With extensive family, business, and educational linkage, Canada and Hong Kong are closely connected. For those thinking of Canada as a destination – via emigration or by moving investments – thorough preparation is essential. This overview will look at some of the financial and personal factors that should be considered.
Traffic between the two countries does not always flow in one direction. By June 2020, around 300,000 Canadians had made Hong Kong their home. Hong Kong also featured as a top 20 destination for funds from Canada, which was, in turn, among the 10 most popular countries for money flowing out of Hong Kong.
Anyone planning a move to Canada should begin by doing some financial homework before contemplating the logistics of a physical or financial relocation. Understanding the country's fiscal rules will help potentially reduce any tax exposure and hopefully maximize wealth.
The principles of Canadian tax
As with any taxation framework, the Canadian revenue system applies several fundamental rules that must be observed to remain within the law. Its principles state that income, including capital gains, is subject to taxation, regardless of where in the world it is earned.
There is a distinction between tax residency and permanent residency, which will impact the amount due. Taxes and tax thresholds on personal incomes vary across the country and represent a combination of rates at a national and provincial level.
Here are some more Canadian tax facts to consider:
- There is no formal tax on gifts.
- Any substantial overseas transfers are likely to attract attention and increase the probability of an audit.
- For inheritance tax, the laws state that a Canadian resident is treated as having disposed of all capital property before death.
- Any estate must pay capital gains tax before distributions can be made to beneficiaries of the will.
Trusts as a tool for tax efficiency
A non-Canadian family member can set up a non-Canadian trust that can minimise the Canadian tax impact for Canadian tax-resident beneficiaries of the trust. These are commonly referred to as "granny trusts".
The granny trust can be put in place if the beneficiary has recently arrived in Canada or will be moving there soon. It can also be arranged in a way that is equally favorable to a person who has always lived in Canada. The trust's timing is flexible, as it can be established before the beneficiary departs Hong Kong or, if preferred, after taking up residence.
Another way to enable the transfer of assets in an economically advantageous way is to establish a family trust. This facilitates effective estate and probate management, succession planning and tax arrangements. Overall, it is a comprehensive method of protecting and preserving wealth.
The ownership of a trust’s assets
It is vital to assess the value of an individual’s assets and document their ownership. This should cover various aspects, including the potential benefits of setting up a trust, as mentioned earlier.
Two records of ownership are also required. The first of these must include any assets that are already owned, and the second is a list of anything that will eventually be inherited from family members or gifted by them. The value of the assets held in a trust should be established on the date of arrival in Canada, as this will become the cost base of the asset for tax purposes. An adept way of handling assets not yet owned is for the non-Canadian family member to create a trust where they can be held.
Invest in Canada
Equities and commercial property
It is not necessary to move to Canada to invest there. One commonly used way of allocating money is with commercial property and private equity. The key here is maximizing tax efficiency. Individual circumstances will dictate the best way to proceed. An offshore trust that provides asset protection may be worth considering. This approach can also be valuable when it comes to estate planning.
Looking more closely at property and investing in real estate can be hugely profitable. As is the case in many other countries, the Canadian market has vagaries that need to be addressed. The most effective way to invest will depend on the residential status of the individual.
- Registered tax residents can claim an exemption on the sale of a property deemed their principal home.
- Non-residents, including offshore trusts and companies, are subject to withholding tax on the rental income from a property and capital gains tax on a sale’s profit.
- Foreign buyers may also be liable for local real estate taxes, so seek clarity on the regulations applicable in different parts of the country.
Debt and equity
A combination of debt and equity could help reduce the taxable income of a Canadian business, as payments to finance the debt will reduce profitability. In this case, it may be possible to take advantage of international tax treaties. This approach calls for caution and should not be undertaken without full knowledge of the processes involved.
Thorough Research – The Foundation of a Successful Move
Despite the well-trodden path between Hong Kong and Canada, relocation can be a daunting prospect. However, if potential emigrants draw up a checklist and undertake thorough research, especially in areas such as taxation, trust architecture, and investment markets, then their move will be rewarding.
Disclaimer: This article should not be taken as accounting, immigration, legal or tax advice. You should seek professional accounting, immigration, legal or tax advice before proceeding with investing in, or moving to, Canada, or establishing a granny or other trust for Canadian tax resident beneficiaries.