Considering A Move To Canada? Income Tax For Permanent Residence For Wealthy Immigrants

• Law Firm: Rotfleisch & Samulovitch P.C.
• Subject Matter: Wealth Management, Tax, Immigration, Wealth & Asset Management, Income Tax, Investment Immigration
• Author: Mr David Rotfleisch
• Published date: 07 July 2023

Introduction -Influx of Wealthy Immigrants to Canada Continues to Rise

A recent report by Henley & Partners, a U.K.-based investment consultancy specializing in international tax planning and migration services, has cast a spotlight on increasing outflows of "high-net-worth individuals" from developing economies, and more specifically China and India. A high-net-worth individuals (according to Henley & Partners) are those with investable wealth of USD $1 million or more. According to Henley's Migration Report 2023, it is estimated that over 13,000 high-net-worth individuals will be emigrating from China over the next year to jurisdictions with more favourable tax regimes for their investable wealth. India is expected to lose almost 7,500 high-net-worth individuals to jurisdictions offering favourable tax environments.

Among the target destinations for these wealthy emigrants includes Canada in 5^th place, with an expected influx of 1,600 new high-net-worth individuals over 2023. Many of the top countries experiencing inflow of high-net-worth individuals have developed aggressive investment migration programs to encourage foreign direct investment in exchange for residence rights, and Canada is no exception. Under Canada's Start-Up Visa Program, wealthy entrepreneurs can obtain the right to live and work in Canada and eventually citizenship in exchange for investing in businesses that are expected to create jobs for Canadians and to grow the Canadian economy. There are also many social and political reasons that favour immigration to Canada, given the country's relatively high standards of living and low rates of crime and corruption.

While Canada may offer many benefits to new wealthy immigrants, planning for such a move is rarely a simple matter. Canadian domestic tax rules can be extraordinarily complex depending on the nature of an individuals' business and investment activities. There are many tax traps into which an unprepared immigrant can unintentionally fall, and as a result end up non-compliant and facing the full weight of the tax administration and compliance wing of the Canadian government, the Canada Revenue Agency ("CRA"). This article aims to address some of the most immediate and often-times neglected tax considerations for high-net-worth individuals moving to Canada, who may be seeking to move capital to Canada or maintain investments abroad. This article will begin by explain how an individual becomes a resident for Canadian tax purposes, and why planning for establishing tax residence is the first crucial consideration for any high-net-worth individual looking to fast-track a move to Canada. This article will then explore a myriad of compliance and anti-avoidance rules, and planning opportunities, for high-net-worth individuals moving to Canada who may already have investment vehicles set up abroad, or may be looking to move capital to Canada. This article will then conclude with some pro tax tips and some frequently asked questions concerning Canadian tax residence and tax planning considerations.

While this article aims to address a number of important topics, any high-net-worth individual moving to Canada should absolutely retain a Toronto tax law firm to advise on how best to plan for emigrating to Canada, as each situation is unique and will invite new and unique tax considerations. Rarely are two situations identical, and only through proper research in light of an individual's goals will an appropriate and tax-efficient plan be developed.

A General Summary of Canadian Tax Residence Rules and Considerations

Distinguishing Between Tax "Residence" and Other Forms of Residence and the Canadian Tax Treatment of Each

It is important to distinguish at the outset that residence for immigration purposes (e.g. citizenship, permanent residence, temporary work or study visas) is a distinct concept from the rules under Canada's tax system that determine whether a person is a "resident" of Canada and therefore subject to taxation as a Canadian tax resident. Unlike an individual's immigration residence status, with is an administrative title the Government of Canada grants to a person, the concept of "residence" for tax purposes is linked to the extent and permanence of an individual's connecting ties to Canada. Broadly speaking, an individual with deep ties to Canada enjoys the privileges of benefiting from its public services, and because those privileges make it possible for that individual to earn income. Many other countries adopt a similar distinction between residence for immigration purposes and residence for tax purposes, motivated by similar policy considerations.

Under subsection 2(1) of the Canadian Income Tax Act, the worldwide income of an individual resident in Canada is subject to tax. In contrast, a non-resident individual of Canada is only subject to tax on Canadian-source income under subsection 2(3) and Part XIII of the Income Tax Act (which includes income from employment in Canada, carrying on business in Canada, or a disposition of "taxable Canadian property"). Thus, if an individual is a Canadian tax resident, then Canada will assert its jurisdiction to tax any income including all income earned outside of Canada. This would include, for example, pension income that may not be taxable in the source country. Section 126 of the Canadian Income Tax Act would then permit that individual to take a tax credit against any Canadian tax liability for foreign taxes paid on that foreign income. Canada's foreign tax credit system helps to ensure that a taxpayer will not be taxed twice on the same foreign income, where that other country may have a stronger claim to that tax base. However, to ensure the tax system remains equitable, foreign tax credits cannot be used to subsidize income taxes from other countries. Foreign tax credits are thus limited to the extent that the taxpayer had pre-credit Canadian taxes owing for that year. Any unused foreign tax credits may be carried forward or back as deductions to offset income taxes paid in other years on a country-by-country basis, but only under limited circumstances.

When is an Individual Treated as a Canadian Tax Resident?

Under subsection 2(1) of the Canadian Income Tax Act, an individual who is a "resident" of Canada is subject to tax on worldwide income. In contrast, a Canadian non-resident individual is only subject to tax on Canadian-source income under subsection 2(3) and Part XIII of the Income Tax Act. An individual may be found to be a resident for Canadian tax purposes in accordance with two distinct rules:

1. a taxpayer may be "ordinarily resident" within the meaning of subsection 250(3) of the Income Tax Act; or
2. where that taxpayer is not otherwise ordinarily resident in Canada at any point in a given taxation year, that taxpayer may be a "deemed resident" under paragraph 250(1)(a) of the Income Tax Act.

Defining "Ordinarily Resident" in Canada

Under subsection 250(3) of the Income Tax Act, an individual is viewed as a resident of Canada where that individual is "ordinarily resident" in Canada. ("Ordinary residence" is often referred to as "factual residence".) The Income Tax Act does not define what it means to be "ordinarily resident", and so Canadian courts have articulated conditions that are to be weighed when determining whether a person is ordinarily resident or not. Broadly speaking, 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 relevant factors for determining somebody's ordinary residence include a person's:

1. past and present habits of life;
2. regularity and length of visits in the jurisdiction asserting residence;
3. ties within that jurisdiction;
4. ties elsewhere; and
5. permanence or otherwise of purposes of stay abroad.

In addition, the CRA has published its own views in Income Tax Folio S5-F1-C1 ("Determining an Individual's Residence Status") as to what factors will militate in favour of an individual being a Canadian factual resident. While the CRA's published views on...