Canada – The New Evolution in Financial Security

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With the OECD, EU and US continuing to put pressure on traditional financial centres, clients from emerging markets such as Russia, China and Brazil are now looking to new jurisdictions to plan for their financial security. One of those jurisdictions may be Canada.

In the case of Fundy Settlement v. Canada, 2012 SCC 14 [April, 2012], the Supreme Court of Canada ruled that a trust should be taxed where its "mind and management" is located, not where the trustee is resident. Although these locations could be the same, tax residency for Canadian purposes is now determined to be where the principal place of business of the trust is conducted.

Therefore, a company can be incorporated in Canada. That company can enter into a trust indenture as trustee (either on declaration, or settlement) on behalf of a client and, if the trustee engages a co-trustee or a trust administrator from outside of Canada to perform the day to day management of the trust, no tax consequences will arise in Canada. As a trust not subject to tax in Canada, there is also no requirement to file any sort of information or tax return.

Where a client is looking for more security over the trustee, the shares of the company can be owned by a third party, which can be resident outside of Canada. Shareholders can include individuals or other entities, such as corporations. While most Canadian companies are required to have a resident director in Canada, certain jurisdictions, such as New Brunswick, allow directors to be non-resident. Given that the company is acting as trustee on behalf of a single trust and not in a commercial capacity, there is also no licensing requirement.

The requirement of the trust (or "Transnational Trust"), to engage a non-resident co-trustee or trust administrator, makes the Transnational Trust a perfect fit to work with financial institutions already established in places like London, Singapore or Hong Kong. It is also the perfect entity with which to hold interests in entities based in various treaty-based jurisdictions.

Fundy Settlement makes Canada the first common law jurisdiction in the world to change the basis for taxation of a trust (not to be confused with the concept of ring fencing tax liability/rates which is employed in New Zealand and Barbados). Canada did not make this rule in order to attract international tax planning opportunities, but rather to clarify (and arguably extend) its right to tax income and gains on assets held overseas by Canadian residents. As a member of the original G7 group of nations, Canada is still viewed as a high-tax jurisdiction, and given its size in the world community, it will not be as easy for groups such as the OECD to pressure Canada to change its rules simply to suit international policy makers.

Given that Canada has "deeming" legislation to tax any trust which receives assets from a Canadian resident, the Transnational Trust can only accept assets from non-resident Canadians. As such, it is not likely that the Canadian government will move to change the rule in Fundy Settlement. From its standpoint, the Canadian government sees Fundy Settlement as a big win in taxing Canadian assets. It is highly unlikely it will change that position for the benefit of assets over which it has no jurisdiction.

In addition to the Transnational Trust, Canada has always had a form of nominee company that can be used in a similar fashion to any traditional "International Business Company." In essence, where a company incorporated in Canada acts as an agent on behalf of a non-Canadian resident client, any income or gains on assets held by the company are not taxable in Canada.

In essence, a Canadian nominee company ("CNC") would be incorporated using either resident or non-resident shareholders. The CNC would require a registered office in Canada, but depending on the jurisdiction of incorporation, the director could also be non-resident. It would then enter into an agency agreement with the owner of certain assets to open bank and investment accounts or engage in business activities outside of Canada. The CNC may execute powers of attorney or appoint discretionary asset managers if provided for under the agency agreement or by subsequent direction from the owner of the assets.

While the CNC has to file a tax return, it does so only in relation to any income it has made in its own right (presumably the fee it charges the client), but not in respect of any income or gains generated in respect of the client’s assets. Similarly, there are no information returns required to be filed in Canada given that the CNC is not the beneficial owner of the assets.

Unlike the popular UK agency company, there is no concept of having the company "book" a fair percentage of the revenues passing through the accounts. There is also no transfer pricing concept in respect of a CNC because the parties are dealing at arm’s length.

Given the ever increasing public stigma in dealing with traditional tax havens and the changing policies surrounding due diligence criteria amongst various financial institutions, Canada is a perfect substitute for standard planning products such as trusts and companies in a global tax and asset protection plan.

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Reprinted from International Man with permission.

A Canadian by birth, Greg McNally is an international tax lawyer by training. He has earned various degrees, including law degrees in Canada and the United States, a Masters of Law in International Tax and a Masters in Business Administration. He practiced law in the Turks and Caicos Islands for 10 years from 1992 until 2002, when he returned to Canada and joined Royal Bank of Canada (Global Private Banking) as their Senior Manager of International Services in Toronto. In 2004, he started an international tax consulting firm called N. Gregory McNally & Associates Ltd., where he now oversees the development and implementation of customized international wealth management solutions on behalf of high-net-worth and ultra high-net-worth clients.

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