This blog has been written by Rahul Sharma, Partner, Fasken Martineau DuMoulin LLP, Toronto

The world is ever-changing.  The UK non-domiciliary regime is ending, although with what appear to be potentially helpful tax measures available to new residents for a four-year period.  Certain favourable golden visa programmes in European countries are also ending or otherwise changing.  And Italy just now doubled its flat tax for ex-patriots from €100,000 to €200,000 per year.  Suffice it to say that certain jurisdictions are rethinking tax incentives previously offered to wealthy foreigners looking for a new place to live.

If countries are rethinking the tax incentives that they offer to high and ultra-high net worth individuals, the latter are rethinking where they and their children should live, spend, invest, and plan.  Canada may not be top-of-mind if wealthy foreign business owners are thinking of a place to relocate; but it could—and likely should—be a key destination to consider for their children and grandchildren who have not themselves generated the “family wealth” and who have no present interests in the family business enterprise or in family properties.

At the time of writing, my newsfeed includes articles that continue to discuss domestic Canadian tax measures, as well as international tax issues affecting high and ultra-high net worth individuals.  But between articles that continue to bemoan the increase in the capital gains inclusion rate and those that touch upon still desirable destinations for those looking to leave higher-tax jurisdictions, little attention seems to be given to Canada and to the “granny trust”.

The term “granny trust” is tax industry-speak for a non-Canadian trust that is subject to neither factual or common law Canadian tax residency (meaning, generally, that the trust’s mind and management is not located within Canada, and the trust is not administered from Canada), nor to deemed Canadian tax residency under the provisions of section 94 of the Income Tax Act (Canada).  Put differently, a “granny trust” is not a Canadian taxpayer, but it has at least one Canadian resident beneficiary.  The term “granny trust” is in reference to the origin of the funds or wealth that is held in trust, being assets beneficially owned by a “granny” or a person generally one or more generations removed from a Canadian resident beneficiary of the trust.

The advantage of the granny trust, in brief, is that this Canadian resident beneficiary can receive distributions of capital from the granny trust on a tax-free basis in Canada (while distributions of income would be taxable to the beneficiary).  So long as a granny trust is properly managed and administered, with appropriate and proper safeguards in place, the tax-free receipt of capital by a Canadian resident beneficiary is a major advantage.  Such favourable tax treatment would not, for instance, be available to a beneficiary who is a resident of the United States due to certain trust anti-deferral rules in that jurisdiction.  This makes Canada unique and a potentially idyllic destination for some.

I am occasionally asked about our granny trust “regime”.  To be clear, a granny trust is not the subject of special tax measures, programmes, or incentives; it is a function of how Canada’s income tax laws and system operates under the Income Tax Act (Canada).  Granny trusts can be excellent planning tools for international inheritances and gifts.  They are often established in tax-favourable jurisdictions where you will find a myriad of trust companies that specialise in the administration of trusts with a nexus to multiple global jurisdictions.  Set-up and ongoing administration costs can vary, so granny trust planning might be ideal for some and not as beneficial for others.  This all depends on individual facts and circumstances.

The critical point, as always, is that there is no substitute for good and competent advice, particularly in a world in which change seems to be one of the only constants that we have.  Where relevant, such advice should include a proper consideration of the potential merits of granny trust planning.