Canada casts wide tax net
QUESTION: I emigrate to Canada next year. I have heard Canada has a very high tax rate. What can I do to minimise the Canadian tax liability on Hong Kong investments? Answer: The highest combined federal and provincial tax rate in Canada exceeds 50 per cent in most provinces.
An individual reaches the top tax bracket with taxable income over about C$63,000 (about HK$360,000).
The tax net is also much wider than in Hong Kong. Canada levies tax on its residents on a worldwide income basis and it also taxes capital gains, dividends and interest.
On the day you become a Canadian resident, you will be deemed to have acquired your capital properties, other than 'taxable Canadian properties' at fair market value. Assets which will be subject to this rule include Hong Kong stocks and real estate.
If you sell these assets after becoming a Canadian resident, the capital gain liable for tax will be measured as 75 per cent of the difference between the net sales proceeds and the fair market value of those assets when you arrived in Canada. You should obtain a valuation of your assets on the day you arrive in Canada.
Investment income earned by a Canadian resident will attract Canadian tax. The most effective way to minimise that tax expense is to transfer investments to an off-shore trust.
For an individual who has never lived in Canada before, a non-Canadian trust can be set up to hold non-Canadian assets. If it is properly structured, the investment income earned in the trust for the first 60 months will not be subject to Canadian income tax. There are rumours this idea may be scrapped, so it would be wise to have this structure set up immediately.
You should have at least C$1 million of investment assets to justify the cost of setting up an off-shore trust structure.