Wealthy global families are becoming increasingly aware of their need for a well thought out citizenship and residency strategy to protect their wealth and to safeguard their freedom of movement.
Those who have begun to examine this complex subject will have found the problem is not a lack of options. Rather, it is identifying the right ones and, probably more importantly, avoiding the wrong ones.
For instance, how do you find a location that is safe, stable and free? That is livable, accessible and cosmopolitan? That offers ‘first-world’ health care, education, culture and services? That is business, family and privacy-friendly? That offers tax advantages and the opportunity to preserve family wealth? And, just as important, is likely to retain all these features in the future – both in the near-term and over the many ensuing generations?
Canada is one of the world’s best-kept secrets. It hasn’t always showed up on the list of potential countries for wealthy families looking for additional citizenships or residences.
The reason is its (partly unfair) reputation as a high-tax and chilly-weather destination as well as the perception that better alternatives might be available.
But things have changed and so have the perceptions. Canada is now recognized as a much more attractive destination for wealthy families, particularly from a tax incentive
and ease of immigration perspective. At the same time, the relative attractiveness of other destinations (such as the US, UK, Switzerland and Caribbean tax havens) has waned, for well-publicised reasons.
While Canada clearly will not be the solution for every family, it is definitely worth a serious look – now more than ever. Canada provides a safe and surprisingly tax-efficient alternative to many of the more well-known citizenships. The country also has a world-class professional services and financial infrastructure, making it an ideal location for a family office for three strong reasons.
1\. An appealing destination and passport.
Canada has many of the most positive features of a developed country, with few of the
most troublesome drawbacks. It is actively looking to increase the number of immigrants, particularly those who are educated and have high net worth. It takes only three years of residency to earn the right to apply for Canadian citizenship.
Canada has deservedly been in the headlines recently for its remarkable economic success and resiliency through the tumultuous global economic crisis of the past several years. It boasts one of the most stable banking system in the world, has had one of the strongest economies among the OECD and virtually avoided the housing real estate crisis altogether due to prudent lending and regulatory policies.
Canada, and its cities like Toronto, Vancouver and Calgary, also rate at or near the top of virtually all the global ‘livability’ studies, based on the attractive culture, environment, education, healthcare and stable democratic government. The future also looks bright with its vast supply of oil, natural gas, minerals, fresh water, arable land, efficient infrastructure and highly-educated work force.
The social ethos in Canada is a multicultural mosaic and religious, linguistic and cultural minorities are allowed, even encouraged, to maintain their culture in their homes and religious institutions.
Many global families are also looking for a high quality primary or secondary passport for themselves and their children. A Canadian passport is at or near the top of the world passport pyramid as measured by flexibility and mobility (when it is needed most). Canadians are welcome virtually everywhere in the world and the country offers one of the best passports for visa-free travel.
2\. A surprisingly-attractive tax regime for high net worth immigrants.
While historically viewed as a high-tax jurisdiction, Canada actually has a wide range of basic tax rates, no estate or gift taxes and no ‘global tax leash’ (i.e. no permanent taxation based on citizenship). And although not well known, there are also tax-reduction structures specifically designed for wealthy families immigrating to Canada that can allow for minimal taxation for the first five years of residency. As well, there are many attractive planning opportunities that can allow them to obtain a valuable passport with minimal tax consequences.
A white paper entitled ‘Canadian Citizenship: The Wealthy Global Family’s Safe and
Tax-Efficient Alternative’ is available on the Northwood Family Office website at [www.northwoodfamilyoffice.com](http://www.northwoodfamilyoffice.com).
There are three main tax saving vehicles that will be of interest to wealthy families.
First, the Immigration Trust structure can result in an immigrant paying no Canadian income tax for five years after becoming a Canadian resident, provided that the income is not earned (and the assets and trust are not situated) in Canada.
Second, Canadian tax law also provides a ‘step up’ on the cost base of an asset upon immigration, meaning that capital gains made prior to arrival will never be taxed in Canada. This can also be combined with the Immigration Trust structure so the step up on the immigrant’s assets takes place at the end of the 5-year immigration trust tax holiday.
The third structure is called a Dynasty Trust (or colloquially ‘Granny Trust’), wherein, if
a non-Canadian relative contributes all of the assets to a trust and the trust remains non-resident, the trust can distribute capital tax-free to Canadian beneficiaries, effectively forever.
3\. World-class professional services and an ideal home for the family office.
Canada has a world-class professional services and financial infrastructure, making it an ideal location for the family office, particularly in the new ‘post-bank secrecy’ world.
From a business standpoint, Canada has unique advantages, including its strategic location in the heart of a mega-economic zone stretching from Chicago to Montreal, as well as its geographic/ trade positioning beside the U.S. and halfway between Europe and Asia. By 2012, Canada will have the lowest corporate tax rates in the OECD and is one of the most cost efficient major centres in the world. It is also substantially less litigious than the U.S. for instance.
From a wealth standpoint, the Canadian market is also very well developed.
Canada has a wide array of major law firms and accounting firms, high quality banks and trust companies, as well as an experienced group of family offices and wealth management firms. There are many benefits to locating a family office in Canada (regardless of where the family members choose to spend most of their time), which are outlined in the aforementioned white paper.
The large bulk of wealth in Canada originates from entrepreneurial families, many of whom represent first or second generation wealth. Financial industry consultant and data purveyor, Investor Economics, suggests the level of millionaire households (measured in investable assets) in Canada is nearly 500,000. Deca-millionaires represent about 25,000 of that total and are forecasted to double to 46,300 by 2018.
While often ‘lumped in’ with its much larger continental neighbor, a second look at Canada reveals a culture, economy and tax structure that is very different from and, in many ways, much superior to that of the U.S., especially from the vantage point of a wealthy family. Canada’s expertise wealth and risk management, its well-developed professional infrastructure and the substantial tax incentives it offers to wealthy immigrant families puts it on par with some of the very best destinations in the world merits serious consideration by many wealthy global families.
