax resident, the taxing process is far from over. In order to help determine which domestic tax laws of the various nations (including China and India) will have the right to tax a particular individual when that individual is a tax resident of more than one country. Canada has signed a number of bilateral tax treaties with other nations. The majority of Canadian treaties adhere to the OECD Model Tax Convention, which offers a number of uniform and sequential tie-breaker rules to establish a person’s residency. An individual is regarded as a resident of the jurisdiction under the OECD Model if:

  1. the individual’s availability of a permanent home in Canada;
  2. the jurisdiction in which the individual’s center of vital interests is located;
  3. the jurisdiction of the individual’s habitual abode;
  4. the jurisdiction of the individual’s citizenship or nationality; or
  5. in cases where the above tests are inconclusive, a mutual conclusion is reached by the competent authorities of each jurisdiction. This means that the Canada Revenue Agency and the tax authority of the other country will collaborate and reach an agreement on the tax residency issue.

In order to honour the determination made under an international treaty, subsection 250(5) of the Income Tax Act states that if a Canadian tax resident is deemed to be a resident of another country as per a bilateral tax treaty, then that individual will be considered a non-resident of Canada from the date the treaty becomes applicable. This means that the rule of deemed non-residence will only be applicable when an individual is a resident of both Canada and another country but is not considered a Canadian tax resident under that particular treaty.

Therefore, if a Canadian tax resident is also deemed a tax resident under a bilateral tax treaty, his or her status as a Canadian tax resident remains unchanged. However, an individual may be considered a factual non-resident if his or her connections to Canada are minimal and indicate that Canada is not their established, usual, or customary place of residence. While establishing Canadian tax residence under domestic rules may seem straightforward, ensuring that this status is not overridden by a treaty determination under subsection 250(5) poses more challenges. Immigrants who aim to establish Canadian tax residence generally need to sever sufficient ties with their home country while establishing significant connections in Canada. To achieve a successful transition for tax purposes, it is advisable to engage both a Canadian tax lawyer and tax counsel from the individual’s home country as early as possible. This will help ensure a smooth transition in terms of tax obligations.

Tax Planning Considerations for High-Net-Worth Individuals Moving to Canada

The full power of Canada’s tax system kicks in once a person achieves Canadian tax residence. Wealthy families and high-net-worth individuals moving to Canada should be mindful of the numerous anti-avoidance, reporting, and compliance regulations even though this may open up new opportunities for wealth and estate planning.

Ensuring disclosure and reporting requirements are completed for tax purposes can be just as crucial as doing appropriate wealth planning since not complying with Canada’s extensive tax laws can be a very expensive mistake. We’ll look at several anti-avoidance and compliance requirements in the areas that are most likely to influence wealthy people who immigrate to Canada.

Obligations for Disclosing Foreign Assets and Foreign Affiliates – T1135 and T1134 Information Returns

Canada has implemented comprehensive asset disclosure requirements for affluent individuals in accordance with sections 233.3 and 233.4 of the Canadian Income Tax Act. The CRA ensures compliance by imposing additional filing obligations on Canadian taxpayers who possess “specified foreign property” or hold shares in a “foreign affiliate” above certain thresholds.

According to section 233.3 of the Canadian Income Tax Act, if a Canadian resident taxpayer possesses “specified foreign property” with a total aggregate cost exceeding $100,000 CAD at any point during the year, that taxpayer is considered a “reporting entity” and must file Form T1135 for that tax year. It’s important to note that Form T1135 is not a traditional tax return and does not create a tax obligation for Canadian tax residents who file it. The purpose of Form T1135 is to ensure that Canadian tax residents report their foreign property interests to the Canada Revenue Agency (CRA) for monitoring by the government. Furthermore, individuals who were non-residents of Canada in a specific tax year but became Canadian tax residents within the same year are exempt from filing Form T1135 for that particular year. Therefore, if a taxpayer possesses specified foreign property with an aggregate cost exceeding $100,000 CAD, but he or she became a Canadian tax resident in 2023, that taxpayer will only be required to file Form T1135 starting from the 2024 tax year.

The reporting requirements for Form T1135 do not encompass all types of foreign property. The term “specified foreign property” is broadly defined in the Income Tax Act and includes various categories such as (but not limited to):

  •  real property, which refers to land and buildings located outside of Canada;
  • shares in foreign corporations or Canadian corporate shares held internationally;
  • funds and intangible property that are situated, deposited, or held outside Canada, such as a foreign bank account.
  • “indebtedness” that is owed by non-resident individuals, such as a mortgage or loan acquired overseas; and
  • interests in or rights under contracts related to specified foreign property, or property that can be converted or exchanged for specified foreign property.

It is important to highlight that cryptocurrency, such as Ethereum and Bitcoin, typically falls under the definition of specified foreign property and is subject to reporting on Form T1135.

The Income Tax Act explicitly excludes property held “exclusively in the course of carrying on an active business” from the definition of specified foreign property. This exclusion recognizes that foreign tax jurisdictions have the right to tax the active business income earned by Canadian tax residents within their jurisdiction, as the business benefits from local laws and economic conditions. However, when a Canadian tax resident holds property passively in a foreign tax jurisdiction, he or she continues to benefit from Canadian laws and economic conditions. This could potentially create an opportunity for unfair tax avoidance compared to other Canadian tax residents or facilitate inappropriate tax evasion and income sheltering from Canadian tax authorities. The exception for “active business” in the reporting requirements of Form T1135 clarifies that the intention of Canadian tax authorities is not to place undue burdens on Canadian businesses operating internationally. Instead, it aims to prevent disparities among taxpayers who hold certain properties in other tax jurisdictions.

Likewise, under subsection 233.4 of the Income Tax Act, a Canadian taxpayer who holds a qualifying interest in a “foreign affiliate” corporation is required to submit a T1134 information return along with his or her income tax return for that particular tax year, reporting respective ownership interest. A foreign affiliate refers to a non-resident corporation in which the reporting entity holds a minimum 1% equity interest, and when combined with related persons, the total equity interest is 10% or more.

The completion of T1135 and T1134 information returns can present challenges for high-net-worth individuals residing in Canada. Many individuals with substantial wealth who move to Canada may have assets or property held through an intermediary entity, such as a corporation, partnership, or trust. This arrangement may be aimed at ensuring ownership privacy or obtaining additional protection against arbitrary expropriation by foreign governments. However, the filing requirements of T1135 and T1134 information returns can compromise these goals. Failure to comply with these obligations can result in significant penalties. Late filing or failure to file the T1135 or T1134 information returns as required can incur penalties of up to $2,500 for each year the returns are not filed, in addition to interest and other penalties deemed appropriate by the Canada Revenue Agency (CRA). Further penalties may apply if the property is misreported or underreported on these information returns. It is important to note that the T1135 and T1134 information returns do not in themselves create a tax obligation. Rather, they serve as a means for the CRA to monitor and account for foreign asset ownership, ensuring that the Canadian tax base is not unduly eroded. Given the strict and unforgiving penalties for non-compliance, it is advisable to proactively discuss these obligations with Canadian tax counsel. Doing so will help determine your specific obligations, if any, and ensure that you comply with the reporting requirements to avoid unnecessary attention or penalties.

Potential Challenges with Passive Income – “Foreign Accrual Property Income” (“FAPI”)

The Canadian income tax system has implemented the foreign affiliate regime to counter the potential indefinite tax deferral that can be achieved by Canadian residents through the use of foreign corporations or trusts located in jurisdictions with favourable tax rules. Section 91 of the Canadian Income Tax Act outlines the concept of “foreign accrual property income” (or FAPI), which is attributed to Canadian resident shareholders of a controlled foreign affiliate when the income is not actually distributed to them. As mentioned above, a foreign affiliate is a foreign corporation meeting two conditions: (1) Canadian residents, either individually or in combination with other individuals (who may or may not be Canadian tax residents), hold at least a 10% ownership of a class or series of shares in the corporation, and (2) the Canadian resident holds at least a 1% ownership of those shares. A controlled foreign affiliate, as defined in subsection 95(1) of the Canadian Income Tax Act, refers to a foreign affiliate where a specific Canadian taxpayer has factual control over the corporation (e.g., holding a majority of voting shares) or where that control is shared among up to four other Canadian residents.

The definition of FAPI encompasses various types of income, and providing a comprehensive explanation of these rules exceeds the scope of this article. However, in a general sense, FAPI includes the following types of income:

  • Income derived from property or investment business;
  • Canadian-source business income that is redirected to a foreign corporation residing in a jurisdiction with a low tax rate;
  • Income generated from services provided by members of a related corporate group; and
  • Income and gains resulting from the sale of capital property (unless the property is used to generate income from an active business, or the property comprises shares in a corporation where the majority of the fair market value of its assets is excluded from FAPI).

When a controlled foreign affiliate earns Foreign Accrual Property Income (FAPI) in a specific tax year, Canadian resident taxpayers who hold shares in that corporation are required to include a proportionate share of the FAPI in their personal income for that year, as per section 91 of the Canadian Income Tax Act. The specific amount of FAPI attributable to an individual taxpayer is determined based on his or her ownership percentage of the corporation’s capital stock. Shareholders who pay tax on FAPI are given additional relief under Section 113, which exempts all or a portion of dividends distributed from that income from taxation. 

The FAPI regime holds significant importance for high-net-worth individuals who relocate to Canada with a foreign corporation holding investments or property generating passive income. Without proper planning and thorough due diligence, a new Canadian tax resident may be required to recognize substantial income personally, even if they do not receive the cash generated by those passive investment activities through the corporation. The Supreme Court of Canada, in Canada v. Loblaw Financial Holdings Inc., 2021 SCC 51, acknowledged that the FAPI regime is one of the most complex statutory regimes in Canadian law. Therefore, it is crucial for individuals immigrating to Canada to carefully review their foreign investment structures for any potential conflicts with the FAPI regime. This proactive approach is essential to avoid the risk of non-compliance with FAPI rules and the associated consequences.

Determining Canadian Tax Residence for Foreign Corporations – The “Central Management and Control” Test

According to Canadian domestic law, a foreign-incorporated corporation can be deemed a Canadian tax resident, subjecting it to taxation on its global income, if its central management and control is exercised in Canada. Determining the location of central management and control is a factual inquiry typically based on the location where the corporation’s board of directors convenes. A similar principle applies to foreign trusts, where the focus is on the actual management location of the trust.

Central management and control is typically associated with the board of directors, even if they are subject to substantial influence from shareholders or other third parties. However, there are situations where the board of directors (including a sole director) may be considered as “nominee” decision-makers, leading to the conclusion that central management and control do not derive from the powers exercised by that board. This scenario arises when the local board of directors refrains from utilizing their governing powers and instead defers to a non-board member who effectively dictates the corporation’s decisions.

When a high-net-worth individual relocates to Canada and continues operating a business overseas through a corporation, there is a possibility that the business may be considered a Canadian tax resident under Canada’s domestic tax laws. The determination of tax residence for corporations can be complex, and Canada’s bilateral tax treaties sometimes include tie-breaker provisions for corporations, similar to those for individuals, to resolve conflicts between Canada’s domestic rules and the domestic rules of the other country involved. It is important to note that not all of Canada’s tax treaties incorporate these provisions for corporations. Consequently, the likelihood of a corporation being deemed a Canadian tax resident depends on both its operational structure and the specific countries in which it conducts business. 

Tax Treatment of Foreign Pension Income

High-net-worth individuals who are immigrating to Canada may possess an interest in a tax-deferred pension plan in their home country. While contributions, accumulations, and distributions from these pensions may enjoy favorable tax treatment under the domestic laws of their home country, it is important to recognize that the same tax-deferred status may not extend to the Canadian tax system. Foreign-qualifying pension plans may not receive any special tax status in Canada, and as such, contributions and distributions from a foreign pension plan must be carefully evaluated within the framework of the Canadian tax system.

As previously discussed, according to subsection 2(1) of the Canadian Income Tax Act, individuals who are residents of Canada at any point during a tax year are subject to taxation in Canada on their worldwide income for that year. Specifically, under subparagraph 56(1)(a)(i) of the Canadian Income Tax Act, amounts received from a “superannuation or pension benefit” are considered fully taxable income in Canada. In a general sense, a superannuation or pension fund or plan refers to an arrangement that provides regular post-retirement income to employees, following the terms outlined in the plan and not at the beneficiary’s discretion. The Canadian Income Tax Act does not differentiate between superannuation or pension income based on the source of payments. Consequently, every Canadian resident taxpayer is subject to the same liability for Canadian income taxes on the payments received, regardless of the origin of those payments.

The taxation of pension funds can create an inequitable situation for individuals immigrating to Canada, as any portion of the pension plan reflecting the return of the pensioner’s capital contributions remains fully taxable. Unless relief is provided through a bilateral tax treaty, foreign pension income received by an individual immigrating to Canada may be subject to full taxation. In most cases, Canada’s bilateral tax treaties preserve Canada’s right to tax foreign pension benefits. These treaties often include provisions that allow the contracting state to impose a maximum rate of tax on pensions and annuities arising within its jurisdiction. For example, under Article 18 of the Canada-Australia Tax Treaty, Australia is permitted to tax pensions and annuities at a rate of 15% of the income received in a year. In such cases, a Canadian resident receiving that income may be eligible to claim a foreign tax credit in Canada for the taxes paid in Australia. However, that taxpayer would still be liable for full tax on that income in Canada. Furthermore, payments received from a “foreign retirement arrangement” are excluded from income calculations for tax purposes in Canada, but only if the amount would not be subject to income taxation in the foreign country if the taxpayer were a resident there. The definition of a “foreign retirement arrangement” prescribed under the Canadian Income Tax Regulations includes a United States Individual Retirement Account (IRA). As a result, it is highly unlikely that any relief from Canadian taxes will be available for foreign pensions received. To mitigate the impact of these tax rules, it is advisable to consult with a Canadian tax lawyer to explore options for restructuring your pension plan or transferring your pension to Canada. Proper planning with a Canadian tax expert can help minimize the Canadian taxes you may owe following your immigration to Canada. 

Tax Implications of Non-Arm’s Length Transactions and Transfer Pricing

If you have an offshore business that engages with a Canadian business you own, it is crucial to consider and comply with transfer pricing rules. In closely-held groups of corporations, market considerations may not always fully influence their interactions, despite being distinct legal entities. Specifically, some corporations within a multinational business family under common control may prioritize family benefits and non-commercial purposes when conducting transactions with each other. For instance, a Canadian company may sell a commodity or provide a service to a foreign subsidiary for its internal use. In such cases, the Canadian company may offer the commodity or service at a value lower than its open market worth, benefiting the subsidiary. As a result, the Canadian company will report lower taxable income compared to a scenario where the transaction occurred with an unrelated party at arm’s length. The practice of shifting profits and expenses among entities in different jurisdictions within a multinational business family can potentially distort Canada’s tax base. This occurs when income is intentionally subjected to lower tax rates or when expenses are inflated, leading to tax advantages for the paying corporation.

Canada’s transfer pricing rules are designed to prevent distortions that may arise when non-arm’s length entities engage in cross-border transactions. The CRA has the authority to adjust the transfer prices or cost allocations of Canadian taxpayers if they do not reflect the terms and conditions that would have been agreed upon by arm’s length entities in an open market. Transfer pricing is a complex area, and there is no one-size-fits-all approach. The CRA endorses various methods that can be utilized to determine an appropriate valuation for transactions.

In cases where entities fail to employ an appropriate transfer pricing method to value a transaction or a series of transactions, the Canadian Income Tax Act grants the CRA the authority under section 247 to make adjustments to the amounts in question. This includes adjustments to both the amount and the nature of the transactions. If entities have entered into a contract that would have been executed on the open market but, due to common control, income was redirected, the CRA can adjust the price or amount related to the transaction to align with the character of the transaction. In situations where entities have entered into an arrangement that would not have been entered into on the open market and was primarily driven by a tax benefit, the CRA has the right to find an appropriate market equivalent to adjust the price or amount of the transaction. While the CRA does not have the authority to completely recharacterize a transaction, it does possess the power to substitute an alternative transaction that reflects the terms and conditions that would have been agreed upon in an arm’s length transaction. In such cases, the CRA can levy taxes based on this alternative transaction.

The CRA holds significant authority to investigate and review transfer pricing decisions made by multinational corporate entities. Paragraph 247(4)(a) of the Canadian Income Tax Act imposes additional obligations on Canadian entities to provide comprehensive information regarding the factors considered in selecting a transfer pricing method. Furthermore, Section 231.5 grants the CRA broad access to documents, including those located abroad, when evaluating an entity’s transfer pricing methodology. It is important to note that the threshold for demanding such information is relatively low, and failure to comply with the CRA’s document request can have negative consequences, potentially prejudicing the entity’s ability to use that evidence in future disputes or litigation against the CRA. Compliance with transfer pricing rules can be a complex and demanding process for Canadian entities, and non-compliance can lead to serious consequences. Therefore, it is crucial for high-net-worth individuals immigrating to Canada and relocating their business operations to be well-informed about transfer pricing regulations by an experienced Canadian tax law firm to avoid potential conflicts with these rules.

Tax Pro Tip: Increased Compliance Burdens for High-Net-Worth Individuals under Incoming Mandatory Disclosure Rules in Canada’s Tax Regime

The federal budget for 2023 includes additional tax reporting requirements that have been carefully reviewed and are especially pertinent for high-net-worth individuals. A new class of “notifiable transactions” containing disclosure requirements was established as of June 22, 2023, the date the 2023 Federal Budget received Royal Assent, to monitor Canadian taxpayers using tax planning schemes with ambiguous tax status. The Minister of National Revenue and the Minister of Finance will decide whether or not a transaction qualifies as a notifiable transaction. However, the Ministry of Finance was provided with several model agreements that might be used under the new system, such as:

  1. manipulation of the CCPC status to evade anti-deferral rules that apply to investment income;
  2. avoidance of the trusts’ 21-year deemed disposition rule.;
  3. implementation of “back-to-back” arrangements with the intention of circumventing thin capitalization rules.

This new regime has significant implications for high-net-worth individuals immigrating to Canada, as it applies to tax planning arrangements implemented after their arrival. While these reporting obligations do not impose additional tax liabilities, they should not be taken lightly. Late filing or failure to file the required information return can result in severe penalties under the Income Tax Act. Individuals who file late may face a maximum penalty of the greater of $25,000 or 25% of the tax benefit obtained from the transaction, while corporations with assets exceeding $50 million may be subject to a penalty of the greater of $100,000 or 25% of the tax benefit. Importantly, under the new regime, the period of reassessment for a notifiable transaction remains open as long as the taxpayer has failed to file the required information return. It is crucial for Canadian taxpayers to understand the implications of this provision. When a taxpayer diligently files their tax returns, the normal tax reassessment period begins as outlined in subsection 152(3.1) of the Income Tax Act. Once this period has elapsed, the CRA is generally barred from reassessing the taxpayer’s tax assessments for that year, except in specific circumstances such as demonstrating “negligence, carelessness, or wilful neglect” on the part of the taxpayer in filing their taxes. Therefore, it is important to note that compliance with the new regime may subject a tax planning arrangement to immediate scrutiny by the CRA. However, by promptly reporting the matter to the CRA, you ensure that they must meet the burden of proof if they take an extended period to reassess your transactions. It is crucial to accurately report your transactions to protect your interests. This highlights the significance of consulting with an experienced Canadian tax lawyer before considering immigration to Canada for tax purposes to guide you through the complexities of both current and future rules, enabling you to develop a suitable plan that aligns with your unique circumstances.

Frequently Asked Questions (FAQs):

What are the criteria for an individual to establish tax residence in Canada?

Residence differs from citizenship or nationality in that it refers to a person’s different connections to Canada rather than their administrative (i.e., immigration) status in Canada. When a Canadian taxpayer actually resides in Canada, that is, when it becomes his or her settled, normal or customary place of living, that taxpayer is considered residents for tax purposes.

Additionally, if a taxpayer spends 183 days or more “sojourning” in Canada, he or she may be considered a resident of Canada under paragraph 250(1) of the Income Tax Act. Furthermore, under subsection 250(5), a Canadian tax resident who is a resident of both Canada and another country and who is considered to be so under an applicable bilateral tax treaty is considered to be a non-resident of Canada as of the date the treaty took effect.

As a result, in order to successfully become a Canadian tax resident, one must not only develop strong ties to Canada but also make sure that he or she is not perceived as a foreign resident under Canada’s bilateral treaties.

What is the purpose of Form T1135, and what are the filing requirements for this form?

According to section 233.3 of the Canadian tax regulations, if a resident taxpayer in Canada owns “specified foreign property” with a cost over $100,000 CAD at any point during the year, he or she is considered a “reporting entity” and must submit Form T1135 for that tax year. “Specified foreign property” includes various investments and assets held abroad, such as publicly traded securities of non-Canadian corporations or cryptocurrency, which are primarily not used for earning income from an active business or personal purposes.

However, there is an exception for individuals who were non-residents of Canada in a specific tax year but became Canadian tax residents in the same year. They are not required to file Form T1135 for that particular year. Therefore, if a taxpayer has specified foreign property exceeding $100,000 CAD in aggregate cost but becomes a Canadian tax resident in 2023, he or she will only need to file Form T1135 starting from the 2024 tax year.

What does the term “notifiable transaction” mean in relation to the Income Tax Act?

With the proposed introduction of section 237.4 in the Income Tax Act, the Minister of National Revenue, in consultation with the Minister of Finance, would have the authority to designate certain transactions or series of transactions as “notifiable transactions.”

Under this amendment, Canadian taxpayers who obtain or expect to obtain a tax benefit, as well as agents, promoters, or individuals not at arm’s length with an advisor or promoter receiving a fee related to the transaction, would be required to report details of such tax planning structures to the Canada Revenue Agency (CRA).

The Ministry of Finance has provided a sample list of notifiable transactions that could be designated, following the Royal Assent of the 2023 Federal Budget on June 22, 2023, which include strategies involving (1) manipulation of the status of Canadian-controlled private corporations (CCPCs) to avoid anti-deferral rules related to investment income; (2) circumvention of the 21-year deemed disposition rule for trusts; and (3) the use of “back-to-back” arrangements to bypass thin capitalization rules.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”

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