People often ask me if they will be able to reduce their income tax liability by establishing an Offshore Trust. The short answer is, “NO”, so long as they are resident in Canada
Thank you again for your assistance. You were systematic, yet precise, understanding, attentive, and more adjectives than we can find to thank you. You did a damn good job.
Canada’s tax system is based on residency. If you are a Canadian resident, then you are taxed in Canada on your worldwide income. In Canada, an Offshore Trust can either b a “factual” resident or a “deemed” resident for tax purposes.
The courts consider an Offshore Trust to be a factual resident of the place where the central management and control over the trust is exercised. So if you reside in Canada, and you are the one with the decision-making powers over the trust, then it is likely that that the trust will be considered a resident of Canada for tax purposes, even though the Trust may be registered in another jurisdiction and the Trustee (usually a financial institution or a trust company) is resident outside of Canada.
The rules for determining whether a trust is a deemed resident of Canada are complicated but basically if there is a resident contributor or a resident beneficiary under the Trust then the Trust is deemed to be resident in Canada for tax purposes. Generally, each of the resident contributors and resident beneficiaries under the Trust are jointly and severally liable along with the Trust for its obligations and liabilities under the Income Tax Act.
The main reason for establishing an Offshore Asset Protection Trust is to protect your assets from lawsuits and creditors. It is NOT and should not be established with a view to reducing your tax obligations.
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