A Second Residence in Canada?

May 21, 2020

With Covid-19 encouraging more and more HNW individuals to relocate to safer havens we look at the pros of a Second Residence in Canada.

New Zealand has made headlines during the Covid 19 pandemic as a prime “Time to get out of Dodge” location.  However, there is another Commonwealth country that is undoubtedly welcoming more fleeing wealthy families.

That country is Canada.

Whether to “cottage country” north of Toronto or the international ski resort at Whistler, international celebrities including Prince Harry and Meghan Markle have been attracted to Canada for decades.

 

Canada boasts a beautiful and varied natural landscape offering an excellent quality of life

A Second Residence in Canada – The US attraction…

More quietly, many wealthy American families have acquired alternative residences in Canada. The benefits are clear –  its proximity to the US, low costs (with the lower Canadian dollar) and universal health care system.

Montreal is an easy 7 hour car journey from Manhattan.

A perfect illustration is this secluded 3 bedroom property just north of Montreal. It sits on almost 2 acres of wooded land with over 100 feet of riverfront and access by a private road. It’s an easy 7-hour drive from Manhattan. It is less than an hour to an international airport and 25 minutes to a hospital. It’s close to shopping, excellent restaurants, ski hills, bike trails and golf. All this for a price tag of only US$230,000.  As you can see, the addition of adding Canada as an alternative residence can be quite reasonable… and relaxing.

A case study – an American in Halifax…

Recently my first US expatriate client – for whom I had secured Canadian citizenship in the mid-1990s  – decided to ride out the pandemic storm in Canada. After acquiring Canadian citizenship as part of his Backup Plan, he became a non-resident. He did not live in Canada for over 20 years. However, Covid-19 prompted him to relocate to Canada.

He selected Halifax, Nova Scotia. In addition to its quality of life, it had a low number of cases and excess medical facilities per capita. Even though he had global medical coverage, as a Canadian citizen he was immediately covered by this province’s medical coverage.  So he did not need to worry about preference being given to “locals with provincial medical cards” over “foreigners with insurance”. Needless to say he was thrilled that the protections he put in place decades ago worked when they were most needed.

Someone today could accomplish the same thing with a Canadian Work Permit.

The practicalities – all you need to know about acquiring a second residence in Canada

This is our third entry in a series of blogs on alternative residence locations. We’ll examine features that HNW families may want to consider when adding Canada to their Backup Plan.

Cost of acquiring residence status?

For HNW families there are several ways to secure immigration status in Canada. I always emphasize that the “best” solution depends upon the family’s unique situation. That said, one currently popular method is to secure Work and Student Permits for the entire family. This can be done by setting-up a Canadian subsidiary of one of the family’s international entities. This “intra-corporate transfer” strategy delivers:

  • speed of acquiring status,
  • complete control over any investment,
  • and the ability to place some families members in Canada for safety without exposing the entire family wealth to taxation.

This status can be continually renewed or converted to permanent residence.

Minimum physical presence requirement to maintain residence status?

Some statuses such as a Work and Student Permit do not have a minimum physical presence requirement. This applies whether maintaining or renewing the status.

Permanent Residents, however, have a physical presence obligation. They must spend a minimum total of two years over a five-year period in Canada. This is in order to renew their Permanent Resident travel document.

If one wants to qualify for citizenship, three years of physical presence in a four-year window is required.

Ability to own property?

Foreigners, Work Permit holders, Permanent Residents and Canadian citizens all have an equal ability to own property in Canada.

When and how does “tax residence” kick in?

An individual becomes a presumed tax resident in Canada when they spend more than 183 days physically present in Canada in a given tax year. As a result, an individual who acquires a Work Permit or even Permanent Residence in Canada but who does not spend more than 6 months in Canada can (with proper advice) remain outside of Canada’s tax net.

There are several compelling reasons why an individual may choose to become tax resident in Canada:

1: No Estate Tax

Canada abolished its estate tax decades ago. Therefore, if an American who was going to be subject to the US Estate Tax wanted to legally avoid same, they could renounce their US citizenship (with a Canadian or other citizenship) and acquire a Domicile of Choice in Canada.

2: No Gift Tax

Canada has never had a gift tax. To escape the US gift tax a US taxpayer would need to follow the same steps as the estate tax above.

3. No Wealth Tax

Currently in place in some countries (such as France). This had already been proposed by some 2020 US POTUS candidates and other international politicians… The impact of Covid-19 will certainly give these policies further traction. If implemented, this would be yet more proof of Canada’s “tax haven” status. Canada does not have a wealth tax.

4. Reduce or eliminate Income and Capital Gains taxes.

In order to appreciate this feature of Canada, one must first understand the “Tax Equation”, which is:

              Taxable Income x Tax Rate = Tax Paid

Obviously a taxpayer would wish to minimize their Tax Paid. Since Tax Rates are fixed by law, a taxpayer can then follow two possible tax reduction strategies. The first strategy is to have the lowest applicable Tax Rate by

  1. moving to locations with lower rates (e.g. provincial, capital gains, income); and/or
  2. generating types of income which attract lower rates (e.g. capital gains vs. ordinary income).

The second tax reduction strategy is to reduce the income which is included in the category of Taxable Income. It is in this second strategy that Canada can be a “tax haven” compared to the US and many other taxing jurisdictions. Specifically, while both Canada and the US include worldwide income in Taxable Income, by using legal pre-immigration planning structures (e.g. estate freeze like planning, granny trusts), one can effectively halve worldwide Taxable Income or even limit it to Canada-only income that will be included in one’s tax calculation. If the individual does not have Canadian source income, then it is quite possible that they can pay no Canadian tax.

5: Use Canada as a shield against tax status in another country

Canada has a large network of countries with whom it has signed tax treaties. Therefore, it can be beneficial to assert a “tie-breaker position” to overcome the potential of tax status in another country.

A classic example is where an individual still manages to trigger the presumption of US tax status. This may be done by running afoul of the substantial presence test – despite using the commuter. If they are both commuting from Canada and tax resident in Canada, then they can apply the Canada-US tax treaty and elect to be a Canadian tax resident…where they pay little to no actual tax.

Canada’s rich quality of life is terrifically family friendly.

6. Spend more than 183 days in one developed country

Whether due to a lifestyle preference or family needs (e.g. schooling), some individuals may want to spend more than 183 days physically in Canada. Because of the above-mentioned tax planning opportunities… if implemented… Canada can provide the lifestyle of a developed country without the excessive taxation that normally accompanies such a lifestyle. In addition, the individual and their family can also reap the future benefits of Canadian citizenship.

Quality of Medical Facilities?

Canada has both universal public and supplemental private health care coverage. Public opinion polls consistently show Canadians overwhelmingly prefer the Canadian public / supplemental private healthcare system over that of a U.S. style system.

Given Canada’s interconnectedness with the US (trade in goods and services, business travel, tourism), the Canadian healthcare system was challenged by Covid-19, and by most objective accounts performed very well.

International school availability

Canada has a similar system to the US with International Baccalaureate programs widely available.

Conclusions:

With the benefit of good information and proper planning, Canada’s persona as a high tax country is actually revealed to be a hidden tax haven.  Furthermore, selling Canada to family members as an alternative residence is relatively easy as it has a well-deserved reputation as a magnet for absorbing many cultures.

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