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Bermuda News Weather Property Rentals Jobs Reviews Social
November 23, 2017
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Offshore Trusts


Offshore trusts are often used to hold income producing assets in a low tax or no tax jurisdiction. The objective is to avoid Canadian taxation of the income earned on these assets. Naturally, if it is very simple to avoid Canadian tax by holding assets offshore most Canadians would hold their investments through offshore trusts. The Canadian Government has created a series of rules that attempt to make it unattractive to hold assets through offshore trusts by attempting to treat such trusts as being resident in Canada and therefore subject to Canadian tax rules. Further, if an inter vivos trust is deemed to be resident in Canada it will be taxed at the highest marginal rate on all undistributed income.

Accordingly, one of the keys in the formation of an effective offshore structure is to establish and maintain non-resident status. The recent amendments contained in the February 16, 1999 Budget make this task even more difficult.

Residence of the Trust:

Revenue Canada uses two approaches to determine that a trust is resident in Canada and subject to Canadian taxation, namely deemed residence and actual residence.

Actual Residence:

One of the key court cases on actual residence is Thibodeau Family Trust v. The Queen. In that case the court found that in determining residence certain guidelines are of assistance:

Place of residence of the Trustees;
The capacity of the trustees resident in a particular place to determine matters within the trustees' discretion;
The existence (or absence) of a "guiding mind and will" (other than the persons with nominal control) that could direct the trust;
The location of the property of the trust;
The residence of the beneficiaries; and
The place or places where the trust carried on business.
The first three factors are the most significant. With regard to the first two factors it is important to ensure that the structure of the trust and the trust documents themselves do not create problems. This is done by trying to ensure that the following are met:

-the majority and preferably all, of the trustees are non-residents. If there is more than one trustee, the trustees should ideally be from the same jurisdiction.
-the trustee should be, to the largest extent possible, independent of the settlor/creator of the trust. It is common and good practice to appoint an institutional trustee resident in the chosen trust jurisdiction.
-the trust assets should actually be managed in the trust's jurisdiction.
-the degree to which the trustee is made subject to the influence of a protector or "letter of wishes" should be limited. The letter of wishes should be delivered when the settlor/creator is non-resident. Subsequent expressions of 'wishes' should be infrequent.
The problem for most people creating the trust is to trust the trustees. The natural instinct of the creator/settlor is to retain as much control as possible over the assets of the trust and the decisions regarding the investment and the distribution to the beneficiaries. To give control of the trust and its assets to non-resident trustees is very difficult. Unfortunately, if the individual exercises more control over the administration of the trust than the non-resident trustees there is a risk that Revenue Canada will take the position that the "guiding mind and will" of the trust is resident in Canada - which means the trust is resident in Canada and subject to tax on its worldwide income. The settlor/creator of the trust often uses several methods to attempt to ensure that the non-resident trustees perform in accordance with their original or subsequent wishes. This is done by appointing non-resident family members or trusted friends as trustees, providing a 'letter or wishes' to the trustees at the time the trust is created, and/or appointing a "protector" of the trust.

A protector is a person who is not a trustee but has been appointed by the creator/settlor and given power over the trust. Typically the power is to remove/appoint trustees and to move the jurisdiction of the trust and its assets. If the protector is given greater powers, it is possible that Revenue Canada will take the position that the protector is the true trustee and the residence of the trust may be the residence of the protector.

Consideration should also be given to Interpretation Bulletin IT-447 (a copy of which is available upon request).

Deemed Residence:

Even if the taxpayer has been successful in otherwise creating a trust that is not actually a resident of Canada the February 16, 1999 Budget proposes that "where a Canadian resident transfers or loans property to a non-resident trust, the trust be treated as being resident in Canada and be taxed [at the highest marginal rate] on all of its undistributed income". An immigration trust is excluded from these budget provisions during the four to five year period following immigration.