Capital Gains Tax Increase: Impact on Planning

The Canadian federal budget was tabled on 16 April 2024. It included, among other things, a proposal to increase the capital gains inclusion rate for the first time since 2001, from one half to two thirds, with the increase coming into effect for dispositions (or deemed dispositions) occurring on or after 25 June 2024 (and for individuals, the increase applies to capital gains over CAD 250,000 in any year, with capital gains below that amount remaining subject to the existing 50 percent inclusion rate).


Taxable capital gains (or losses) are realized when a Canadian resident sells a capital asset outside of a registered plan or qualifying insurance policy, and subject to some exemptions (e.g. lifetime capital gains exemption, principal residence exemption, reductions of inclusion rate on charitable donations). It is a common goal in Canadian tax planning to characterize as much personal and corporate income as possible as capital gains rather than other forms of income, because of the 50 percent inclusion rate (the other 50 percent being received tax free). Such planning will remain relevant as long as the capital gains inclusion rate is less than 100 percent; however, the increase to the inclusion rate will erode the benefit of doing so.


Examples of events or transactions which will be impacted by the increase include corporate surplus stripping transactions (which aim to extract corporate surplus as capital gains rather than dividends), estate freezes, taxes on death, and taxes on becoming non-resident of Canada. In addition, many professionals in Canada practice their profession through a professional corporation and accumulate and invest their savings in those corporations, virtually always pursuing a capital growth strategy because dividend income is taxed aggressively. The increase will impact the taxation of capital gains realized in those corporations.


Canadians may wish to consider deliberately triggering accrued capital gains prior to 25 June 2024 while the existing 50 percent inclusion rate is still applicable. This could entail crystalizing gains in investment accounts, carrying out an estate freeze, making lifetime gifts of capital property to family members or charities, or expediting plans to become non-resident of Canada (which triggers a deemed disposition of certain capital property upon exit).


Individuals with intentions to accumulate investment assets in private corporations and who would have otherwise planned to invest and grow their wealth in the corporation may now find that investing in corporate-owned life insurance is comparatively more attractive as well.  Such policies and their in-policy growth continue to be tax-sheltered, and their comparatively conservative investment returns (versus unrestricted investment accounts) are less of a disadvantage in view of the higher capital gains inclusion rate.


Details of how the capital gains inclusion rate increase will be administered have not yet been released, particularly with respect to which transactions will be deemed to fall before and after 25 June 2024, and with respect to the inclusion rate for capital losses. It appears from the initial budget release that there will be an effort to match the inclusion rate for capital losses to capital gains at the same rate, likely to forestall triggering gains at the lower rate and losses at the higher rate on the same type of asset, such as public securities.


If you would like to pursue transactions to take advantage of the current 50 percent capital gains inclusion rate prior to 25 June 2024, or discuss becoming non-resident of Canada and related planning, please contact us and we will be glad to assist. ■

Planning for Canada’s Departure Tax

We have written previously about the importance of planning for the tax consequences of emigrating from Canada; see our previous inBrief here. In this inBrief, we will describe a number of more advanced planning options for Canadian residents who are considering giving up their Canadian residency. Bear in mind that not all of the approaches discussed in this inBrief will be right for any particular person, as each person’s individual circumstances will differ.


Upon becoming a non-resident, Canada imposes a departure tax in the form of deemed disposition of certain capital assets, causing any unrealized capital gains to be realized in the year of departure. It is common for high net-worth individuals in Canada to hold their public and private investments through holding companies (Holdcos), so one major source of capital gains upon emigration is the shares they own in their Holdcos. We will also touch upon foreign trust planning, Canadian real estate holdings, and charitable donations.


With respect to Holdco shares, much emigration planning focuses on how to minimize the departure tax by reducing the fair market value of those shares prior to exit. Some potential options to achieve this may include.


Strategic Dividends: Causing Holdco to pay out dividends to the maximum extent it can out of tax-preferential accounts maintained by it, which may include Holdco’s capital dividend account (CDA), eligible refundable dividend tax on hand (ERDTOH) and non-eligible refundable dividend tax on hand (NERDTOH). Dividends can be paid out of Holdco’s CDA tax-free, and dividends that are paid out of its ERDTOH and NERDTOH result in tax refunds to the company, making them somewhat more tax-efficient. In advance of doing this, it may be advisable for Holdco to sell some of its investments, thereby realizing capital gains and creating additional CDA that can be dividend out tax free. The payment of dividends in this manner will reduce the fair market value of Holdco’s shares, thereby reducing the amount of the deemed capital gain on such shares upon emigration.


The other reason you should be sure to dividend out all CDA in any Holdco prior to emigration is because such dividends lose their tax-free status when paid to a non-resident shareholder. Once you are a non-resident, Holdco will be required to apply a withholding tax to any dividends paid to you, and you will be taxed on such dividends personally under the laws of your new country of residence. If Holdco will continue to operate after you emigrate and will continue to have Canadian resident shareholders, it would be prudent to create separate classes of shares that allow for dividends out of CDA to be paid to Canadian shareholders (who can receive them tax-free), and other dividends to be paid to you (as you may very well be in a position to receive them much more tax-efficiently than a Canadian shareholder[1]).


Life Insurance: Cause Holdco to acquire life insurance on your life, acquiring a policy that is maximum funded at the outset but with attributes that result in the policy having a low fair market value. This expenditure in exchange for an asset that is initially low-value (the life insurance policy) reduces the value of the Holdco shares. There are several other potential benefits to this approach that stem from the value of the insurance policy itself, because its value will increase after you have emigrated and can be leveraged as a valuable asset of Holdco going forward (i.e., front-end or back-end leveraging strategies to extract value from the policy during your life), in addition to the security of the death benefit.


If Holdco does leverage the life insurance policy by borrowing against it, Holdco will be able to use those funds for income-generating investments and will be permitted to deduct the interest on the loan. This can be an attractive arrangement.


You may wish to consider whether it makes sense to introduce a foreign ownership structure that is more forward-looking and supports your wealth and estate plans more broadly. For example, if you intend to establish a family trust structure in an offshore jurisdiction as part of your post-emigration planning, it may be prudent to transfer the shares of Holdco to the foreign trust at approximately the same time that you emigrate from Canada. You would do this after having taken any available steps to reduce the value of Holdco’s shares, as described above. If Holdco’s value is derived primarily from Canadian real estate holdings, this approach could be beneficial if you foresee a sale of Holdco in the future. In that case Holdco shares will be “taxable Canadian property” and will be taxed in Canada, and you can reduce the impact of that tax by reducing the value of Holdco’s shares through dividends after you are a non-resident (at the lower beneficial treaty rate).


There are special considerations with respect to Canadian real estate holdings. Canadian real estate is “taxable Canadian property” and is not subject to the deemed disposition upon emigration.[2] How you can best structure your holding of Canadian real estate as a non-resident will depend on whether it is property for your personal use, or if it is a rental property. If it is for personal use, you will need to consider whether your ownership of it puts you at risk of being deemed to be Canadian resident for tax purposes even after your emigration.[3] If it is a rental property, you will likely wish to transfer ownership of it to a Canadian holding company, otherwise the tenant will be required to withhold an amount in respect of tax from every rent payment they make to you as a non-resident owner.


Finally, an option that is not to be overlooked is simply making a charitable donation of assets that have significant accrued capital gains before you emigrate, which will have the effect of reducing both the value of your holdings as well as reducing your departure tax exposure. It will also generate a charitable tax credit which you may use to further reduce your tax burden on exit. If your charitable intentions are relatively large and you wish to maintain some ongoing involvement and control over the how the endowment is managed, you may wish to establish a charitable foundation instead of simply donating funds or assets to an existing charity. A charitable foundation that is registered as such with the Canada Revenue Agency will qualify as a registered charity and can issue charitable tax receipts, and can carry out activities and funding in line with its charitable purpose in Canada and overseas. The charitable options should, of course, only be considered where the primary objective is furthering the chosen charitable purpose with any tax incentives being secondary.


The strategies discussed in this inBrief are intended to illustrate that there may be effective pre-emigration planning that you can consider, aimed at reducing the impact of Canada’s departure tax. All such strategies are complex in their planning and application and professional advice is required to evaluate and execute them. If you are interested in exploring planning of this nature, please contact us and we will be delighted to assist. ■


[1] The withholding tax that Holdco would be required to apply to dividends paid to you as a non-resident would be a default rate of 25% if you reside in a non-treaty country, or could be 5%, 10% or 15% if you  reside in a treaty country.  You may need to hold your shares through a company established in your new country of residency to access these reduced rates.

[2] You may elect to trigger a deemed disposition of taxable Canadian property if you prefer, in order to trigger gains or losses which you are able to offset against other losses or gains on exit, respectively.

[3] Very briefly, owning a residential property which is available for your personal use in Canada will cause you to be deemed tax resident in Canada, unless there are tie-breaker rules in the applicable treaty with your new country of residence.  Ensuring that you will indeed be non-resident for tax purposes is a critical aspect of non-residency planning.


Family Governance in Trust Structures

When contemplating a family wealth structure that is intended to endure, such as a family trust or foundation, it is important to consider how the structure will be governed, particularly in the longer term after the founder’s lifetime. Governance mechanisms that are designed to encourage ongoing family involvement in the structure have proven to be effective at averting second, third and future generation conflicts that can undermine the structure. The most common family governance mechanisms are the family charter and the family council. This inBrief will provide an introduction to those mechanisms and explain why they can be useful for many families.


Trust Governance versus Family Governance


Most family trusts are fully discretionary, meaning the trustees are given very broad discretion to manage the trust assets and distributions. Such trusts are also normally made subject to some common governance and control mechanisms which set out either firm rules or soft guidance for the trustees. Those mechanisms typically consist of the terms of the trust deed, the appointment of a trust protector, and the issuance of a letter of wishes. These governance structures are discussed in more detail in our inBrief “A Matter of Some Discretion: Controlling Your Trust.


The usual control mechanisms for a trust are a necessary starting point; however, if the trust is intended to survive through multiple generations and successfully serve the needs of the family, family governance becomes very important. When a family wealth structure fails over time, it is most often because of relationship breakdown among family members, no matter how well-drafted the trust deed was or how effective the tax planning. It would be rare, for instance, for a founder to be able to successfully lay out the detailed investment and distribution scheme for a trust beyond one or two generations into the future, after which that exercise becomes overly cumbersome and complex and will probably be incorrect.


The main purpose of a family governance structure is to enable long term harmony between family members; it achieves this by keeping all family members engaged with and informed about the trust, and by placing some important decision-making powers in their hands.  When a grandchild or great-grandchild is a beneficiary of a trust, they will likely lack personal context around the ancestor (founder) who established it and why, and they may quite naturally view the trust through the lens of self-interest without any broader family context.  They may not know or care about the ongoing future success of the structure. The natural outcome over time is conflict between family members or with the trustees or both.


Family governance mechanisms can be especially important when there is a family business that is owned by the trust, since trust ownership can lead to a lessening of family members’ emotional attachment to the business over time. There is also a natural divide between passive family member beneficiaries, and family members who are involved in the family business.


Good family governance seeks to remedy these disconnects and prevent that sort of conflict by ensuring each family beneficiary, over generations, is kept informed about the structure and has a voice along with other family members in decision-making for the trust.


Family Charter and Family Council


A family governance structure sets out how a family makes decisions in the context of a wealth structure like a family trust, how family members are kept informed, and how family governance integrates with other structures such as a trust or family business. Family governance usually consists of two main components: the family charter and the family council.


The Family Charter


The family charter is essentially the family’s constitution or code of conduct. Its contents are unique to the particular family’s needs and wishes and should retain some flexibility for amendments so it can adapt to future needs. It is a document that should have moral and ethical value to the family, while operationally it is intended to set out how family decisions will be made, when such decisions are required, and some principles or guidelines to inform those decisions. It has been aptly described as a bridge between family and business, or family and trust. Some of the topics typically addressed in a family charter include[1]: a preamble for important context; the family history; core values or goals of the family; adherence by family members; formation of a family council and its functions, decision making and voting rights; relationship with the family trust/business structure; family philanthropic/charity/education goals; conflict resolution; and procedures to amend the family charter.


Although family charters are generally not intended to be legally binding documents, that possibility is not ruled out. While it is not an area that has been sufficiently tested given the private nature of such documents, there is a growing belief that family charters can be legally binding (at least in part) if they are drafted and executed in a manner that indicates a clear intention to be bound.  Even where a family charter is not legally binding, it can of course remain very morally persuasive.  Importantly, it can carry tangible consequences by properly linking compliance with the terms of the family charter to one’s ongoing entitlement to benefits from a family wealth structure.  That is, a family member might be given reduced or suspended entitlements to receive trust distributions in case of non-compliance with requirements set out in a family charter, and such consequences can be given effect by a family council using influence or control that it enjoys over the role of trust protector, for example.


The Family Council


If the family charter is the family constitution, then the family council is the parliament or board of directors, made up of representative members of the family.  The family council is tasked with giving effect to the family charter, making decisions on behalf of the family as a whole, balancing competing interests, and communicating trust and company business to the other family members who otherwise would not have visibility into or involvement with the family wealth structures.


The family council can build harmony by communicating with the broader family and representing their interests at family council meetings thereby giving them a voice through representation, among other things.  It can also advise on how and when to make distributions equitably across branches of the family and across generations, taking into account the purpose of the structure, individual needs, or current versus future needs.  Sometimes the family council can also be a useful vehicle to track informal shared ownership arrangements in which one family member may be tasked with owning property for the broader benefit of other family members, in an arrangement that relies on family integrity rather than legally enforceable obligations.  Such informal arrangements can be very beneficial because they do not generally trigger reporting, disclosure, registration, attribution, FATCA/CRS, tax, and other consequences that arise when formal trusts are created.  This is a benefit of greater family strength, and is one way in which tangible value is produced by good family governance.


Integration of Family Governance


As noted above, family trusts are usually the sole creation of a founder with little or no input from family members (although that dictatorial approach seems to be softening these days). One way to promote the success of a family trust over multiple generations is to have the founder consult representatives of the family members during the trust planning process, and in particular in the family charter drafting process. The trust document may integrate the family charter and family council and include ways for the family representatives to select, remove and replace the trustees, or to act collectively as trust protector or trustee advisory committee.   It could also include dispute resolution provisions to avoid future litigation among beneficiaries and trustees.  Allowing for future members of a family council to exercise control over a trust, in the role of protector or otherwise, ensures that the trust’s operations remain flexible over time and are adapted to best serve the family through evolving needs and successive generations.  Having room to adapt to changing family and legal environments is crucial to the long-term success of any wealth structure.


Vesting trust protector and advisor powers in a diffuse, multi-person committee can also be important from a tax planning point of view.  Where only one person has effective control over the trust in the role of protector, there is a risk that trust income will be taxable in such person’s hands, or that the trust itself will be deemed tax resident in the place of such person’s residence.


This inBrief has focused on family governance in the context of a family trust. We would note that the same concepts apply to private foundations as well, and to family businesses through the terms of shareholders’ agreements, partnership agreements, or other comparable constitutional documents.   In all cases, the goal is to provide for a vehicle through which family interests are represented and communicated, in an effort to achieve a fair and sustainable balance between family interests versus business interests, and immediate needs versus future needs.


Finally, although our focus as a firm is to ensure a robust legal and tax structure, we would be remiss if we did not acknowledge the fact that family governance structures can be valuable beyond the wealth management context, and we encourage families to capture their broader beliefs, values and goals and reflect them in their family charters.


Planning with trusts, foundations and business structures is complex, and particularly so in the cross-border context. It is critical to obtain legal and tax advice from experienced professionals before embarking on such planning. Please don’t hesitate to contact us and we will be delighted to discuss how we can assist.■



[1] This is not an exhaustive list of topics that can be included in a family charter. For further information on the drafting and substance of family charters, please contact the author.

Invest in Start-ups in Canada: Qualify for Canadian Citizenship

Venture capital (investing in startups) has been a popular form of investment for many over the years. In recent years, Canada’s Start-up Visa Program has offered Canadian permanent residency (leading to Canadian citizenship upon qualification) to immigrant investors as well as immigrant entrepreneurs with the skills and potential to build businesses in Canada that are innovative; can create jobs for Canadians; and can compete on a global scale.



A qualifying immigrant investor can now invest a minimum of CAD115,000 in a qualifying Angel Fund and a qualifying startup (and an approved immigrant entrepreneur can manage and operate such start-up) in order to qualify for Canadian permanent residency. Based on past cases, it takes between two to two and a half years to process such application and to obtain Canadian residency if all proceeds in the ordinary course. Such investor and entrepreneur could further qualify for Canadian citizenship by remaining in Canada for three years (during a five year residency).



Under this program, designated organizations (certain venture capital funds, angel investor groups or business incubators) choose which startup investment business proposals to review and to invest in. The startup does not even have to be in Canada: it can be a foreign startup and then the immigrant entrepreneur can relocate with the start-up to Canada and become eligible for Canadian residency. Each designated organization has its own intake process for proposals and criteria used to assess the proposals. If a designated organization chooses to support the start-up business idea, it will give applicants a Letter of Support. For example, for an incubator, such Letter of Support will mean that the incubator is willing to accept the start-up into its program and help the business grow in Canada while providing guidance and expertise. As a result, the investor and entrepreneur are not alone in growing the start-up: they receive support and direction from the incubator, in addition to obtaining Canadian residency leading to Canadian citizenship upon qualification.


Finally, it is important to note that the ability to communicate and work in English, French or both languages will help a start-up succeed in Canada. As a result, applicants will have to take a language test from an approved agency. Applicants will also need to give proof that they have sufficient initial funds to support themselves and their dependents after arrival in Canada. For example, this requirement can be satisfied for a family of four if an applicant and family bring CAD25,000 to Canada. ■

Cross-Border Holding Companies: The New Normal

Holding companies are an important part of almost any deliberately planned corporate structure. By “holding company” we are referring to a legal entity whose primary, or possibly sole, function is to own other assets. They are important for asset protection, segregating lines of business or assets, limiting liability, tax planning and estate planning, among other things. This inBrief discusses the continued utility of holding companies against the backdrop of a heightened regulatory focus in recent years.


For those operating in higher tax jurisdictions like Canada, the United States, the UK and the EU, establishing holding companies in tax-preferential jurisdictions has been a popular strategy, as there were legitimate tax advantages available by doing so. Those tax advantages would have generally involved either accessing a benefit (reduced rates) under a tax treaty, or deferring the tax on income accumulated in the holding company.[1] There is a misconception that holding companies operate to conceal ownership or tax information from tax or law enforcement authorities or that they otherwise facilitate illegal activity, or that a taxpayer can simply decline to disclose foreign assets or holdings thereby shielding them from tax. While that may once have been true (perhaps before the internet era), it is not true now and has not been for many years.


There has also been a perception that holding companies have facilitated a practice known as profit-shifting: the practice of deliberately shifting revenue from being earned in a high tax jurisdiction where the substantial business actually takes place, to a company established in a low/no-tax jurisdiction where the business has little or no substantial economic activity. This was indeed a common and lawful practice and was usually not considered to be abusive.[2] Over the last seven to eight years, such arrangements have been recharacterized as abusive as a result of OECD initiatives in that regard, most notably what is known as the BEPS project (which stands for base erosion and profit shifting). The BEPS project is an OECD initiative that is aimed at promoting policy and legislative changes globally that are designed to increase tax revenues for OECD nations by combatting what they characterise as abusive practices.[3] The use of holding companies has been a major focus of the BEPS initiative and the holding company landscape has radically changed as a result.


The arrival of “economic substance” requirements in low/no-tax jurisdictions is perhaps the most important change, as such requirements have made prior profit-shifting practices difficult or infeasible. One of the action items under the BEPS project (Action 5)[4] is to deal with what the OECD has identified as “harmful tax practices”, which includes profit-shifting to low/no-tax jurisdictions. To prevent profit-shifting, low/no-tax jurisdictions were required to implement “economic substance” rules, which operate essentially as follows: if a company is foreign-owned and carries on activities that are typically associated with passive income (such as holding investments or IP, or acting as a regional headquarters, or offering passive financing, among other things), then such companies must demonstrate that they have adequate economic substance in the country of incorporation, failing which they will be fined and ultimately shut down. Adequate economic substance is demonstrated by having physical premises in the country, local full-time employees, local assets, local expenditures, a local bank account, and physically present local board and management activity.[5] Put another way, if the entity meets the economic substance test, it is no longer really a holding company in the traditional sense, it is simply an active company.


For an entity that solely carries on “holding” activities as narrowly defined in economic substance legislation and has no other function (acting as a region headquarters or owner of group intellectual property, for example), the level of economic substance required is significantly reduced. The economic substance rules (including the lesser requirements for pure holding entities) adopted into law are generally consistent across all conventionally popular low/no-tax jurisdictions, as they follow OECD guidance.[6]


The general expectation several years ago was that the BEPS initiatives would cause companies to move their assets and operations back to the higher tax jurisdictions in which the parent company or group was physically based, rather than seeking out the most tax-efficient location. Instead, the more common reaction was for companies to develop the required economic substance (genuine active business, full time employees, physical offices, etc.) in the low/no-tax jurisdictions, in order to continue to legitimately benefit from preferential tax regimes. The landscape has changed so that companies in tax-preferential jurisdictions are only useful if they actually carry on an active business and meet the economic substance requirements, or, in the case of pure “holding” companies as defined in the legislation, they meet the reduced economic substance requirements. These developments have made offshoring more expensive than it used to be, but it is clearly still a worthwhile proposition for many businesses for which at least some of their active business can be conducted in preferential jurisdictions.


Another area in which holding companies have been affected by the BEPS initiative is with respect to eligibility for tax treaty benefits. Access to treaty benefits has been limited for holding companies, pursuant to BEPS Action 6 (Prevention of Tax Treaty Abuse).  Previously, a holding company established in a country with which Canada[7] has a tax treaty was treated as a resident of the treaty country and was therefore entitled to the treaty benefits. That typically means that payments to the holding company from Canadian entities or sources were subject to reduced withholding tax rates, and capital gains in the holding company could often be realised entirely tax free. It became popular to establish holding companies in treaty countries specifically to access the treaty benefits for a particular transaction or category of transaction and for no other reason; a practice viewed by the Canadian courts, incidentally, as consistent with the purpose of the treaties, and not abusive.[8] As was the case with profit-shifting, the use of a mere holding entity without adequate economic substance whose purpose was primarily to access a tax benefit was recharacterised as abusive pursuant to BEPS Action 6. The OECD addressed this form of “abuse” by introducing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), which has one primary effect: to amend existing tax treaties to deny the application of benefits under the treaties if “one of the principal purposes” of any arrangement was to access the treaty benefits.[9] The MLI is controversial as there is significant uncertainty around how the “principal purpose test” will be applied in practice.  Pending further clarity on this, the availability of treaty benefits will be uncertain in almost any circumstances, and any planning that relies on treaty benefits will be riskier. For further discussion of the potential conflicts and uncertainty caused by the MLI in Canada, please see our earlier inBrief here:  Tax Minimization is Every Canadian’s Right:  Supreme Court of Canada.


To recap, holding companies have been the focus of global tax reforms, resulting in the advent of economic substance requirements in low/no-tax jurisdictions, and the introduction of the MLI which is aimed at preventing “treaty shopping”.  Today, as a result, foreign-owned companies established in low/no-tax jurisdictions are only beneficial from a tax perspective if they can demonstrate the required economic substance through people, premises, assets, and expenditures.  Passive holding companies with no local presence in such jurisdictions are no longer viable, and while it is open to debate, it is generally acknowledged that this is a positive step towards global tax fairness.


There remain many situations in which a holding entity is necessary as part of a corporate or family wealth structure where no tax advantage is being sought or realised, and as such, they should arguably not be subject to the same economic substance requirements as holding companies which do result in tax advantages. For example, it is often advisable for a family trust to establish one or more holding companies that are owned by the trust and which are useful for legitimate asset protection, segregation and management.  Such holding entities also enable the adoption of bespoke family governance mechanisms at the holding company level through the use of shareholders’ agreements, board structures, and a family charter, for instance. If the trust has been established in a tax-effective manner (e.g., if the trust assets originated from persons resident in a tax-preferential jurisdiction, and depending on the domestic tax treatment of its beneficiaries), the purpose of the holding company would likely not be tax-driven beyond simply a wish to avoid making the position worse. However, in the current landscape, the addition of a holding company under the trust can have negative consequences, even though such consequences do not arise for the trust itself.  These sorts of holding companies have been caught in the crossfire, so to speak.  Where the trust has EU or US beneficiaries, for example, the mere introduction of a holding company may trigger punitive sets of rules known as “controlled foreign affiliate” (or CFC) rules, where such rules would not have otherwise applied if the trust held the assets directly, even though the use of a holding company provides no tax advantage to the trust.[10]


A potential solution in the above example of a trust that requires a holding vehicle for non-tax reasons is the use of tax-transparent “flow through” entities, such as limited partnerships and certain limited liability companies. Such entities are typically established in high-tax jurisdictions like Canada and the United States, where economic substance rules have not been adopted. Generally speaking, such entities allow for a tax-neutral result while interposing a layer of segregation, management and control, and a limitation of liability, and can therefore often present an effective alternative to conventional offshore holding vehicles.[11]


Cross-border tax planning has always been complex, and the rapidly changing environment has only made it more so.  It is essential to obtain fact-specific professional advice before implementing any such planning.  Please contact us if you wish to explore whether international planning for yourself, your business, or your estate can be beneficial for you. ■


[1] The deferral advantages have not been available for several years in most jurisdictions due to comprehensive domestic legislation in every high-tax country, and the treaty advantages are quickly disappearing as a result of the BEPS initiative (discussed below).


[2] It was generally not an abusive practice because such practices were already very heavily monitored and regulated by domestic tax legislation which applies to interests in foreign entities, transfer pricing, thin capitalization, along with many anti-avoidance and attribution rules.


[3] More information about BEPS can be found here:


[4] The BEPS project consists of 15 separate “Actions”, each focused on a particular issue or category of issues.


[5] A physically present board is no longer achieved with a “fly in, meet, fly out” approach, as was the case (and continues to be) for purposes of the company’s “residency”.  A company may be tax resident in the country of incorporation but still not meet the economic substance tests.


[6] We note that some low/no-tax jurisdictions have not yet adopted economic substance legislation, such as Nevis or the Cook Islands, although most have.


[7] We are using Canada as an example, although the concept is applicable to many other countries.


[8] See Canada v. Alta Energy Luxembourg S.A.R.L, 2021 SCC 49.


[9] The list of signatories to the MLI can be found here:


[10] This is a general statement meant to illustrate the problem.  The rules are complex and there can be exceptions if there is adequate opportunity to plan at the outset, and each set of facts should be reviewed on their own merits.


[11] As noted, each specific set of facts should be reviewed on its own merits, and professional advice is essential in such planning.

Beneficial Ownership Registers for Ontario Corporations

As of 1 January 2023, all privately held corporations in Ontario must maintain a register of their beneficial owners, namely individuals who exercise “significant control” over these corporations. The changes were introduced as amendments to the Business Corporations Act (Ontario)[1] which were introduced in Bill 43 (Build Ontario Act, Budget Measures, 2021). In this note, we look at the implications of the new rules, both practically speaking and in the context of the global transparency movement.




Like other OECD countries, Canada is making efforts to tackle money laundering and abusive tax structures by enhancing the transparency of ownership and control of Canadian corporate entities. The relative ease of establishing corporations anonymously in Canada was highlighted by Transparency International in 2015. In 2019, federally registered private corporations were required to begin keeping a register of individuals with significant control, to be made available to certain tax and law enforcement authorities upon request. Several provinces have followed suit in respect of provincially incorporated entities, Ontario being most recent.  Importantly, the registries are not available to the public. The focus on beneficial ownership transparency in Canada and worldwide is being driven by OECD anti-money laundering and tax avoidance initiatives in recent years.[2] The establishment of beneficial ownership registers in particular reflects 2020 revisions and guidance to FATF Recommendations number 24 and number 25 (which relate to ensuring that accurate and up to date beneficial ownership information is available to appropriate authorities).


Ontario requirements


Under the new rules, a person with “significant control” is someone who is the registered or beneficial owner of, or who has direct or indirect control or direction over 25 per cent of the corporation’s shares by votes or value.    It also includes any individual who has any direct or indirect influence that if exercised would result in de facto control of the corporation as well as an individual whose circumstances meet the definition as set out in the regulations (not yet established). What is “direct or indirect control or direction over” shares, or “control in fact” are not defined but further guidance may be set out in the regulations; however, it is clear that joint ownership arrangements, ownership by family members, voting agreements and shareholders’ agreements and any comparable contractual arrangements will qualify.


The register must include names, birthdates, tax jurisdiction and a description of how the individual meets the definition of significant control. The corporation must ensure the register is kept up to date by taking steps to refresh the information in the register at least once every financial year. There are penalties (monetary and potential imprisonment) for directors and officers who knowingly allow the corporation to fail to maintain correct records and for shareholders who knowingly fail to provide accurate information in response to requests for information from the corporation. That is, Ontario corporations are required to request such information from their shareholders, and the shareholders are required to respond.


The register must be kept at the corporation’s registered office and be made available to requests from tax authorities, regulatory bodies and law enforcement.


It should be noted that no such similar requirements have been introduced in respect of partnerships or limited partnerships in Ontario as of the date of writing.


Are public registries next?


Although the new Ontario rules place a greater burden on corporations to ensure that they hold accurate records about their beneficial owners, the fact that such information must be available to authorities upon request is not a particularly novel concept given the existing powers of such authorities to require disclosure from corporations. Pragmatically speaking, the new rules can be viewed as somewhat cosmetic. A far more dramatic and controversial issue is whether such records will be required to be made available to the public (and the press), but it seems unlikely for now that this will occur in Ontario (or other Canadian provinces, with the possible exception of Quebec) without substantial further debate and the allocation of significant funding from the federal and/or provincial budgets.


The federal government had previously announced a publicly accessible beneficial ownership registry of federally registered corporations to be established by end of 2023. However, it has yet to announce any details of when and how this will occur or to allocate the required budgeted funding. In the intervening years the controversy around making such beneficial ownership registers public has grown, as doing so raises potentially serious privacy concerns and questions about whether making such information public carries benefits that outweigh those concerns (particularly when such information is already available to relevant tax and law enforcement authorities). The UK was the first to implement such a public registry, which continues to operate now. On the other hand, a recent landmark ruling of the Court of Justice of the European Union[3] invalidated a provision of the EU Anti-Money Laundering Directive guaranteeing public access to beneficial ownership information on the basis that such public access violated privacy rights. While it is far from certain, it may be that the Canadian government and many others around the world will reconsider the establishment of such a public registry for similar reasons.


The implementation of publicly accessible beneficial ownership registries in Canada remains controversial and, for now, not imminent in the near term.


[1] Implemented in sections 140.2, 140.3, 140.4 and 258.1 of the Business Corporations Act (Ontario).


[2] In particular the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (transparency focused); the Financial Action Task Force (FATF) (anti-money laundering focused); and, a third major work stream, known as the base erosion and profit shifting (BEPS) initiative, which is led by the OECD Committee on Fiscal Affairs (tax avoidance focused).


[3] The full ruling can be found here:

What is International Tax?

Tax is a jurisdiction-specific subject where each country applies its own system and rules of taxation. Many countries have provincial, state, regional or municipal tax rules in addition to or separate from the federal rules. Despite tax being a jurisdictionally limited concept, you often hear about “international” or “cross-border” tax issues. Those terms generally refer to issues in which more than one country’s tax laws have the potential to apply at the same time, or to the ever-expanding body of supra-national rules relating to disclosure, economic substance, minimum tax and anti-avoidance, or the world’s network of bilateral tax treaties. This inBrief will give examples of situations in which cross-border tax issues arise.


One common example that many individuals may encounter during their lifetime is undertaking a change in tax residency. If an individual moves from one country to another, it may mean their place of residency for tax purposes changes as well. Indeed, changing one’s tax residency is the centerpiece of some of the most effective tax planning strategies. Such a change will have consequences in both the country of departure and the country of arrival. For example, Canadians giving up Canadian tax residency incur a deemed disposition of most of their worldwide capital assets[1] calculated as of the date of departure and an obligation to pay any capital gains tax on such deemed proceeds. At the same time, one’s assets may be given a new cost basis in the new country of tax residency, and that new country may require special disclosures relating to one’s assets in the initial tax filings. Individuals must also make themselves aware of how they will be taxed on their local and worldwide income and capital gains under their new tax residency status. Several jurisdictions that compete to attract immigration by high-net-worth individuals offer special tax regimes, which may be a flat annual tax irrespective of income levels, or may be zero tax on foreign source income, among other incentives.


Another common example is the ownership of assets in foreign countries, especially income-producing or investment assets such as real estate or interests in public or private companies.


The asset or its income may be taxed in the foreign jurisdiction, and will likely also be taxed in the home jurisdiction. If there is a double taxation treaty in place between the two countries one may be able to avoid double taxation; however, if there is not, double taxation may result without any relief. All high-tax countries have developed extensive anti-avoidance rules that are aimed at preventing their residents from realising a tax advantage simply by moving assets to a low- or no-tax country or holding them through entities established in such a country. Even for people who hold foreign assets without any intention to obtain a tax advantage it is important to be aware of those rules so as not to inadvertently fall afoul of them, as disclosure or filing failures can result in significant penalties. Determining the detailed tax treatment of foreign holdings, whether held directly or indirectly, in both the country of residence and the foreign jurisdiction(s) is critical and can be complex. Professional advice is essential.


Recently, there has been a strong trend towards increasing transparency and disclosure with respect to tax matters among nations, and introducing economic substance and/or minimum tax rules, particularly in low- or no-tax jurisdictions. With the notable exception of FATCA, these initiatives have been driven by the OECD, which evaluates nations and designates them as white, black, or gray-listed, with serious reputational and practical consequences for being black or gray-listed. As a result, most low- or no-tax jurisdictions have been rapidly introducing new tax and compliance rules to avoid that consequence.  These new and fast-evolving changes have significantly constrained previously acceptable international tax planning strategies. Simply establishing a holding company in a zero-tax jurisdiction in order to hold revenue-generating or growth assets to shelter such income or growth, or in order to access treaty benefits, will no longer be sufficient and is no longer good planning. Good planning today requires awareness of the OECD initiatives and how they have been implemented so far. It also requires an understanding of how such initiatives will continue to be implemented over the coming years as more countries implement and enforce economic substance rules, minimum tax levels, and beneficial ownership registries that may or may not be publicly accessible. Finally, treaty networks are undergoing amendments to reduce access to treaty benefits in situations that are now (but have not historically been) viewed as abusive avoidance transactions.


However, these developments have not detracted from the healthy competition among nations to attract an influx of businesses and wealthy individuals, and there are still many opportunities to realise tax advantages with sound international planning. These opportunities include, for example:


  • A business that can relocate some of its revenue-generating operations to a subsidiary in a low- or no-tax country, with employees and operations to support a genuine presence that satisfies the economic substance requirements in that country. For Canadian parent companies that have a foreign subsidiary in a country with which Canada has a tax treaty (such as the UAE), the “active business income” (a defined term in Canada’s Income Tax Act) of the subsidiary can generally be repatriated to the parent on a tax-free basis.  This model can result in significant tax savings.


  • Changes in one’s tax residency generally, as described above in this article.


  • Succession planning, particularly where an advantageous place of tax residency has been obtained first.  The use of succession planning structures such as trusts, foundations, corporations (and wills) can offer excellent and lasting tax advantages when implemented while the individual is tax-resident in a low- or no-tax jurisdiction. By allowing the “structure” to own or inherit assets, rather than individual heirs who may reside in high-tax jurisdictions, the assets remain sheltered and can continue to grow without successive applications of inheritance tax, for instance.


Understanding and planning for international tax issues has always been complex, and the complexity continues to grow as the international regulatory landscape evolves.  However, opportunities for good planning remain for those with the circumstances to support it. If you wish to discuss your circumstances in this regard please do not hesitate to contact us. ■


[1] There are some important exclusions to the assets on which a deemed disposition is incurred, such as Canadian real property and registered savings plans.

Foreign Private Foundations for Canadians

A private foundation is a corporate entity with separate legal personality, but which has no owners, and therefore does not issue shares or other ownership interests.  It is established by a founder who contributes initial funds or assets to the foundation.  The foundation is governed by its constitutional documents, which typically consist of a charter and bylaws, and a governing body called directors or council members.  There will typically also be a guardian or enforcer who is empowered to supervise the directors to ensure they are complying with the foundation charter and bylaws, and with their duties as directors under applicable law.  The foundation’s charter or (more likely) bylaws will identify the foundation’s beneficiaries, if any, or its purpose, along with all other rules by which the foundation and its directors are to be governed.  Those rules may include, for example, guidance as to how the foundation is to invest and manage its assets, how it is to distribute them to beneficiaries through generations or otherwise use them towards the foundation’s stated purpose, and how decisions are to be made by the foundation’s directors, among other things.  Private foundations have a long history in the civil law world as useful vehicles for family wealth management, estate planning and asset protection across multiple generations.  They are used for many of the same purposes as trusts in the common law world, and are indeed sometimes viewed as trust substitutes.


A private foundation offers certain advantages over a trust structure which make them very useful in the context of wealth and succession planning, which include[1]:


  • A foundation is a corporate entity with legal personality, which can own its own assets, contract in its own name, and which enjoys limited liability, but can carry out the functions of a trust, including a purpose trust.  In order for a trust structure to achieve a similar result, a holding company is required in addition to the trust itself, resulting in a greater administration burden.


  • Foundations are more readily recognized and accepted by financial institutions, asset registries (land registries), and contractual counterparties in many more parts of the world than trusts (including Europe, Asia and the Middle East). There is also growing formal recognition of private foundations in common law jurisdictions, some of which have introduced their own foundation laws.[2]


  • Beneficiaries are not required to have rights to receive information from the foundation, allowing for much greater confidentiality than a typical trust structure.


  • There is very limited, and sometimes no, publicly available information regarding a private foundation. The foundation’s bylaws typically contain the detailed terms governing the foundation, and the bylaws need not be filed with any regulatory body.


  • Foundations are not burdened by the often antiquated and seemingly arbitrary legacy of common law rules that afflict trusts, such as the rule against perpetuities or the right of beneficiaries to collapse a trust under what is known as “the rule in Saunders v. Vautier”.


  • The directors of the foundation are not subject to the equitable common law duties to which trustees are bound. They owe no fiduciary obligation to beneficiaries, only to the foundation itself.  Similarly, beneficiaries need not be given any standing to enforce the terms of the foundation, and need not have any rights or entitlements from the foundation whatsoever.


  • Because of their corporate status and limited liability, foundations are useful for holding higher risk assets which may attract claims. A trustee, by contrast, may be wary about accepting such assets or may charge greater fees to hold and manage them.


  • Foundations offer the same, or potentially greater, asset protection benefits as trusts. Since claims must be made against the foundation itself (as opposed to a trustee), there is less direct concern around liability of directors (as opposed to trustees who do have that concern).  Also, civil law jurisdictions may not recognize the existence of a trust and simply attribute trust assets to the settlor for purposes of, for example, a divorce settlement.


In view of the above, a Canadian may wish to consider a private foundation where there is a desire not to extend information and enforcement rights to beneficiaries, minimize potential for claims, where the foundation will be investing, banking, or holding assets outside of the common law world, or where a founder and founder’s family resides in a civil law jurisdiction.  As discussed below, a foundation may also be useful in a tax planning context.


While the benefits of private foundations are compelling in the right circumstances, it is important to consider how the Canadian courts view foreign private foundations, and consequentially how they are viewed from a Canadian tax perspective.  As noted, private foundations do not exist in Canadian law.[3]  The approach taken by the Canadian courts when faced with a foreign legal entity which does not exist under Canadian law is a two-step approach, whereby it first examines the characteristics of the entity as defined under the applicable foreign laws and the entity’s own constitutional documents, and then compares those characteristics with those of entities recognized under Canadian law.[4]


The foreign entity will be treated as the type of Canadian entity it most closely resembles.  Using that type of analysis, a Canadian court will treat a foreign private foundation as either a corporation or a trust.


There are many potential factors that will influence a court’s and the Canada Revenue Agency’s (CRA) determination that any particular foreign private foundation is more analogous to a corporation or a trust.  These include such things as how the foundation is controlled, any rights reserved by the founder, who can enforce the foundation’s terms, the nature of beneficiary rights, duties of directors, how the foundation is described under local laws, and how the foundation actually functions in practice.   The CRA has stated expressly that the most important attributes to consider are the nature of the relationship between the various parties and the rights and obligations of the parties under applicable law and the foundation’s constitutional documents.[5]  The Canadian courts, in the very limited jurisprudence that exists on the subject, have also focussed on the nature of the relationships and the respective rights and duties among the parties to the foundation in order to arrive at their determination.[6]  The hallmarks of a trust relationship will include such things as a trustee’s fiduciary duty towards beneficiaries, the existence of beneficiary rights, and a beneficiary’s ability to enforce its rights against the trustee (among other things).  A foreign private foundation can be structured in a manner that creates similar relationships to a trust, or in a manner that does not.  Since it will be a case-by-case analysis, it is not possible to achieve absolute certainty as to whether any particular foreign private foundation will be treated as a corporation or a trust by a Canadian court (or the CRA).  The analysis, however, can be predictably and materially influenced by how the foundation is structured.  The Canadian legal and tax treatment of a foreign corporation (and a Canadian shareholder) is materially different from the legal and tax treatment of a foreign trust (and a Canadian beneficiary).  Therefore, thoughtful structuring of the foundation is key from a Canadian planning perspective.


With the right planning at the outset, a foreign private foundation can be part of a stable, efficient and effective wealth management, protection, and succession plan for Canadians.    Private foundations are available under the laws of several jurisdictions worldwide, including notably Lichtenstein, The Netherlands, The Cayman Islands, Panama and the UAE.  Specialist advice is essential.


If you would like to discuss whether a private foundation structure is right for you, please contact us. ■




[1] Some of the advantages described here can be achieved with trust structures as well, but these are inherent to foundations whereas trusts would need to be carefully drafted to achieve these benefits.


[2] The Cayman Islands and the UAE’s common law financial free zones (the Dubai International Financial Centre and Abu Dhabi Global Markets) offer private foundation structures under their domestic laws, for example.


[3] While private foundations are not expressly contemplated under Canadian law, the Income Tax Act (Canada) does expressly contemplate foreign corporate entities that do not have share capital, at section 93.2, which is a description that could very well apply to a private foundation.  Section 93.2 allows the CRA to treat interests of beneficiaries effectively as shares for tax purposes if the interests of the beneficiaries amount to a right (absolute or contingent) to receive payments.


[4] This approach was developed in Backman v. Canada [2001] 1 SCR 367, 2001 SCC 10 and applied many times in subsequent decisions, and is the approach used by the CRA as well.


[5] See for example CRA Income Tax Technical News No. 38.  It should also be noted that the CRA has expressed its view that, generally, it will consider a Lichtenstein foundation to be a trust.  That stated position is not binding and has no legal force, and does not change the fact that the courts will consider each foundation according to its own characteristics in order to determine whether it should be treated as a corporation or a trust.  The CRA’s position was specific to Lichtenstein foundations, and may not apply to foundations established under other regimes which differ from the Lichtenstein regime.  For the CRA positions see Technical Interpretation 2008-0266251 I7 dated 15 April 2008, reiterated in Technical Interpretation 2010-0388611 I7 dated 7 March 2011.


[6] As summarised in the 2012 Federal Court of Appeal judgment in The Queen v Peter Sommerer (2012 FCA 207), and the Tax Court of Canada decision in the same matter, Sommerer v. The Queen (2011 TCC 212).

No Such Thing as Fairness when it Comes to Tax: Supreme Court of Canada

On 17 June 2022, the Supreme Court of Canada issued its much-anticipated decision in Canada (Attorney General) v. Collins Family Trust[1].  The facts can be summarized briefly as follows:


  • In 2008, a taxpayer (Todd Collins) created a trust and holding company structure.


  • Collins was advised by an accounting firm as to the tax consequences of the structure, which were thought to be predictable and reliable based on:


  • absolute consensus in the professional community regarding the interpretation of the particular section of the Income Tax Act on which the plan relied (section 75(2)); and


  • the Canada Revenue Agency’s (CRA) agreement with that position as stated in a then-current Interpretation Bulletin, and as demonstrated by its conduct (no attempts at prior reassessments of such structures).


  • In 2011, the Tax Court of Canada decided another, entirely unrelated case,[2] which interpreted section 75(2) in a manner different from the prevailing consensus, the effect of which was to totally eliminate the tax efficiencies of the Collins structure. A large and unexpected tax bill would become due on the Collins structure (and other identical structures) on the basis of the Sommerer.


  • After Sommerer, the CRA embarked on multiple retrospective reassessments of structures that followed the Collins model, including for years prior to the 2011 Sommerer decision when everyone, including the CRA, thought the Collins structure was uncontroversial.


  • One such Collins-style structure called Pallen Trust had already applied to the court in BC[3] to seek the equitable remedy of recission to allow them to effectively undo the structure on the basis that the Sommerer case  had  made the structure unfairly onerous from a tax perspective. Pallen Trust argued that it was equitable to grant recission because it would have been unfair to impose such negative tax consequences retroactively since the plan was implemented on what were understood to be predictable and reliable grounds at the time.  That is, the structure was implemented on the basis of a “mistake” (an equitable mistake, not just bad planning).  The court agreed and granted the equitable relief requested.


  • The Collins Family Trust sought the identical equitable relief as was granted in Pallen on identical facts. The BC Superior Court agreed with the Collins Family Trust, as did the BC Court of Appeal.  The Attorney General appealed to the Supreme Court.


In an 8-1 majority decision, the Supreme Court found against Collins stating that it found “nothing unconscionable or unfair” about the facts at hand, and that this was simply “the ordinary operation of a tax statute”.  Given the factual context of the case, it is difficult to comprehend the conclusion that there is nothing unfair about the application of what are effectively punitive tax consequences on a surprise, retroactive basis.  The majority also went out of its way, somewhat bizarrely, to state that equitable remedies could never apply to relieve a tax mistake.


In the minority was Justice Côté whose dissenting reasons accounted for 71 out of the total 100 paragraphs in the judgment.  On our reading, the dissenting position and reasoning of Justice Côté was much more rational, more persuasive and fairer than that of the majority.  Côté uses strong language in places taking the majority to task for what she saw as incorrect and inappropriate reasoning and conclusions by the majority, and stating that tax mistakes were eligible for equitable relief if they met the usual tests (which were indeed met in this case, in Côté’s view).  However, as convincing as Côté’s reasons are, she is only one out of nine and her position does not reflect the law in Canada as of today, unfortunately.


It is unfortunate not only for Collins (and the others who used identical structures), but for all Canadian taxpayers.  Legally minimizing one’s tax burden is a fundamental right of Canadians, but the law is such that planning almost always contains some level of uncertainty.  That reality is already an unfortunate starting point, and rather than achieving greater certainty over time, we seem to be doing the opposite.  The Collins Family Trust judgment stands as a warning that taxpayers cannot even rely on planning that is thought to be normal, conventional, and entirely acceptable, including as affirmed in published positions of the CRA. ■


[1] Canada (Attorney General) v. Collins Family Trust (2022 SCC 26)

[2] Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff’d 2012 FCA 207, [2014] 1 F.C.R. 379

[3] Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499

Choosing the Right Offshore Jurisdiction

Wealth and estate planning that make use of so-called offshore trust structures are popular. Such structures are useful for many reasons, including to support individuals and families who are seeking a change in residency, and to offer longevity, predictability and security that is not always available in one’s home country. They can more readily adapt to beneficiaries in different and changing jurisdictions, and in the right circumstances they can offer tax efficiencies. If you have determined that an offshore structure is right for you, you will find that there are many offshore jurisdictions that could potentially be suitable for your needs. This inBrief looks at how to go about evaluating and selecting the right jurisdiction for your structure.


A brief summary of some of the factors you should take into account follows:


– A zero-tax environment. Many jurisdictions offer this.


– Reputability. This is really a colloquial catch-all for how well the jurisdiction adopts and implements FATF guidelines, OECD (and US) tax and reporting rules, transparency and level of cooperativeness of local government and courts, among other things. The international reputation is not a matter of perception, but much more importantly, it is a matter of how willing other professionals and financial service providers will be to deal with entities formed in that jurisdiction.


– Regulatory compliance. This is related to reputability. A jurisdiction that is compliance-focused will be more readily welcomed by banks, investment managers, insurers, land and asset registries, and others that will interact with the entity you establish. In this context, compliance refers essentially to thorough disclosure of beneficial ownership and processes to keep it up to date and verifiable, and accessible to legitimate government inquiry (not to the public, necessarily).


– Quality of service providers. Offshore structures such as trusts can only function properly if they are serviced by qualified, experienced, reliable service providers, in particular trust companies acting as trustees (others include accountants, lawyers, private bankers, investment managers, and insurance advisors). It is of great benefit to establish a trust in a jurisdiction with a mature market of well-established service providers.


– The legal environment. Offshore jurisdictions tend to have well-developed laws regulating their trust industry, and many have developed issue-specific specializations.  Depending on your priorities and what you wish to achieve with your trust, you may be better served by one jurisdiction or another.  For instance, the Cook Islands have a relatively strong position protecting Cook Islands trusts against foreign claims.  The British Virgin Islands offer a special regime for so-called VISTA trusts[1], which have advantages when the trust acts as a holding vehicle for shares in an underlying company, especially where the underlying investments are relatively high risk.  The Cayman Islands have a special regime for so-called STAR trusts, which allow for non-charitable purpose trusts, useful for creating “orphan” structures, for example.  There are other examples, and many other uses for VISTA and STAR trusts[2].


– The courts. This is really part of the legal environment, but it deserves a separate mention. The track record of the courts in upholding the local laws, and their ability to address trust-related claims in a manner that is sophisticated and predictable is an important factor.


– Privacy. This is also part of the legal environment but deserves a separate mention too. Robust, modern privacy laws are important to ensure that your sensitive personal and financial information is not misused or disclosed to third parties or the public or potential bad actors. It is worth clarifying that “privacy” does not mean “secrecy”, and that any reputable jurisdiction will have detailed beneficial ownership disclosure requirements, and will have international reporting obligations and exchange-of-information treaties, including among tax authorities. The purpose of an offshore structure is not to conceal information from governmental authorities who have a legitimate interest. This was the case decades ago and is the source of negative stereotyping of offshore jurisdictions which continues in the media to this day, ignoring the enormous reforms in transparency, regulation and international disclosure that have occurred over the years.


– Political stability. A long track record of peace and good order and rule of law is critical. Trusts for wealth and estate planning purposes are often intended to last for many years, over multiple generations.


– Cost. The cost of establishing and ongoing maintenance of the trust or other structure is a legitimate focus, of course, but in our view is not the primary driver. The other factors listed above are more important, and, the cost tends to be relatively similar across the board, with limited exceptions.


In our view, among the factors listed above, by far the most important factors to focus on are the legal environment and the quality of trust service providers. The legal environment is important because the objectives for the trust may be better served by the laws of one jurisdiction or another. The quality of trust service providers is important not only for the reasons summarized above but also because a good service provider brings with it its own standards and safeguards around privacy (and the IT infrastructure and culture of compliance that goes with that), often at a level higher than that required by local laws.


A good service provider will also attract qualified personnel, will be responsive, service-oriented, and will be helpful and capable whenever new demands arise.


If you have identified jurisdictions that are reputable, and which have a legal environment that supports your needs, and which have quality service providers available, you can consider some of the softer tie-breaker considerations, such as time zone for ease of communication, and physical accessibility in the event you wish to personally visit from time to time to meet your trustees or other providers.


During the planning phase, it can be useful to weigh the pros and cons of different jurisdictions for a number of reasons. Good planning sometimes entails utilizing a structure with elements in multiple jurisdictions (a private investment company owned by a trust, each in different jurisdictions, for example); and, it can be helpful to consider an alternate jurisdiction in case you wish to re-domicile your trust (most offshore trusts are portable from one jurisdiction to another, if the trust deed allows for it).


The above is not intended to be a definitive list, and specific factual context must always be taken into account. The factors set out above should usually present a reasonable starting point.


If you are considering an offshore trust structure or have questions about whether it may be suitable for you, or which jurisdiction may suit your needs, please contact us and we will be happy to help. ■




[1] Trusts created under the Virgin Islands Special Trust Act 2003 (as amended) (British Virgin Island)

[2] Trusts created under the Special Trusts (Alternative Regime) Law 1997 (Cayman Island)