Tax Issues - Hull on Estates #175
Listen to: Tax Issues - Hull on Estates #175
This week on Hull on Estates, Ian Hull discusses tax issues, specifically those concerning Canadian clients who are leaving the country.
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Tax Issues - Hull on Estates- Episode #175
Ian Hull: Hi and welcome to Hull on Estates.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of
Ian Hull: This is Ian Hull and I am doing a solo podcast today. I will typically podcast with my law partner, Suzana Popovic-Montag. However the holiday season of August has got in the way and therefore I’m going to be doing a solo podcast.
I have been focusing this summer on a bit of a mini project and that has been to help me and my clients better understand some of the core tax issues. Today we podcasted on our Hull on Estate and Succession Planning about tax issues and what I provided was what was essentially a Reader’s Digest view of taxes.
I wanted to talk a little bit about something slightly, although it is tax-related today on Hull on Estates, different and that is some of the considerations with respect to clients who leave Canada and what are sort of the…and I mean again, we’re not tax experts…but what are some of the issues that you’re going to have to face if you have a client who is leaving Canada.
Before I do that, I do want to remind everyone that on September 24th, Hull & Hull is going to hold its regular Breakfast Series at the Ontario Bar Association and we will have 3 speakers for our hour-long presentation. And I welcome you to join us and obviously e-mail us or contact us should you need information. But there is lots of information about that on the web as well.
So let’s step back to the scenario. And why I am struck by this issue a little bit this summer anyway has been that I had two very good clients leave Canada. And it was a learning experience for me from a couple of standpoints. But they were both embroiled in very complex trust arrangements and so leaving Canada from my small world of trusts law was something that was complicated in some respects by the tax issues. I mean it’s important really to ask at some level what are some of the reasons why your client is leaving because that may have an impact. And the general rule on the tax standpoint is that when you leave, again there’s lots of flexibility to this general rule, but the general rule is of course if you leave Canada and your client is leaving Canada, you are going to suffer through the deemed disposition of your assets in that sense.
So if you look at what the purpose of why a client might be leaving Canada, it can have an impact on how you want to plan their departure. Sometimes they’re leaving to return home after living in Canada for a couple of years. Or it’s a number of years, with the aim of you know, having been Canadian citizens, though want to go back to say their own home country. In that sense, they may be seeking a better business opportunity. Lots of clients that we have worked with over the years leave Canada to go and take on a more prosperous opportunity in the United States, for example, where they have been operating in a business environment with a Canadian business and then they get an opportunity to go to the United States to bigger and better things in their mind. Some people, of course, retire to a warmer climate and that is a big part of the departing clients certainly as the generation of the baby boomers move into that stage in life. It can also be just a change in lifestyle for sure. But obviously one of the reasons why people leave Canada in that sense is that they want to also possibly be looking for a lower tax jurisdiction for tax reasons itself.
So in terms of the tax analysis, we often will look at sort of two tax entities, and that is, the United States and the US experience because we have a core, we have a series of tax treaties and we have sort of an easily understandable arrangement with that with regard to the tax treaties that exist with the United States. And then, of course, there are clients who are looking for tax havens themselves. And by definition, a country that may have no tax so that the person who moves into the tax haven does not need to worry about the tax situation in which he or she is moving into. But those regions can often be identified. And when I say no tax, I mean that’s probably overstating it. But the Caribbean arrangements exist. Europe, of course, has them in the Isle of Man, Jersey. And, of course, the famous tax haven in Europe was of course Switzerland but now countries like Liechtenstein and others have their own tax advantageous reasons to be there.
Of course all of these countries do in fact have tax systems so the domestic tax earned is an issue once you’re there. But the other category, of course, is the idea of moving to the United States to look to, which is often the case, a generally better financial arrangement.
One of the first issues that I like to canvass, make sure is canvassed with my tax advisor so that whenever my clients come to see me about this and they’re saying that they are in the process of arranging to leave Canada, one of the first things I do is I arrange a good tax advisor. And on my video podcast today, I talked about the question of whether or not you need a tax advisor who is an accountant or who is a lawyer. And in a typical legal fashion, I can answer that question in my mind anyway, the same way that all good lawyers would do – and the answer is “both”. We need to consider obviously an accountant who can give the advice. And at some level, though, you are often faced with the need to get a tax lawyer to give you an opinion as to the legal effect of the transaction that is being proposed. So you would get a tax accountant to say well look, here’s a good way to do this. Let’s do X, Y and Z and do a triple butterfly here and add in this capital dividend account here and do all the sorts of buzzwords that a good tax advisor is going to give you. And then all of a sudden you are also going to be recommended, probably by the accountant him or herself, to consider getting a tax opinion as to the effect, especially in situations where there are corporate holdings because if you are taking a tax route so to speak you will want to be mindful of the fact that if there are other shareholders, i.e. other people with a financial interest, how is that going to impact? And in my practice, I see this a great deal of the time because where there is a tax effort being undertaken by an accountant that impacts on a trust and that trust has various special interest, i.e. special financial interests such as minor children or even a discretionary trust, you will often find that you’ll want to look to a tax lawyer to give you their view as to the legal effect of the proposed transaction.
But the basic starting point is, for Canadian taxation, of course the determination of residency. And a Canadian resident individual pays tax on world income, while a non-resident would typically pay tax only on Canadian source income. So if the individual, for example, has lived in Canada for many years but ceases residency, that may have an effect on their tax treatment of their income. And whereas a person who is a resident of Canada and has sufficient ties to constitute residency, those ties include for example having a home in Canada or having family in Canada, spending a significant amount of time in Canada, those kinds of scenarios. When that person leaves Canada and moves to another country, the question will be are they indeed severing their residency or not? And again, what that has an impact on is what is going to be the immediate tax impact upon departure? So residency itself is a core issue to identify this. And as I said at the beginning, one of the main reasons for all of this is, of course, that a Canadian resident who leaves Canada will be deemed to sell his or her assets at fair market value at the time of leaving, with the exception of some certain Canadian assets. But that’s the general rule. And that, of course, gives rise to what can be a significant capital gain. And this is referred to typically as what one calls the departure tax.
So to sort of summarize where we’re at, if we’re looking at a Canadian client who is going to be leaving Canada, we want to look at some of the core issues of residency and so forth being mindful of the fact that the real issue and the real tax that is haunting you on your departure is, of course, the departure tax and the deemed disposition that comes with your departure.
So again, I remind everyone, please feel free to participate at our upcoming September 24th Breakfast Series. And we have that option available by webinar, we have that option available by attendance and by phone-in. And if you need any details on that, go to the web page or feel free to e-mail me directly at ihull@hullandhull.com.
So it’s been a pleasure presenting on Hull on Estates this week and I’ve missed my partner, Suzana Popovic-Montag, for this podcast but we wanted to keep on and not miss a week and we weren’t going to let the holiday schedule affect that. So she’ll be back soon enough and back on both Hull on Estate and Succession Planning and on Hull on Estates.
Thank you very much.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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