On February 11, 2014, the federal government announced that it intended to repeal the so-called “immigrant trust” exception found in section 94 of the Income Tax Act (Canada) (the “ITA”). Due to the limited transitional rules provided (and no grandfathering), taxpayers generally have (at most) until the end of this year to remedy immigrant trust structures before they become subject to Canadian tax.
By way of background, a non-resident trust is deemed to be resident in Canada under ITA 94 if there is a “resident beneficiary” under, or a “resident contributor” to, the trust. A long-standing exception to that rule applies to trusts the only contributors to which are individuals who have not been resident in Canada for more than 60 months – commonly referred to as “immigrant trusts”.
Under the draft legislation implementing the government’s announcement, immigrant trusts will generally be deemed resident in Canada from January 1, 2014 onwards (and subject to Canadian tax on income it earns thereafter) unless they meet two stringent criteria: (1) the trust would have been deemed resident in Canada from January 1, 2014 to February 10, 2014 if it were not for the “immigrant trust” exemption; and (2) no “contribution” (which can capture a wide array of transactions) is made to the trust after February 10, 2014 and before 2015. If those requirements are met, an immigrant trust will only generally be deemed resident in Canada beginning January 1, 2015 (provided the 60-month period has not already expired by that date).
Onerous income tax consequences may arise if an immigrant trust continues in existence beyond 2014 (even if the trust can avail itself of the delayed effective date). With the proper tax advice, it may be appropriate to take steps to wind-up or repatriate an immigrant trust structure. Unfortunately, the time for doing so is quickly running out.