As Canada’s population becomes ever more global, with immigrants bringing wealth from all over the world, a new kind of problem has emerged for estate planners and financial advisers.
When estates are bequeathed inside Canada, the laws are often straightforward on what needs to be done, with a proper will and an executor being at the top of the list. But when one or more other countries come into play – as is so often the case with immigrants to Canada – the rules of the game become increasingly muddled.
It’s a scenario that financial advisers are seeing more of as the population expands and diversifies.
“We’re far more global than we used to be,” says Sara Plant, vice-president and national director of wealth services for BMO Harris Private Banking.
“We’re seeing families that are here and they’ve left assets in other jurisdictions all around the world. It isn’t necessarily only where they came from. You could have somebody who’s moved from India, for example, and they have family in the United States, and they have family in England, and they have assets in those jurisdictions.”
Navigating these complex situations is a growing job for advisers, since the people receiving the inheritance in Canada may not have thought about potential problems they could face. Or they are new to the country and don’t necessarily understand the rules.
But the stakes are considerable, since an inheritance from outside Canada could leave the person on the receiving end with a hefty tax bill if the right preparations aren’t made.
“What we tend to find when people come from another country is that they bring with them expectations about inheritance laws,” but those expectations aren’t always accurate, Ms. Plant says.
The key advice estate planners have for Canadians who may be getting an international inheritance, or new immigrants who could face that scenario in the future, is to start planning early – in advance of the person’s death – to avoid tax problems.
If the estate involves a large amount of money, say more than $1-million, advisers suggest placing the funds in an inbound inheritance trust, which will shield it from taxes.
Though the inheritance itself won’t face taxation in Canada, the returns that capital yields if it is invested will lead to a stinging tax bill every year. Such a trust can protect that income as well.
“If that $1-million was put into a properly structured offshore trust of which the Canadian child is a beneficiary, then the investment income that’s earned in that offshore trust can be non-taxable in Canada indefinitely,” says Prashant Patel, vice-president of high net worth planning services at RBC Wealth Management.
The informal term for such investment vehicles is a Granny Trust, a name derived from the idea of a grandmother overseas leaving her possessions to the family in Canada, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
“You can receive it tax free, but if you invest it in something you are going to pay tax annually,” Mr. Golombek says. And that tax applies to “any gains that you realized in whatever you invested in, like the stock market or bonds.”
But the catch, Mr. Golombek and other advisers point out, is that the trust has to be set up early, before the person dies. Wait until the will is being read, and it’s too late to protect yourself from taxes.
This is a mistake that is often made, because people are unaware of the requirements.
“We get phone calls all the time saying so-and-so just died, I heard about this offshore trust. But it has to be in the will. It has to be done in advance before the individual passes away,” Mr. Golombek said.
“We certainly are seeing executives being transferred to Canada as part of global companies, and this is always a planning idea that we would recommend to them, because we know they’ve got someone offshore. They’ve got someone in Hong Kong or London or France.”
But the complications aren’t always on the Canadian side. Rules in some countries about whether real estate ownership can transfer outside that jurisdiction, or whether funds can leave the country, can also stand in the way of an inheritance. In those cases, advisers look at the rules in each jurisdiction individually.
Ritu Narayan, director of the immigrant investor program at RBC Wealth Management, says many newcomers to Canada aren’t well versed in what financial planning is needed for estates because they have been focusing on other aspects of their move.
“Very often they say, ‘We were not aware of it,’ because all they were focusing on was getting their permanent residency status,” Ms. Narayan says. “So that’s where we play a role.”