All About Estates

Certain Recurring Tax and Estate Planning Questions from New Canadians

Today’s blog post was written by Rahul Sharma, Partner, Fasken Martineau DuMoulin LLP, Toronto

According to a recent article in the Globe and Mail, Canada added more than 437,000 new permanent residents last year, while the federal government intends to admit 1.45 million more new permanent residents over the next three years. These are considerable figures for a country whose population currently stands at just above 39 million inhabitants.

New Canadians means new taxpayers. But entering into Canada’s tax system, and engaging in Canadian tax and estate planning for the first time, can be challenging. This is particularly so for higher net-worth (HNW) individuals and those relocating to Canada with assets, accounts and existing tax and estate planning structures in their countries of origin. Many new Canadians are physically arriving in Canada and staying, studying or working in the country, but remaining otherwise tied financially in varying degrees to their families and/or to assets, accounts and structures in their countries of origin. Not surprisingly, inquiries from newcomers to Canada, particularly HNW newcomers, regarding Canadian tax and estate planning considerations, are steadily increasing.

In this blog post, I answer certain recurring questions posed by new Canadian taxpayers or by individuals looking to relocate to the country in the near future. The items discussed in this blog post are by no means exhaustive and no substitute for proper legal and tax advice, particularly as every case will turn on its own facts.

Is there a gift, estate or inheritance tax in Canada?

The immediate answer to this question is ‘no’. The broader answer is that Canadian tax residents are, in general, taxable on their worldwide income. The Income Tax Act (Canada) provides a deemed disposition and reacquisition of capital assets immediately before death, resulting in a potential capital gain or loss. If assets with accrued capital gains are gifted from one individual to another, a capital gain is realised by the donor, with tax payable by the donor in respect of the gain.

There is also, with certain exceptions, a deemed disposition and reacquisition of capital assets when a person ceases to be a Canadian tax resident. The resulting tax liability, if any, is often colloquially referred to as “departure tax” amongst Canadian tax practitioners.

What happens to the cost basis of my non-Canadian investments when I become a Canadian tax resident?

Generally, an individual receives a step-up in the cost basis of his, her or their foreign investments (to fair market value) upon the initiation of Canadian tax residency. This “bump” in cost basis may be easy to determine for an individual with market securities. It might be more difficult to ascertain for individuals with private company shares, real estate or other illiquid assets. Valuations might be required in such cases in order to determine the fair market value at the time of the initiation of Canadian tax residency.

Do I have disclosure and reporting obligations in respect of my non-Canadian assets?

This generally depends on the aggregate cost amount of the non-Canadian properties, accounts and investments, with an annual filing in Canada Revenue Agency (CRA) form T1135 required when the cost amount of “specified foreign property” (as defined in the Income Tax Act (Canada)) exceeds CAD$100,000 at any time during a taxation/calendar year. This CAD$100,000 threshold has been in place for some time. Practically, the threshold may be quite low for certain HNW individuals and serious attention should accordingly be paid to ensuring that all reporting and disclosure obligations are met on a timely basis. This also means ensuring that foreign banks and investment brokers are advised of the need to provide statements and information that will permit newcomers to Canada to properly and fully comply with Canadian reporting and disclosure requirements.

If an individual owns interests in certain foreign private companies, the individual might also be required to make filings in Canada Revenue Agency form T1134. Certain receipts and/or contributions to foreign trusts could also require forms T1141 and/or T1142 to be filed.

While certain exceptions to foreign asset reporting exist for the first year of Canadian tax residency, Canadian resident individuals are still required to properly calculate, report and pay tax on their income from all global sources for their first year of Canadian tax residency. The failure to file the aforementioned forms in a timely manner can give rise to penalties and the possibility of CRA scrutiny of foreign assets and holdings.

Will I need new Wills and Powers of Attorney in Canada?

With the acquisition of Canadian real property, bank accounts and other assets and investments comes the likely need and benefit of local Will and incapacity planning. The challenge for newcomers to Canada who continue to own properties and investments in their countries of origin is the need for Will and incapacity planning to be coordinated between the two countries. The laws and probate or similar procedures of global jurisdictions are unique and subject to local nuances. In certain instances, it might be beneficial for newcomers to Canada to have coordinating Wills and Powers of Attorney prepared in their province or territory of residence in Canada, as well as in their jurisdictions of origin (where they continue to own property). A couple of quick and simple examples—and cautionary tales—come to mind.

In one case, a fairly new Canadian citizen with sizeable global assets arrived at a first meeting with copies of an existing Canadian Will and a more recently made Will in the country of the individual’s origin, where the individual continued to own assets. Both Wills governed the succession of all of the individual’s global assets, wheresoever situate. However, the more recently made Will made in the individual’s country of origin included a common “revocation” clause that revoked all prior Wills made by the individual. Such revocation would theoretically encompass the individual’s earlier made Canadian Will, leaving the individual (who had intended for the two Wills to operate in tandem, one with the other, and for the non-Canadian Will to be limited only to the succession of assets in that foreign jurisdiction) with only the later made non-Canadian Will. This issue could have been resolved through discussion and coordination between the individual’s Canadian and foreign lawyers.

In another case, an individual died in Ontario with a holograph (handwritten) Will. The Will, although made by the deceased in his handwriting and signed by him, was validly made under Ontario law. At the time of the deceased’s passing, he also held bank accounts in his country of origin. The laws of the deceased’s country of origin do not recognize holograph Wills, and so the deceased died intestate (without a Will) under the laws of that country. The deceased’s surviving spouse and heirs were accordingly required to submit to local probate procedures on an intestacy. These procedures were lengthy and costly, but needed to be fulfilled in order for the local banks to provide access to the accounts in question.

It stands to be reiterated that the foregoing questions and answers are far from exhaustive, and that every case will turn on its own unique facts. Canada’s tax laws are complex and often unintuitive. Both Canada’s tax and estate or succession laws can also be incongruent with those of foreign jurisdictions where newcomers to Canada may still have considerable assets and property interests. Newcomers to Canada, particularly those who continue to own assets in their jurisdictions of origin, are strongly advised to engage competent tax and legal advisors in Canada and to ensure that their Canadian tax and estate planning matters are well handled.

Another recurring question, particularly from HNW newcomers to Canada, is what to do with their foreign trust structures. The question is perhaps most often raised by Americans coming to (or coming back to) Canada who have established trusts in the United States as part of their local estate planning. This question is a little more complex and will accordingly be answered in greater detail in my next blog post.

About Fasken
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