Moving to Canada

[peripatetic]

OK, so I married a Canadian ten years ago. Still happy with that decision, but now it looks like we will be moving to Canada next year. In preparation for that I have a few investment related questions for my soon-to-be fellow Canadians.

 

First a bit of background: My wife runs a small business and I make a living investing and speculating, mostly in the stock market. We're not all that rich, but I hope that by playing safe and compounding at, say, 5% a year I can pay the rent and maintain our modest lifestyle. I own a (European) company through which I manage my investments.  This allows me to defer capital gains taxation on most European stocks, so that I only really pay taxes on what I take out of my company in the form of dividends. Sadly, it looks like I will have to liquidate this company before moving to Canada, as Canadian regulations make controlling a company abroad prohibitively expensive.

 

I've started to read up on taxation in Canada, but I'm starting from scratch and the more I read, the more confused I get. So my questions to you are: After liquidating my assets and bringing them to Canada, how do I best organize my investments? Is there a way to (legally) defer capital gains taxation?

 

Any thoughts on this would be much appreciated!

[rb]

Hi,

 

Taxation in Canada is actually not that difficult. Let me see if I can explain it for you a bit here.

 

Firstly you don't need to liquidate your European company as it won't be prohibitively expensive to keep it but it doesn't make any sense to use it for investing so you probably may as well do so.

 

Ok, in Canada you will be taxed at the Federal, Provincial and Local levels. At the local levels there are only property taxes. There is a yearly tax based on the property you own. Homeowners pay this tax. If you will rent your landlord will pay it, not you.

 

At the Federal and Provincial levels there is income tax. Canada uses a progressive tax system - as in the more money you make the higher the tax rate. For example at the Federal level you will be taxed 0% on your first $12,069 of income, 15% on your next $35,561, 20.5% on the next $47,629, 26% on the next $52,408, 29% on the next $62,704 and 33% on income over $210,371. The provinces have a similar system with different rates.

 

Money you make working is income, interest is income, foreign dividends are income, Canadian dividends have a slightly lower inclusion rate, only 50% of capital gains are considered income. Capital gains become taxable when realized (as in when you sell). Really the only (legal) way to defer taxes on capital gains is to not sell.

 

You also want to keep an eye on the speculating bit. If you do something that resembles day trading your capital gains will have a 100% inclusion rate and be treated as income.

 

Investment holding companies are taxed at the highest marginal tax rate both federally and provincially, so if you're as you say "not all that rich" it will probably make sense to hold your investments personally and not through a company.

 

The federal government and the provinces (with the exception of Alberta) charge sales tax (VAT) normally referred to as tax. As opposed to Europe sales tax in not included in the displayed price of most items but it will surely be added at the checkout. It will take a while to get used to it.

 

Canada also has some tax deferral accounts. The two big ones are the RRSP and the TFSA. The Registered Retirement Savings Plan or RRSP is an account where the money you deposit is subtracted from your income when you deposit it and added to your income when you withdraw it. Profits made in the account are not taxable. Once you take the money out you can't put it back in. The contribution limit for RRSP is 18% of your employment income up to a maximum of $27,230 per year.

 

The Tax Free Savings Account is an account where profits made in the account are not taxed. Money you deposit are not subtracted from your income when you deposit it but is not added to your income when you withdraw it either. Money you withdraw you can deposit back in the following years. The contribution limit for the TFSA is $6,000 for every year you are a resident.

 

I think this pretty much covers the basics of Canadian taxation.

[mcliu]

http://madanca.com/articles/entry/what-is-the-foreign-accrual-property-income-fapi-in-canada/

FAPI rules to consider for your European holdco.

 

With tax integration in Canada, there’s limited ways to defer taxes in a Canadian corp.

https://www.apcconline.com/wp-content/uploads/2015/05/APCC-Theory-of-Integration.pdf

[SharperDingaan]

There's no need to liquidate the european company.

Assuming you are the controlling shareholder, it just borrows in its local currency, and puts the proceeds in a newly created Canadian company. Do your Canadian investing through the Canadian company. If the european company subsequently has zero net income every year (move expenses [interest] up/down), foreign net income reporting largely becomes a non issue ;)

 

For your first few years - if you tend to lease versus purchase, you will look no different than an ex-pat &/or diplomat. Home country 'arrangements' typically just go on 'hold' until there is a change in status. Makes life a lot simpler.

 

Welcome to Canada!

 

SD

 

 

 

[peripatetic]

Many thanks to all for the thoughtful and thorough responses.

 

Rb, I wish I had come across such a clear summary earlier, before getting lost in the details. Would have saved me a lot of frustration!

 

Thanks also for the thoughts on how I could perhaps keep my European company. This looks more promising than what I initially assumed. I guess whether this makes sense is largely a question of size - I will need to have a closer look at whether the savings outweigh the hassle.

[Orchard]

did this European holdco allow you to defer gains on Euro stocks while you were living in the U.S.? Or were / are you living in Europe?

[peripatetic]

did this European holdco allow you to defer gains on Euro stocks while you were living in the U.S.? Or were / are you living in Europe?

 

I live in Europe and have no idea how this would play out for US residents.

[scorpioncapital]

canada is not a good country to have foreign assets. There are many reporting requirements and many tax hits. Usually it's best to either do it all in your personal name or a provincial company. If you think you will later move out of Canada beware of the exit/departure tax which is quite onerous if you have foreign wealth (including US stocks). Still, if it's a simple family wealth management, nothing is easier than in your own name.

 

[SharperDingaan]

As in all good strategic planning: design today - for where you want to be tomorrow.

The small business tax rate (depending on province) will probably be lower than your marginal tax rate, there are a number of small business incentives, and the businesses are permitted significant passive income. The expectation being than upon 'retirement'; the net proceeds from the sale of the business(es), are simply reinvested within the existing business 'shell', to produce a (passive) income that funds your retirement. The 'business' essentially becomes an RRSP, but WITHOUT the requirement to start drawing it down at age 72.

 

SD

 

 

 

[rb]

did this European holdco allow you to defer gains on Euro stocks while you were living in the U.S.? Or were / are you living in Europe?

If you are living in the US, this structure would would make you liable for tax on subsection F income. Not good.

[rb]

As in all good strategic planning: design today - for where you want to be tomorrow.

The small business tax rate (depending on province) will probably be lower than your marginal tax rate, there are a number of small business incentives, and the businesses are permitted significant passive income. The expectation being than upon 'retirement'; the net proceeds from the sale of the business(es), are simply reinvested within the existing business 'shell', to produce a (passive) income that funds your retirement. The 'business' essentially becomes an RRSP, but WITHOUT the requirement to start drawing it down at age 72.

 

SD

 

Narrator: They're not.

[SharperDingaan]

As in all good strategic planning: design today - for where you want to be tomorrow.

The small business tax rate (depending on province) will probably be lower than your marginal tax rate, there are a number of small business incentives, and the businesses are permitted significant passive income. The expectation being than upon 'retirement'; the net proceeds from the sale of the business(es), are simply reinvested within the existing business 'shell', to produce a (passive) income that funds your retirement. The 'business' essentially becomes an RRSP, but WITHOUT the requirement to start drawing it down at age 72.

 

SD

 

Narrator: They're not.

 

You are allowed 50K/yr of 'penalty free' passive income (dividends, interest, 50% of capital gains) if your company has earnings of 500K. More, if company earnings are less than 500K.  What is optimal, will depend on your 'why' - which will drive the strategy.

https://milliondollarjourney.com/official-passive-income-rules-for-canadian-small-business.htm

 

The underlying premise is that the Canadian business actually 'does' business, and is not just a holding company for passive investment.

'Does' can be anything from part-time professional practice, part-time agency. seasonal import/export, partnerships, etc. Just have a business plan, with a reasonable expectation of future profit at some point - and you have the necessary 'venture in the nature of trade'.

 

The clamp-down was because some small businesses/tax advisers were abusing it.

However, for the 80% of 'normal' applications - there is little reason to expect resistance.

 

SD

 

 

 

 

 

[mcliu]

As in all good strategic planning: design today - for where you want to be tomorrow.

The small business tax rate (depending on province) will probably be lower than your marginal tax rate, there are a number of small business incentives, and the businesses are permitted significant passive income. The expectation being than upon 'retirement'; the net proceeds from the sale of the business(es), are simply reinvested within the existing business 'shell', to produce a (passive) income that funds your retirement. The 'business' essentially becomes an RRSP, but WITHOUT the requirement to start drawing it down at age 72.

 

SD

 

Narrator: They're not.

 

You are allowed 50K/yr of 'penalty free' passive income (dividends, interest, 50% of capital gains) if your company has earnings of 500K+.

More, if company earnings are less than 500K.  What is optimal, will depend on your 'why' - which will drive the strategy.

https://milliondollarjourney.com/official-passive-income-rules-for-canadian-small-business.htm

 

The underlying premise is that the Canadian business actually 'does' business, and is not just a holding company for passive investment.

'Does' can be anything from part-time professional practice, part-time import/export, part-time agency. seasonal import/export, partnerships, etc. Just have a business plan, with a reasonable expectation of future profit at some point - and you have the necessary 'venture in the nature of trade'.

 

The clamp-down was because some small businesses/tax advisers were abusing it.

However, for the 80% of 'normal' applications - there is little reason to expect resistance.

 

SD

   

 

Passive income in a CCPC is taxed at the highest bracket..

[SharperDingaan]

Obviously, if amounts are significant - consult with a tax accountant first. Actual tax rates for 2019 and 2020 income earned by a CCPP attached.

https://home.kpmg/content/dam/kpmg/ca/pdf/2019/04/federal-and-provincial-territorial-tax-rates-for-income-earned-by-a-ccpc.pdf

 

All of which underlines that optimization will be driven by the size of the expected Canadian income, and the strategic intent.

Assuming Ontario, and income (net of expenses) > 500K/yr. Do nothing and pay 50.2%, convert passive into active income and pay 26.5%, or be active and pay 12.5%. Maybe 5-10% of the tax paying population? and only AFTER .... everything has been done to expense as much as possible?

 

After which .... does it really matter.

Do you really need to risk reading in the paper - that dollar-for-dollar, you pay less tax than your admin assistant? Simply because you were wealthy enough to afford hiring a good tax accountant.

 

SD

 

 

 

[mcliu]

Obviously, if amounts are significant - consult with a tax accountant first. Actual tax rates for 2019 and 2020 income earned by a CCPP attached.

https://home.kpmg/content/dam/kpmg/ca/pdf/2019/04/federal-and-provincial-territorial-tax-rates-for-income-earned-by-a-ccpc.pdf

 

All of which underlines that optimization will be driven by the size of the expected Canadian income, and the tax payers strategic intent.

Assuming Ontario, and income (net of expenses) > 500K/yr. Do nothing and pay 50.2%, convert passive into active income and pay 26.5%, or be active and pay 12.5%. Maybe 5-10% of the tax paying population? and only AFTER .... everything has been done to expense as much as possible?

 

After which .... does it really matter.

Do you really need to risk reading in the paper - that dollar-for-dollar, you pay less tax than your admin assistant? Simply because you were wealthy enough to afford hiring a good tax accountant

 

SD

 

How would you go about converting passive income into active business income?

[SharperDingaan]

Purchase and leaseback. Joe buys an asset (building, truck, etc.), and leases it to Joe businessman for use in the business.

No different to lending yourself money from an RRSP (RHOSP, LLP, etc), and repaying the RRSP at market rate (0% interest) over time. Fail to make the payment, and it is taxed as deemed income.

 

SD

 

[rb]

Purchase and leaseback. Joe buys an asset (building, truck, etc.), and leases it to Joe businessman for use in the business.

No different to lending yourself money from an RRSP (RHOSP, LLP, etc), and repaying the RRSP at market rate (0% interest) over time. Fail to make the payment, and it is taxed as deemed income.

 

SD

That is specifically prohibited.

[Parsad]

As in all good strategic planning: design today - for where you want to be tomorrow.

The small business tax rate (depending on province) will probably be lower than your marginal tax rate, there are a number of small business incentives, and the businesses are permitted significant passive income. The expectation being than upon 'retirement'; the net proceeds from the sale of the business(es), are simply reinvested within the existing business 'shell', to produce a (passive) income that funds your retirement. The 'business' essentially becomes an RRSP, but WITHOUT the requirement to start drawing it down at age 72.

 

SD

 

Narrator: They're not.

 

You are allowed 50K/yr of 'penalty free' passive income (dividends, interest, 50% of capital gains) if your company has earnings of 500K+.

More, if company earnings are less than 500K.  What is optimal, will depend on your 'why' - which will drive the strategy.

https://milliondollarjourney.com/official-passive-income-rules-for-canadian-small-business.htm

 

The underlying premise is that the Canadian business actually 'does' business, and is not just a holding company for passive investment.

'Does' can be anything from part-time professional practice, part-time import/export, part-time agency. seasonal import/export, partnerships, etc. Just have a business plan, with a reasonable expectation of future profit at some point - and you have the necessary 'venture in the nature of trade'.

 

The clamp-down was because some small businesses/tax advisers were abusing it.

However, for the 80% of 'normal' applications - there is little reason to expect resistance.

 

SD

   

 

Passive income in a CCPC is taxed at the highest bracket..

 

Nope.  The first $150K of passive income is taxed at the small business rate.  But for every $1 of passive income above $50K, you lose $5 of CCPC income that can be taxed at the small business rate.  Once you hit $150K of passive income, you pay full tax.  Cheers!

[mcliu]

Uh.. what? I’m pretty sure it’s not.. Where are you getting that?

Above $150k is where you lose the SBD for your active income.

[Cigarbutt]

For the opening poster, an impression that arises from some of the posts implies that it can be advantageous to hold passive investments within a 'small' corporation. Because of integration (you will be taxed a second time when money comes out as dividends), the intent of the rules aims to have an equivalent result to investments held within personal portfolios. You also have to remember the possibility of another level of taxation when you eventually dispose or sell the shares of your business. There are ways to 'maximize' the investment outcome but unusual scenarios will likely be 'looked' at. i would say it only makes sense if you have a material operating entity within the corporation in the event that you want to take advantage of this setup. The recent rules have somewhat diminished the ability to build passive investment capital within your operating entity. There are also setup and 'maintenance' costs.

 

@mcliu

This topic was mentioned before:

https://www.cornerofberkshireandfairfax.ca/forum/personal-finance/tips-for-minimizing-taxes/20/

 

 

[mcliu]

There’s a difference between deferring taxes on active business income by using the SBD and saying passive income in a CCPC is taxed at small business rates.

 

If you set up a holdco and put a bunch of investments in, you’re going to pay more taxes through that than if you held the investments personally.

[SharperDingaan]

Little different for Ontario. See Page 3 of the CIBC Report ...

 

"On November 15, 2018 the Ontario government announced that it will not follow this federal measure, so

active business income up to $500,000 will continue to qualify for the Ontario small business deduction.6 To

date, Ontario is the only province that has announced that it would not follow the federal rules limiting the

SBD based on passive income. In this report, it is assumed that provinces other than Ontario will follow the

federal rules.

 

https://www.cibc.com/content/dam/small_business/day_to_day_banking/advice_centre/pdfs/business_reports/ccpc-passive-income-en.pdf

 

Purchase and leaseback is permitted as long as it is via an independent 3rd party, and not self-funded.

The day-1 lease is 51% funded via the 3rd party. One year + one day later the third party is bought out, subject to a right to repurchase at end of lease.

 

SD

 

[peripatetic]

Great to see so much interest in this topic. Very helpful. Also a great illustration of how impenetrable the issue of taxation can be for someone looking in from abroad.

I will probably just keep it simple and invest in my own name. That's just my personal preference, not an opinion on the legality and feasibility of the suggested work-arounds.

 

That said, allow me one last thought experiment before giving up my European investment vehicle: What if, before moving to Canada, I were to sell 50.1% of my company to my sister, reducing my economic and voting interest the European company to 49.9%. Am I correct to assume this would not be deemed a controlled foreign corporation? Even if I remain a director of the company, and execute the occasional trade from Canada? Other than falling out with my sister, can you see any other pitfalls here?

[Parsad]

Uh.. what? I’m pretty sure it’s not.. Where are you getting that?

Above $150k is where you lose the SBD for your active income.

 

Hi Mcliu, that is correct. You said originally that passive income is taxed at the highest rate in a CCPC.  I was just pointing out that doesn't kick in until you are over $150K in passive income.  Cheers!

[scorpioncapital]

Great to see so much interest in this topic. Very helpful. Also a great illustration of how impenetrable the issue of taxation can be for someone looking in from abroad.

I will probably just keep it simple and invest in my own name. That's just my personal preference, not an opinion on the legality and feasibility of the suggested work-arounds.

 

That said, allow me one last thought experiment before giving up my European investment vehicle: What if, before moving to Canada, I were to sell 50.1% of my company to my sister, reducing my economic and voting interest the European company to 49.9%. Am I correct to assume this would not be deemed a controlled foreign corporation? Even if I remain a director of the company, and execute the occasional trade from Canada? Other than falling out with my sister, can you see any other pitfalls here?

 

What are you trying to achieve? I think you still have to disclose a foreign affiliate if the ownership is over 10%

(e.g. https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1134/t1134-17e.pdf)

 

Other than that, I would consider keeping it nevertheless if you think you might be a non-resident again of Canada in the future. It would be really lots of work to open and close a corporation like this. While a salary out of the company would probably be equivalent to a local salary, and dividends somewhat higher taxed, it may be worth it still.