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Special Opportunities for Canadian Resident Estate Beneficiaries with a Non-Resident Relative

In this blog, we highlight some special opportunities available where a non-Canadian resident passes assets on death to a Canadian resident. To illustrate, a couple of common examples:

  • You have a parent or other relative who never lived in Canada who will be passing significant assets down to you on his or her death under his or her will.
  • You left Canada at least 18 months ago and have become a non-resident of Canada for tax purposes, but you have children or other relatives back in Canada.

In both of these situations, there may be the opportunity to minimize or even eliminate Canadian taxation on the income on the inheritance which the Canadian beneficiary might otherwise have paid resulting in very significant tax savings over time.

Under Canadian tax rules, if you inherit a gift of capital outright, you do not pay tax on the inheritance itself. But if you are a Canadian tax resident, the ongoing income on the inheritance is taxable to you. Likewise, if the gift is by way of a trust, if the trust is considered resident in Canada for tax purposes, either the trust will pay tax on the income or the beneficiary will if the trust elects to allocate the income out to the beneficiary.

If however, a trust is created under a will of a non-resident of Canada who either never lived in Canada or has not been resident in Canada for tax purposes for at least 18 months at the time of his or her death and if the trust is not considered Canadian tax resident because it is not controlled by Canadian tax residents, if income earned by the trust is not paid out to the Canadian beneficiary (but instead capital is), the capital distributions will be tax-free. As well, the income will not be taxable in Canada if it is not paid out to a Canadian resident beneficiary. As a result, it is possible to set-up the trust in a jurisdiction outside Canada where there may be little or no tax payable on the ongoing income. The terms of the trust could require that any unpaid income be accumulated, and becomes part of the capital of the trust.

For anyone who is Canadian tax resident and has a relative or other person from whom they may be receiving a significant inheritance or who has left Canada and has Canadian resident beneficiaries, this is a planning idea that may be worthwhile to consider, particularly where large sums are involved. Often a corporate trustee and/or persons resident in the low-tax jurisdiction would be named as trustees of the trust. The costs of maintaining a trust, including any trustee and administration fees and a variety of other considerations are relevant when considering whether this planning meets one's goals and objectives. However, where it does, it can provide for very significant tax savings over time.

Increasingly, people are more mobile and move to different jurisdictions outside Canada, or decide to come to Canada, but have relatives elsewhere, raising the need to consider the variety of options that may be available in each unique individual situation.

- Margaret O'Sullivan

Don't miss our next blog, which will provide an overview of some of the personal and family law considerations to be taken into account when dealing with a cottage property.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.

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