An offshore trust with a Canadian-resident beneficiary is exempt from Canadian income tax if the contributor has not yet been resident in Canada for at least five years. That is the rule. That is what newcomers to Canada need to know. Unfortunately, no such statement is to be found in Canada’s Income Tax Act. Instead, this concept—known as the “immigration trust”—must be pieced together from a set of rules targeted at offshore trusts and which, together with the explanatory notes, span forty pages of fine print. Given this treatment of immigration trusts, it is little wonder that those who draft Canada’s tax legislation have been unsuccessfully struggling with the more broadly applicable offshore trust rules since the 1990s.
The treatment of immigration trusts in the Income Tax Act highlights what has long been a cause for complaint: tax is too complex to be understood except by those whose fees are too high to be paid. The applicable rules begin with a provision which, in substance, states that a trust will be deemed to be resident in Canada upon satisfying conditions set out elsewhere with consequences set out elsewhere. Starting, then, with the conditions, a trust is only deemed to be resident if there is either a “resident contributor” or a “resident beneficiary”. Upon looking up “resident contributor”, we learn that this means a resident of Canada that is a contributor. A “contributor” is then defined as a person that has made a contribution, including a person that has ceased to exist but excluding a person that is tax-exempt. The definition of “Resident contributor” then goes on to exclude—and this is where the immigration trust enters in—“an individual (other than a trust) who has not, at that time, been resident in Canada for a period of, or periods the total of which is, more than 60 months (other than an individual who, before that time, was never non-resident)”. So far so good. It is in the definition of “resident beneficiary” where things get complicated unnecessarily.
A “resident beneficiary”, we are told, is (i) a person that is (ii) a beneficiary, but only if (iii) that person is a resident of Canada and (iv) there is a connected contributor. A “connected contributor” is a contributor other than—and here is where the immigration trust enters in again—“an individual (other than a trust) who was, at or before the particular time, resident in Canada for a period of, or periods the total of which is, more than 60 months (but not including an individual who, before that time, was never non-resident)”. Also excluded is a person whose contributions were made at a “non-resident time of the person”. This is where the value of breaking down the deceptively simple rule into a set of complex interlocking concepts becomes apparent as we learn that “non-resident time” means:
in respect of a contribution to a trust and a particular time ... a time (referred to in this definition as the “contribution time”) at which the person made a contribution to a trust that is before the particular time and at which the person was a non-resident (or, if the person is not in existence at the contribution time, the person was non-resident throughout the 18 months before ceasing to exist), if the person was non-resident or not in existence throughout the period that began 60 months before the contribution time (or, if the person is an individual and the trust arose on and as a consequence of the death of the individual, 18 months before the contribution time) and ends at the earlier of (a) the time that is 60 months after the contribution time, and (b) the particular time.
Turning then to the consequences, one is identified straightaway as the computation of the trust’s income. Simple. Comprehensible. Or is it? Another consequence is identified by reference to section 2 of the legislation which, in substance, says that Canadian residents are taxable on their worldwide taxable income. So why do we have one provision which refers to computing “income” while another cross-references a further provision which refers to “taxable income”?
As Canada’s Income Tax Act is laid out, “income” from property is determined under Subdivision b of Division B under Part I. That is the trust’s profit. The trust’s “taxable income” is then determined under Division C of Part I. That is the amount on which the trust is taxed after claiming deductions that would not otherwise be claimed in the determination of profit under generally accepted accounting principles. What this means for immigration trusts is that the trust is first deemed to be resident in Canada for the purpose of determining its net profits on its worldwide income and is then again deemed to be resident in Canada for the purpose of claiming those special deductions allowed under Division C of Part I of the Act. This is perfectly clear and logical ... if one’s adult life has been dedicated to understanding the workings of the tax legislation. Further consequences of the trust’s deemed residence must be determined by tracking through a lengthy list of cross-referenced sections.
So what, then, does all of this mean for taxpayers?—simply that an offshore trust with a Canadian resident beneficiary is exempt from Canadian income tax if the contributor has not yet been resident in Canada for at least five years.
One can hope that, in another decade or so, Canada’s Department of Finance will, if not get these rules right, at least get them settled. In the meanwhile, these rules, finished or not, apply retroactively to 2007 and we are all deemed to understand them.