Canadian Finance Minister Targets Offshore Trusts With New Legislation, by Mike Godfrey

Tax-news.com, New York

27 June 2000

Canada stepped up its campaign against offshore tax havens last week with a further swipe at offshore trusts. Finance Minister Paul Martin released draft legislation regarding the taxation of non-resident trusts and foreign investment entities. The proposed legislation will be tabled in the Canadian Parliament later this year and the Department of Finance has invited interested parties to comment on before September 1.

Martin said 'It is important that the income tax system not provide a means for Canadians to avoid Canadian income tax by transferring funds to offshore trusts or accounts. The proposed rules intend to provide a fair and workable approach to dealing with this complex area.'

Proposals affecting the taxation of non-resident trusts and foreign investment entities were introduced in the 1999 federal budget. Then in November 1999 the Department of Finance announced a number of revisions to the proposals that are reflected in this latest draft legislation.

The proposed non-resident trust rules generally provide that a family trust will be considered to be resident in Canada – and therefore subject to tax on its worldwide income for a taxation year – where certain non-arm’s length contributions are made to the trust by a person who is resident in Canada at the end of the year.

A foreign investment entity will generally be a non-resident entity that has investment properties representing at least one-half of its assets. Canadian investors may, if they so elect, include in taxable income their annual share of the income earned by the entity. However, a Canadian investor who does not have sufficient information to do the calculation would instead be required to include in income the annual increase in the fair market value of the interest in the entity.

The draft legislation also includes special measures designed to prevent avoidance of these rules, in particular through the use of foreign insurance policies and the use of interests in non-resident entities that are designed to track returns earned on investment properties.

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