4 ways to save cross-border tax

November 9, 2012 | Last updated on September 15, 2023
3 min read

If you have clients with cross-jurisdictional tax ties, there are a few ways to lower their obligations.

Avoid residency

If you don’t live in Canada, you don’t have to pay our taxes.

The practice is common among people from the Indian subcontinent living and working in the Middle East. Upon receiving permanent residency status in Canada, they go back to their lucrative jobs in the Gulf and send back part of their tax-free salaries to support their families.

Read: Tax cheats beware

Or, say a Hong-Kong native comes to Canada, bringing a spouse and children. The spouse and children reside here, but “the breadwinner avoids being classified as a resident to avoid paying tax,” says Kevyn Nightingale, leader of MNP’s expatriate tax practice.

To do that, she’ll go back to Hong Kong often; keep an apartment there; maintain Chinese business ties; and register her Canadian home in her husband’s name.

These tricks work — sometimes. Residency is a difficult thing to determine.

“No one factor is dominant,” he says. “Do you look, feel and smell like a Canadian resident? If so, you probably are.”

CRA can determine residency if you ask; “problem is, they’re biased toward people being residents. Their determinations are often incorrect,” he says. So, he rarely asks for the determination, because it’s not required.

Consider the Canadian jurisdiction

For high-income earners, “Moving from Ontario to Alberta saves 10 points,” says Nightingale.

Read: Common U.S. tax troubles

Immigrant trusts

CRA encourages wealthy immigrants to become residents by opening special tax-sheltered trusts.

Clients can open immigrant trusts upon landing in Canada, which are valid for five years starting January 1 of the arrival year. “Any income or capital gains earned inside the trust within that period are protected forever,” says Steve Harding, director, International Solutions with RBC Wealth Management.

Read: Tax planning for business immigrants

It must be offshore, and is usually discretionary (no one beneficiary has an absolute right to the proceeds).

Make sure clients keep spending money out of the trust, says Harding. (If they do need funds during the five-year period, they can remove capital without tax consequence; they’ll just have to pay fees to the trustee).

After the five-year period, CRA will tax any income and gains made on the closing value of the immigrant trust.

Offshore in-bound trusts

Rich clients should set up offshore discretionary trusts for heirs instead of gifting directly. That lets heirs avoid taxes on the gift’s capital gains.

If a Canadian citizen stays offshore for at least five complete tax years, sets up the trust, and then names Canadian beneficiaries, the trust isn’t deemed Canadian anymore — and so not subject to our tax law.

Read: Advising immigrants

That means clients can receive tax-free capital distributions, says Harding. “They just have to declare them on tax returns.”

To make this work, “you need at least $3 million, because of the fees paid to tax planners and trustees,” says Harding. Establishing such a trust costs at least $5,000.