Today’s budget contained a couple of surprises.  The current Conservative government has made a habit of coming up with some particularly interesting budget moves relevant to the international and cross-border tax world. Today’s budget attempted to kill the Immigration Trust, grazed the Captive Insurance industry and killed the offshore financial business sector dead …

The Immigration Trust is Dead… Long Live the Immigration Trust… 

First of all, harking back to the “Hallow’een Massacre” when they killed off the Income Trust concept, todays budget attempted to kill off the Canadian Immigration Trust. For those of you not familiar with the concept, the Immigration Trust is a specific exemption in the Income Tax Act that allowed new Canadians not to pay Canadian income tax on on non-Canadian assets for the first five years that they were resident in Canada. It was created in the 1950s as a means to allow non-Canadians, but particularly US managers, executives and experts (everyone from professors to programmers), to move up to Canada without exposing their non-Canadian assets to much higher rates of Canadian tax. Prior to that, getting qualified successful professionals and executives to move to Canada had been problematic due to the discrepancies between the way Canada and the rest of the world taxed various types of income…. D’OH … I guess that the government forgot about this direct, obvious and hopefully unintended consequence of this bone-head move…

This structure was seen as an incentive, and a transitional measure, to encourage wealthy, successful & entrepreneurial people to move to Canada. This structure did not prevent new Canadians from paying income tax on Canadian income or business, it just deferred taxing non-Canadian assets for a short, set period.   Moreover, the Immigration Trust was such a part of the Canadian tax infrastructure that the previous budget had actually simplified the rules for such trusts so as to make them more efficient and widely available to new Canadians. It is also important to remember the government only spent the previous 14 years discussing these improvements in the Immigration Trust structure, during which there was no mention whatsoever of getting rid of it.  I guess the government only wants poor, unsuccessful people with no assets to come here and become a burden on the social services …

In any event, because they basically went off half-cocked without thinking, the government has not done anything but make the planning for wealthy new immigrants to Canada one step more complicated. It only took me (and probably the rest of the Canadian tax bar) about 30 seconds (once I got over the shock) to McGyver my way around the changes. So everything has changed, and nothing has changed. Let me know if you are interested in discussing the next generation of immigration trust planning. So no worries, we are still in business.

Captive Insurance & Financial Institutions: FAPI Games

The government also made a move to limit the use of “captive insurance” companies to cover Canadian risk.  Generally, the Foreign Accrual Property Income Rules (FAPI) would prevent Canadians from insuring themselves offshore by deeming all insurance of Canadian risk to be FAPI (taxable income in the hands of the Canadian owner/parent).  However, as is always the case, some clever tax lawyers were skirting the rules by having a non-Candian subsid take on “Canadian” risks, and then insuring that risk via the Captive.  So this was not dumb as moves go, because it was just anti-avoidance. FYI, none of my captive structures would ever even contemplate this because in my humble opinion, insuring Canadian risk indirectly is clearly GAARable (meaning tax-law-wrong) so I would not do it.  So as far as I am concerned, who cares? But it re-iterates the current government’s unwillingness to litigate away the bad, and leave the good alone.  So they drop a bomb, and not worry about what collateral targets it might hit.

The second international-tax-related nugget in today’s budget was to restrict the use of an exemption in the FAPI rules to major Canadian domestic banks.  If there was ever a case where money talks, this is it. Effectively, in the FAPI rules, if your foreign subsid was a bank or trust company or regulated securities dealer in a foreign country, then any income therefrom was deemed to be from active business and not FAPI. Which is proper, because we do not want to discourage businesses, including asset managers and other financial entities, from investing outside of Canada.  But unfortunately Canadian mid-tier asset managers/advisors and other entities were getting into this game, and frankly doing well at it. Maybe too well… There was no harm done here as such offshore entities would eventually dividend any income back to the Canadian parent, which would be taxed in Canada when it flowed out to the shareholders.  So the tax “cost” of such structures was close to nil. But it helped even out the financial services playing field in Canada, and we can’t have that….SO the new rules basically say that only big guys ($2 billion in capital and above – because $1bn is obviously not enough to keep the riff-raff out) can use this exception; the little guys get crushed, but the big boys can carry on merrily.  Not exactly fair, and blatantly biased in favour of the Big 5. Granted, there were some dodgy players in this game, but if this specific FAPI exemption was being abused, the CRA would have won on the facts and law if they had audited any of the “iffy” structures. But no, the government decided just to nuke the little guys instead…

Overall, this budget caters to the howling crowd, but really does nothing to help the Canadian economy (and is clearly counter-productive).  Nor does this budget plug any real international tax loopholes, either because they were not there to begin with (yes shoddy enforcement was an issue) or because good tax lawyers always have a Plan B.