Financial strategies for new Canadians

Arule of thumb for retirement planning is to start making tax-sheltered or tax-deferred investments early in life so your money has lots of time to grow. It's good advice, but what if you've just moved to Canada and have to figure out what to do with an existing nest egg?

Canada has developed a financial system for wealthy new Canadians that is good for the country as well for immigrants, according to Steve Harding, senior manager of international services for RBC International Wealth Management.

Canada allows people coming to this country to shelter their financial assets tax-free for up to five years in an "immigration trust," for example. Newcomers begin to pay tax on investment income only after five years.

The advantage of this for immigrants with significant assets (at least $2 million, in Harding's estimation) is that they can avoid Canadian tax while their savings get some time to grow. "That's a big gain for some of them," said Harding.

The system also helps Canada attract wealthy immigrants who open businesses and otherwise invest in the country, Harding said. The five-year tax buffer allows immigrants to feel more secure about the decision to leave their home country and makes them more likely to take that leap.

"It is quite smart for Canada to let these people set up trusts," Harding said.

Hong Kong redux

Take the exodus of wealthy people from Hong Kong prior to the return of the British colony to China in 1999. In the years leading up to the handover, many nervous residents fleeing the city-state came to Canada.

After China took over, however, very little changed for those who remained, which made the new Canadians confident they would be fairly treated if they returned, Harding said. "And a lot of people went back."

Canadian rules let these people maintain their investments here without penalty while they decided whether or not to stay in this country. So, in effect, Canada attracted more Chinese immigrants during this period than otherwise would have been the case, Harding said.

Contrast that with places such as Australia, "where they have quite draconian rules," he said. As a result, Canada has developed a good reputation as a destination for wealthier individuals looking to move.

Size matters

Unfortunately, immigration trusts are not really an option for many newcomers, Harding said. They're of most benefit to people who already have substantial savings.

Immigration trusts are of most benefit to people who already have substantial savings.

Immigrants planning to come to Canada need approximately $2 million in financial assets to make a trust worthwhile, he estimated.

That is the level at which a trust makes economic sense, Harding said, because establishing such a savings vehicle generally costs in the range of $75,000 in legal and financial fees.

A trust of about $2 million will generate approximately $150,000 in tax savings, for example, according to Harding's calculations. Considering that $75,000 of the tax gain will go to lawyers and investment advisers, the holder of the trust will save the remaining $75,000, a return of 3.75 per cent.

Some critics have griped that immigration trusts give newcomers a tax break not available to other Canadians.

The counter-argument is that most new Canadians only get to be full citizens of the country after a lengthy immigration process.

During that period, it hardly seems fair to fully tax people who do not enjoy the benefits of citizenship, Harding said.

Other financial devices

Besides the immigration trust, foreign professionals and executives who are in Canada temporarily can use the country's existing registered retirement savings program, Harding said.

The program allows temporary residents to accumulate money on a tax-free basis, just as Canadian residents can.

If those people return to their home country, they can collapse the financial savings account and avoid Canadian tax, Harding said.

But, watch out, he warned. Some countries have more onerous tax regimes than does Canada. Thus, the individual could wind up paying more tax in their home country than if they had kept the money outside a Canadian RRSP in the first place, Harding said.

The same analysis is true of a tax-free savings account, Harding noted.

Temporary residents can avoid Canadian tax on the income generated within the account, but they could face a large tax bill in their home country, depending upon the provisions of the existing tax treaty between Canada and that country, he said.

"You need to be careful of the rules of the country where you live," he said.

Be honest

Since some immigrants are coming from countries with less efficient financial systems than Canada's, there might be a temptation to hide income by not declaring all of one's assets, Harding said.

Indeed, he once discovered that a client who was dying had not declared a big chunk of income, a move that would have caused his heirs untold trouble with Canadian and U.S. tax authorities, Harding said.

In this case, the RBC manger was able to extract his client from his tax difficulties, he said. "But, I have seen some horror stories."

In fact, Harding said he will not take clients who refuse to declare all their assets.