As a general rule a non-resident trust is taxed in the same manner as any other non-resident person. The objective of Subsection 94(1) of the Income Tax Act (Canada) (the "Act"), the general taxation provision of concern, is to subject certain non-resident trusts to taxation on the part of their foreign source income. Where the non-resident sets up a non-resident trust in favor of Canadian beneficiaries prior to becoming a resident in Canada, the provision of subsection 94(1) will not apply for a period of 60 months, calculated from the time the individual becomes a resident in Canada for tax purposes. During the period the trust is not subject to Subsection 94(1) taxation, the passive income and capital gains earned or realized outside Canada by the non-resident trust would not be subject to Canadian tax. This is commonly referred to as a tax holiday used primarily by newcomers to Canada.
Care should be taken in setting up the trust to ensure that the non-resident settler does not contravene other areas of the Act. Thus the trust must be irrevocable and the settler should not be entitled to the capital or to dictate the distribution of the income or capital of the trust.
During the tax holiday period, the trust can accumulate and capitalize the income free of tax and when the exemption period expires, distribute the capital to the Canadian beneficiaries.
Setting up an offshore trust may therefore be a valid and sensible part of tax planning for certain high net worth individuals when relocating to Canada. Due to the complexity of the task one should ensure that an accountant and a lawyer specializing in this area of practice is involved in coordinating such a project.
