For over 40 years, Canada offered a unique tax benefit to individuals not previously Canadian resident or who had been resident in Canada for less than 60 months. Such persons were allowed to establish a nonresident trust, which would not be taxable by Canada and from which a Canadian resident beneficiary could receive tax-free capital distributions. In addition, and in comparison to U.S. tax rules, income accumulated in the trust at the end of the calendar year automatically became capital, following typical provisions in discretionary trusts. Once converted into capital, the rules for tax-free distributions of capital became applicable.
This made Canada an attractive jurisdiction for global elite. Wealthy immigrants to Canada could shelter foreign investment income and capital gains from Canadian tax for a period of up to 60 months after becoming resident. Needless to say, these structures became quite popular.
In a surprise move announced in February 2014, the tax benefit was withdrawn from 2015 onwards. However, if the trust received a contribution after February 22, 2014, it would become taxable from 2014 onwards. Importantly, no grandfathering was provided for existing trust arrangements, which is both unfortunate and unfair. The change impacts a large number of individuals, as many people have structured their tax planning on the basis of having this exemption for 60 months.
CANADIAN TAX SYSTEM
Canada has a common law definition of residence, which is basically a facts and circumstances test. When an individual establishes sufficient ties to Canada, that person will become resident. While Canada also has a substantial presence rule (183 days in the calendar year), this rule is only applicable to persons who spend time in Canada without becoming resident under common law principles. Citizenship and immigration status are not a basis for levying tax.