Canada is one of the most immigrant friendly nations in the world. The country's population growth is driven by immigration. Canada welcomes approximately 250,000 new immigrants each year. In addition, as of December 2008, there were 252,000 foreign workers and 178,000 foreign students in Canada.
Canada boasts an entrepreneurial economy that thrives on new enterprises. According to the Canadian Federation of Independent Businesses, 95% of all companies in Canada have fewer than 50 employees and 99% have fewer than 500 employees. Nearly half of Canada's GDP is composed of small and medium sized businesses, which employ more than half of the Canadian workforce.
Despite the entrepreneur and immigrant-friendly environment, obtaining Canadian visas is a complicated process for businesspersons. There are three primary reasons for this. First, business cases require more preparation, documentation, and due diligence thank other applications. Second, there are now a multitude of avenues available, given the rapid growth of provincial programs over the last five years, each with its unique criteria and procedures. Finally, an effective application and strategy can mean the difference between spending years in an immigration queue, and getting to Canada quickly. This article summarizes the four program areas that every business person should consider before applying to immigrate, as well as the often overlooked area of immigration trusts.
1)
The Federal Entrepreneur Program
The Entrepreneur category is suitable for immigrants who have experience owning and operating a "qualifying business" for at least 2 years in the 5 years prior to making their immigration application. Whether a business counts as a "qualifying business" is based on employment, sales, income and ownership. Immigrants must also demonstrate a legally obtained minimum net worth of C$300,000. Immigrant Entrepreneurs must also pass a point system based on education, experience, age, language, and adaptability.
Successful applicants receive a condition immigrant visa, pending establishment of a "Qualifying Canadian Business" (based again on employment, sales, income, ownership, and active management). The business must also create at least one new full-time job for a Canadian unrelated to the immigrant. Entrepreneurs must report on their business progress until satisfying the government that program criteria have been satisfied, at which time the terms and condition on their visas are removed
2)
The Federal Investor Program
Investors are required to make an interest free loan of C$400,000 to the Canadian government. Many major Canadian financial institutions ("facilitators") offer financing for this passive investment. This investment is returned without interest after 5 years. Immigrant Investors are also required to demonstrate a legally obtained minimum net worth of at least C$800,000, which is significantly higher than the net worth requirement for Immigrant Entrepreneurs. Furthermore, Immigrant Investors have to demonstrate: i) experience owning and operating a "qualifying business" as in the Federal Entrepreneur Program; or ii) manage at least 5 full-time personnel for at least 2 years in the 5 years before application; or iii) a combination of one year in each of i) and ii). Finally, Immigrant Investors are selected on the same point system applicable to the Entrepreneur category. This option is favourable to immigrants who want time to acclimatize to the North American business climate and do not want the obligation to establish a business in Canada within a certain time frame, as is required for Immigrant Entrepreneurs. There are no conditions placed on Investor visas.
3)
Federal Self-employed Person Program
Self-employed persons are individuals who have relevant experience of: i) self-employment in cultural or athletic activities; or ii) participation at a world class level in cultural activities or athletics; or iii) farm management experience. Self-employed Immigrants are required make a significant contribution to one of these three types of economic activities in Canada. For example, individuals working as self-employed soccer coaches in their home country, or players for a "world class" level soccer team could be eligible for this category. Like Investors, self-employed persons need not meet any post-landing conditions, and are also assessed on a point system. Please note that Federal Entrepreneurs and Self-employed persons are eligible for work permits while awaiting their immigrant visas, although these are very challenging to obtain.
4)
Provincial Business Immigration
Quebec Business Immigration Program
Quebec, which is the only Canadian province with a predominantly Francophone population, has the provincial power to select economic immigrants who wish to settle in the province. It is also the only province to have its own selection system, as opposed to nominee system (description below), meaning that it is a more robust program than other provinces have. Quebec also offers three business immigration categories (Entrepreneur, Investor, Self-employed). The first two are similar to the federal categories. Quebec Self-employed immigrants must be experienced workers who intend to practice their own profession or trade in Quebec, and possess legally obtained net assets of at least C$100,000. Immigration under each of these three categories requires the business immigrants to contribute specifically to Quebec. For example, Immigrant Entrepreneurs in Quebec are required to start their businesses in the province, Investor funds finance Quebec provincial business assistance programs, and selection consideration includes the applicant's knowledge of and intention to settle in Quebec.
Provincial Nominee Programs for Business Immigrants
The provinces of British Columbia, Manitoba, Saskatchewan, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Ontario, and the Yukon Territory all operate "Provincial Nominee Programs" with business immigration categories. These programs allow provinces to "nominate" (rather than "select") business persons, and offer an expedited immigrant process to the Federal system. In addition, work permits are easier to obtain than for federal business immigrants. Provincial nominees are usually required to invest in the province, start a business, or pursue a joint venture with existing local businesses. In 2008, nominees and their family members comprised over 20,000 of Canada's 150,000 economic immigrants. Provincial nominations will likely double over the next few years and are an increasingly important part of Canada's economic immigration system.
Immigration trusts: Canadian tax advantages for business immigrants
Every person contemplating business immigration to Canada, whether through one of the federal or provincial programs, should always consider setting up an immigration trust to take advantage of tax exemptions. What follows is a summary of considerations in the area of immigration trusts.
Why establish an immigration trust
When individuals become residents of Canada, they become taxable on their world-wide income, regardless of where the income (i.e. dividends, rent, interest, and business profits) generating assets are located. However, if properly structured, business immigrants do not have to pay Canadian tax on the income generated by their non-Canadian assets the first 60 months that they are resident in Canada for tax purposes. In order to not pay Canadian tax on income from such assets, individuals must establish a trust in any jurisdiction other than Canada, and then transfer such income-producing assets to a non-resident trust either prior to or after arrival in Canada. This structure is commonly referred to as a "5-year immigration trust" (an "Immigration Trust").
How immigration trusts work
There are no specific requirements, language or structure required for a trust to qualify as an Immigration Trust, except that it cannot be resident in Canada. Generally speaking, provided i) the trustees of a trust are non-residents of Canada, ii) the trustees do not meet in Canada and iii) no person resident in Canada exercises management and control of the trust, the Immigration Trust should not be considered to be resident in Canada. After the contributor to the Immigration Trust has been resident in Canada for five years, the trust will be deemed to be resident in Canada.
Since the Immigration Trust is not resident in Canada (and not deemed to be resident in Canada for five years), the income of the Immigration Trust is generally not taxable in Canada. However, income earned in a year by the Immigration Trust that is paid out of the trust to the beneficiaries in Canada in the same year that it was earned is taxable as income in the hands of the Canadian resident beneficiaries under the Income Tax Act. Fortunately, it is acceptable for income earned by the Immigration Trust in a year to be "capitalized" at the end of the year and then distributed to the beneficiaries as capital of the trust in the following year. Distributions of capital from trusts are always received tax-free in Canada. As a result, provided that the Immigration Trust gives the trustees the discretion to capitalize income and distribute capital, the beneficiaries should pay no Canadian income tax on any income earned by the assets during the 5-year period.
Each Canadian resident beneficiary of an Immigration Trust will have reporting requirements. Of course, all residents of Canada have to file tax returns each year. The beneficiaries also have to file information statements for any distributions of income or capital from the Immigration Trust.
The "step-up" to fair market value
On becoming residents in Canada, immigrants are deemed to have effectively re-purchased all their assets for tax purposes at the fair market value of those assets on the day of arrival. This is referred to as the immigration "step-up" to fair market value. On any subsequent sale of those assets, immigrants are only taxable on any increase in the fair market value of the assets since becoming resident in Canada.[1] However, assets that have been transferred to an Immigration Trust are not considered to have been brought to Canada until the end of the 5-year period. This means that an immigrants are able to further reduce the capital gains on any subsequent sale of the assets of the Immigration Trust after the five-year period.
After the 60-month exemption from income tax
In the year in which the contributor to the Immigration Trust becomes resident in Canada for more than 60 months, the Immigration Trust is deemed to be resident in Canada, and therefore taxable in Canada on its worldwide income. At that time, the beneficiaries can decide how to deal with the assets of the Immigration Trust. There are a variety of options, depending on the specific facts of each case. If the beneficiaries of the Immigration Trust leave Canada before the end of the five-year period, the assets in the trust will never be taxed in Canada. We suggest that the beneficiaries of Immigration Trusts consult us before the end of the 5-year period so that we advise on creating the most tax-efficient structure going forward based on their specific circumstances.
Conclusion
If business immigrants have significant assets, and there would be no non-Canadian adverse consequence to transferring assets to such a trust, an Immigration Trust is generally advisable. There is no fixed amount of assets that the individual needs to have in order for the Immigration Trust to be worthwhile, as the Canadian tax advantages include not only a reduction in income tax, but also a reduction in compliance obligations, as well as the opportunity for tax-free capital gains. As a practical matter, if an individual owns assets that generate more than C$20,000 in taxable income each year, then the Immigration Trust would likely pay for itself during the 5-year period, depending on the facts in each case.
From the perspective of a corporate employer transferring executives or other employees with significant assets to Canada, it is advisable to ensure that all such employees have a trust in place to hold non-Canadian assets. The employer benefits directly from establishing these structures because it reduces risk to its reputation by ensuring that its employees are not failing to report their non-Canadian income. The employer also reduces their employees' overall cost of moving to Canada. Reducing such costs and simplifying their Canadian tax issues can make key personnel more willing to make a transfer, and also allows them to focus on their work once they arrive.
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[1] In Canada one-half (50%) of the capital gain is included in ordinary income and taxed at the graduated marginal tax rates on income. The effective marginal tax rate on the capital gains is half that of ordinary income.
This article is one of several that appear in
Global Migration and Executive Transfers Client Alert, June 2009.