halifax estate planning council offshore trusts what still works ? october 15, 2007
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HALIFAX ESTATE PLANNING COUNCIL OFFSHORE TRUSTS WHAT STILL WORKS ? October 15, 2007. Pierre J. Dansereau, LL.L., MBA, TEP Royal Bank of Canada Global Private Banking Senior Manager, International Services. Agenda. Trusts for asset protection The tax rules dealing with non resident trusts - PowerPoint PPT PresentationTRANSCRIPT
HALIFAX ESTATE PLANNING COUNCIL
OFFSHORE TRUSTSWHAT STILL WORKS ?
October 15, 2007
Pierre J. Dansereau, LL.L., MBA, TEPRoyal Bank of Canada Global Private
BankingSenior Manager, International Services
Agenda
Trusts for asset protection The tax rules dealing with non resident trusts Review of planning in a Canadian context Review of planning in a U.S. context
Definition : Special type of trust mainly designed to offer safety for assets transferred and their protection against creditors of the settlor or of the beneficiaries. In a sense, all trusts are asset protection trusts.
Many jurisdictions offer trusts but only a few of them have instituted laws specifically dealing with asset protection, namely Bahamas, Barbados, Cayman Islands. Why offshore ?
What is an Asset Protection Trust ?
Debtor-favorable foreign laws Domestic laws do not apply Definition of fraudulent conveyance may be different Absence of a mutual assistance treaty (or limited) Representation in a foreign court Property of assets held offshore Certainty that settlor can be a beneficiary Probably tax-neutral
Where should the assets be located ? Canadian real estate ? Shares in a private Canadian company ? Investment accounts in Canada ? In the US ?
“Such a trust would be most effective if the situs of the trust property is outside Canada and at least one of the
trustees was resident in the jurisdiction where the trust is formed. If the assets remain in Canada, there is a
concern that a Canadian court would permit the execution of a judgment against the offshore trust notwithstanding
its jurisdiction.”
Jack Bernstein, Aird & Berlis
Preserving One’s EstateUsing An International Trust
Why do they work ? The creditor must win a judgment in Canada The creditor must sue in the trust’s jurisdiction and hire a local lawyer The onshore creditor must usually post a bond Contingency fees are illegal The lawsuit must be admissible under local laws The creditor may have to re-litigate the whole matter The creditor must prove the asset transfer was made with the intent to
defraud creditors Immediate protection if solvent when the transfer was made Protection after 2 years (Bahamas) if transfer rendered insolvent and no
offshore lawsuit to quash the transfer Each creditor must sue individually (no class action) Possibility of “moving” the trust
*** Beware of third party liability
Preserving One’s EstateUsing An International Trust
The Old Non-Resident Trust Rules
Old section 94 deemed an otherwise NRT to be resident in Canada for tax purposes if:
1. The trust received a transfer from a Canadian resident
AND
2. The trust provides for a Canadian resident beneficiary related to the contributor
Department of Finance’s focus was clearly on the residency of the beneficiary(ies)
The New Non-Resident Trust Rules
New proposed section 94 deems a NRT to be resident in Canada if, at year end:
1.There is a resident contributor
OR
2.There is a resident beneficiary
Department of Finance’s focus now shifted to residency of the contributor
Excludes exempt foreign trusts
Very limited grandfatheringVery limited grandfathering
Definitions
RESIDENT CONTRIBUTOR : Canadian resident for 5 years or more + contributor to the trust
RESIDENT BENEFICIARY : Beneficiary resident in Canada whose interest is not contingent on the death of a person related to the contributor and there is a connected contributor
CONNECTED CONTRIBUTOR : Contributor other than a person who:- Has not resided in Canada more than 5 years during his lifetimeOR- Has resided in Canada more than 5 years during his lifetime and the contribution
occurred more than 5 years (18 months in the case of a testamentary trust) after becoming a non-resident and more that 5 years before becoming again a resident of Canada
CONTRIBUTION : at any time, transfer or loan of an asset without an arm's length indicator
The Foreign Trust will be Deemed Resident if…
There is a resident contributor
There is a resident beneficiary
At the end of the trust tax year, a person resident in Canada and has resided here more than 60 months in total
At the end of the trust tax year, a beneficiary resident in Canada whose beneficial interest is not contingent on the death of a person related to a contributor when there is a connected contributor (a contributor who resided in Canada more than 5 years during his lifetime and who was resident at any time in the 5 years preceding and 5 years after the date of contribution (10 year minimum timeframe)
What tax planning is left for international trusts ?
Canadian Based Planning
International Border
Canadian Children
Canada
$$$
$$$
Non resident parents
Rest of World
InternationalTrust
tax benefit
• income/gains not taxed in Canada• undistributed income added to capital• no "resident contributor"• no "resident beneficiary"
• discretionary distributions of capital can be made tax-free to beneficiaries
Canadian Inbound Planning
International Border
Canadian Family
Canada
$$$
Rest of World
InternationalTrust
tax benefit
• income/gains not taxed for 60 months• undistributed income added to capital• no "resident contributor or "resident beneficiary" for the first 60 months
$$$
• discretionary distributions of capital can be made to the beneficiaries
Canadian Immigrant Planning
Immigrating client
Immigrating client
International Border
Canada
Non-Canadian Family
$$$
InternationalTrust
tax benefit$$$
Rest of World
• trust deemed resident of Canada (Canadian contributor)
• distributions of income and capital gains to non-resident beneficiaries are not entirely deductible so trust pays tax in lieu of withholding tax
• deemed disposition of trust assets when Canadian contributor dies if there are no Canadian resident beneficiaries; trust is then tax-free
• tax in country of residence of beneficiaries ?
Canadian Outbound Planning
International Border
Canada
Canadian Children
$$$
$$$International
Trust
tax benefit
Rest of World
• If trust funded less than 5 years after leaving, trust deemed resident if a beneficiary resides in Canada (unless a “successor beneficiary”)
• otherwise, income/gains not taxed in Canada
because there is no "resident contributor" or
"resident beneficiary"• undistributed income added to capital• capital distributions made tax free• Tax to the non-resident settlors ?
Canadian Emigrant Planning
Emigrating parents
Non resident parents
Tax Planning - Dead
Created By Beneficiaries Name
1 Canadians None or Charities Purpose or "Red Cross" Trusts
2 Canadians Canadians CCPC Barbados Freeze Trusts
Tax Planning - Alive
Created By For Beneficiaries Name
3 Non-Residents(deceased or living)
Canadians Pure Inbound Trust
4 New Canadians Canadians Immigration Trust
5 Former Canadians Non-Residents Emigration Outbound Trust
6 Deceased Canadians
Non-Residents Non-Canadian Testamentary Trust
7 Cdns Moving to the US
Cdns Moving to the US
Drop Off Trust
Tax Planning - Breathing
Created By For Beneficiaries
Name
8 Canadians Non-Residents Pure Outbound Trust
9 Former Canadians Canadians Emigration Inbound Trust
10 Returning Canadians
Canadians Post-Death Inbound Trust
11 Canadians Canadians US Co Estate Freeze Trust
12 Canadians Purpose Trust Health & Welfare Trust
Other Structures
Newfangled estate freezes Foreign life insurance ? Foreign funds ? Foreign private banks ? Foreign foundations/establishments ? Foreign structures unknown in Canadian law ?
Disclosure FAPI and foreign affiliate regimes Proposed FIE rules
If not conservative, make sure risk fits client's tolerance
U.S. Based Planning
U.S. Based Planning
Concerns High income tax rates but lower than Canada Variable state, county, city taxes Gift, inheritance and Generation-Skipping Transfer
Taxes Danger that client could at some point be subject to
U.S. taxation as any U.S. domiciliary Imperfect integration with Canadian tax system
(recent Protocol alleviates some problems) Trusts taxed quite differently
Grantor trust -vs- non-grator trust US trust -vs- foreign trust Complete gift -vs- incomplete gift trust
International Border
U.S.
$$$
Rest of World including Canada
InternationalTrust
•Avoids U.S. Gift and Estate Tax, GST•Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person
$$$
•No income tax benefit
U.S. Long-Term Immigrant Planning
Immigrating client
Immigrating client
International Border
U.S.
$$$
Rest of World including Canada
•Avoids U.S. Gift and Estate Tax, GST
•Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person
$$$
InternationalTrust
tax benefit•Universal Life: accumulation tax-free, borrowing tax-free, proceeds tax-free
U.S. Long-Term Immigrant Planning
Immigrating client
Immigrating client
Variable Universal Life Policy
International Border
U.S.
$$$
Rest of World including Canada
InternationalTrust
•Avoids U.S. Gift and Estate Tax, GST•Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person
•have trust invest in deferred annuity: tax-free accumulation while in the U.S., no exit tax when leaving, cash in once out of U.S. tax net
U.S. Temporary Residence Planning
Client Leaving for U.S.
Temporary U.S. Resident
Deferred Annuity
International Border
American Children
U.S.
InternationalTrust
$$$
$$$
Non resident parents
Rest of World
• annual income not taxed in U.S.• pecuniary distributions made tax
free• excess income taxable when
distributed
3 pecuniary distributions to
specifiedbeneficiaries or
distributee trusts
U.S. Inbound Planning
Thank You !
RBC Contacts
Mr. Pierre J. DansereauSenior Manager, Int’l ServicesRBC Global Private Banking1, Place Ville-Marie6th Floor, East WingMontreal, QuebecH3B 1Z5Tel.: 514-874-7731FAX: 514:874-6954E-mail: pierre.dansereau
@rbc.comwww.rbcprivatebanking.com
RBC Private Bankers (Atlantic)Ms. Peggy [email protected]
Ms. Heidi [email protected]
Mr. Sylvain [email protected]
Ms. Lynne [email protected]
This presentation does not represent or replace a comprehensive financial plan or represent any type of financial planning service. The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our
clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness. This presentation is not intended as nor does it
constitute legal or tax advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that
your own circumstances have been considered properly, and that action is taken on the latest available information. Interest rates, market conditions, tax rules and other
investment factors are subject to change.