Nomad Capitalist R&D: Offshore Tax Planning for Canadian Trusts

Leaving Canada for tax purposes requires careful handling of any trusts or corporations you own, because Canadian tax law ties residency to where central management and control are exercised. Changing your personal tax residency can trigger residency changes for these entities, leading to potential capital gains, withholding taxes, or the need to dissolve the structure.

Trust residency

• Central management and control determines a trust’s tax residency. Historically this was linked to the trustee(s); if you are the sole trustee, moving your personal tax residency can also shift the trust’s residency.
• When multiple trustees are involved, the trust is deemed resident in the jurisdiction where the more substantial central management and control occurs.
• A recent Supreme Court of Canada decision allows a beneficiary or settlor to be treated as exercising significant control, potentially making the trust a Canadian resident even if they are not a trustee.

Options for a Canadian trust when you become a non‑resident

1. Leave the trust in Canada (resident trust)

   • The trust continues to be taxed in Canada.
   • Distributions to you are subject to a 25 % non‑resident withholding tax on the income you receive.

2. Convert the trust to a non‑resident trust

   • Upon your change of residency, the trust is deemed to have disposed of all its assets at fair market value.
   • This deemed disposition can generate capital gains and trigger tax on those gains.
   • The non‑resident trust remains liable for Canadian tax on Canadian‑source income, similar to any other non‑resident taxpayer.

3. Dissolve the trust

   • You must plan the extraction of assets in the most tax‑efficient manner before winding up.
   • The dissolution may involve distributing assets, which can also create capital gains or other tax consequences.

Because residency determinations hinge on factual details of control and management, a case‑specific analysis by a Canadian attorney is essential before deciding which route to take.

Corporate residency

Corporate tax residency also depends on where central management and control reside, and on the residency status of the majority of shareholders.

Options for a Canadian corporation when you become a non‑resident

1. Maintain the corporation as a Canadian resident

   • The corporation continues to be taxed under Canadian corporate tax rules.
   • Any income you receive from the corporation as a non‑resident is subject to withholding tax.

2. Wind up and dissolve the corporation before you become a non‑resident

   • The corporation’s assets and liabilities must be settled on the final financial statements and corporate tax return.
   • A deemed dividend is generally payable to you upon dissolution.
   • Investments held by the corporation may be sold or transferred to you, resulting in a capital gains tax on the corporation’s final return.

If you cease to be a Canadian resident and you are the sole shareholder, the corporation will likely be treated as a non‑resident as well. In that case, you are deemed to have disposed of your shares at fair market value and immediately reacquired them at the same value, which can also trigger capital gains tax.

Practical considerations

• Determine the location of central management and control for each entity before changing residency.
• Assess the tax impact of deemed dispositions on both trusts and corporations, including potential capital gains and withholding taxes.
• Plan asset extraction carefully if you intend to dissolve a trust or corporation, to minimize tax liabilities.
• Engage qualified Canadian legal and tax professionals to confirm residency status and to structure any transitions in compliance with Canadian law.