HALIFAX ESTATE PLANNING COUNCIL OFFSHORE TRUSTS WHAT STILL WORKS ? October 15, 2007

1. HALIFAX ESTATE PLANNING COUNCIL OFFSHORE TRUSTS WHAT STILL WORKS ? October 15, 2007 Pierre J. Dansereau, LL.L., MBA, TEP Royal Bank of Canada Global Private Banking Senior Manager, International Services

2. Agenda • Trusts for asset protection • The tax rules dealing with non resident trusts • Review of planning in a Canadian context • Review of planning in a U.S. context

3. What is an Asset Protection Trust ? Definition : Special type of trust mainly designed to offer safety for assets transferred and their protection against creditors of the settlor or of the beneficiaries. In a sense, all trusts are asset protection trusts. Many jurisdictions offer trusts but only a few of them have instituted laws specifically dealing with asset protection, namely Bahamas, Barbados, Cayman Islands. Why offshore ? • Debtor-favorable foreign laws • Domestic laws do not apply • Definition of fraudulent conveyance may be different • Absence of a mutual assistance treaty (or limited) • Representation in a foreign court • Property of assets held offshore • Certainty that settlor can be a beneficiary • Probably tax-neutral

4. Preserving One’s Estate Using An International Trust Where should the assets be located ? • Canadian real estate ? • Shares in a private Canadian company ? • Investment accounts in Canada ? • In the US ? “Such a trust would be most effective if the situs of the trust property is outside Canada and at least one of the trustees was resident in the jurisdiction where the trust is formed. If the assets remain in Canada, there is a concern that a Canadian court would permit the execution of a judgment against the offshore trust notwithstanding its jurisdiction.” Jack Bernstein, Aird & Berlis

5. Preserving One’s Estate Using An International Trust • Why do they work ? • The creditor must win a judgment in Canada • The creditor must sue in the trust’s jurisdiction and hire a local lawyer • The onshore creditor must usually post a bond • Contingency fees are illegal • The lawsuit must be admissible under local laws • The creditor may have to re-litigate the whole matter • The creditor must prove the asset transfer was made with the intent to defraud creditors • Immediate protection if solvent when the transfer was made • Protection after 2 years (Bahamas) if transfer rendered insolvent and no offshore lawsuit to quash the transfer • Each creditor must sue individually (no class action) • Possibility of “moving” the trust *** Beware of third party liability

6. The Old Non-Resident Trust Rules • Old section 94 deemed an otherwise NRT to be resident in Canada for tax purposes if: • The trust received a transfer from a Canadian resident AND • The trust provides for a Canadian resident beneficiary related to the contributor • Department of Finance’s focus was clearly on the residency of the beneficiary(ies)

7. The New Non-Resident Trust Rules • New proposed section 94 deems a NRT to be resident in Canada if, at year end: • There is a resident contributor OR • There is a resident beneficiary • Department of Finance’s focus now shifted to residency of the contributor • Excludes exempt foreign trusts • Very limited grandfathering

8. Definitions RESIDENT CONTRIBUTOR : Canadian resident for 5 years or more + contributor to the trust RESIDENT BENEFICIARY : Beneficiary resident in Canada whose interest is not contingent on the death of a person related to the contributor and there is a connected contributor CONNECTED CONTRIBUTOR : Contributor other than a person who: - Has not resided in Canada more than 5 years during his lifetime OR - Has resided in Canada more than 5 years during his lifetime and the contribution occurred more than 5 years (18 months in the case of a testamentary trust) after becoming a non-resident and more that 5 years before becoming again a resident of Canada CONTRIBUTION : at any time, transfer or loan of an asset without an arm's length indicator

9. The Foreign Trust will be Deemed Resident if… There is a resident contributor There is a resident beneficiary At the end of the trust tax year, a person resident in Canada and has resided here more than 60 months in total At the end of the trust tax year, a beneficiary resident in Canada whose beneficial interest is not contingent on the death of a person related to a contributor when there is a connected contributor (a contributor who resided in Canada more than 5 years during his lifetime and who was resident at any time in the 5 years preceding and 5 years after the date of contribution (10 year minimum timeframe)

10. What tax planning is left for international trusts ?

11. Canadian Based Planning

12. $$$ International Trust Non resident parents tax benefit International Border Canadian Children Canadian Inbound Planning • income/gains not taxed in Canada • undistributed income added to capital • no "resident contributor" • no "resident beneficiary" Rest of World • discretionary distributions of capital can be made tax-free to beneficiaries $$$ Canada

13. $$$ • income/gains not taxed for 60 months • undistributed income added to capital • no "resident contributor or "resident • beneficiary" for the first 60 months International Trust Immigrating client tax benefit • discretionary distributions of capital can be made to the beneficiaries International Border $$$ Canadian Family Immigrating client Canadian Immigrant Planning Rest of World Canada

14. International Trust $$$ tax benefit International Border $$$ Non-Canadian Family Canadian Outbound Planning Rest of World • trust deemed resident of Canada (Canadian contributor) • distributions of income and capital gains to non-resident beneficiaries are not entirely deductible so trust pays tax in lieu of withholding tax • deemed disposition of trust assets when Canadian contributor dies if there are no Canadian resident beneficiaries; trust is then tax-free • tax in country of residence of beneficiaries ? Canada

15. tax benefit $$$ International Trust Non resident parents $$$ Canadian Children Emigrating parents Canadian Emigrant Planning • If trust funded less than 5 years after leaving, trust deemed resident if a beneficiary resides in Canada (unless a “successor beneficiary”) • otherwise, income/gains not taxed in Canada • because there is no "resident contributor" or • "resident beneficiary" • undistributed income added to capital • capital distributions made tax free • Tax to the non-resident settlors ? Rest of World International Border Canada

16. Tax Planning - Dead

17. Tax Planning - Alive

18. Tax Planning - Breathing

19. Other Structures • Newfangled estate freezes • Foreign life insurance ? • Foreign funds ? • Foreign private banks ? • Foreign foundations/establishments ? • Foreign structures unknown in Canadian law ? • Disclosure • FAPI and foreign affiliate regimes • Proposed FIE rules • If not conservative, make sure risk fits client's tolerance

20. U.S. Based Planning

21. U.S. Based Planning Concerns • High income tax rates but lower than Canada • Variable state, county, city taxes • Gift, inheritance and Generation-Skipping Transfer Taxes • Danger that client could at some point be subject to U.S. taxation as any U.S. domiciliary • Imperfect integration with Canadian tax system (recent Protocol alleviates some problems) • Trusts taxed quite differently • Grantor trust -vs- non-grator trust • US trust -vs- foreign trust • Complete gift -vs- incomplete gift trust

22. $$$ International Trust Immigrating client Immigrating client International Border U.S. Long-Term Immigrant Planning • Avoids U.S. Gift and Estate Tax, GST • Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person • No income tax benefit Rest of World including Canada $$$ U.S.

23. $$$ Variable Universal Life Policy Immigrating client Immigrating client tax benefit • Universal Life: accumulation tax-free, borrowing tax-free, proceeds tax-free International Border U.S. Long-Term Immigrant Planning International Trust • Avoids U.S. Gift and Estate Tax, GST • Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person Rest of World including Canada $$$ U.S.

24. $$$ Deferred Annuity Client Leaving for U.S. International Border Temporary U.S. Resident U.S. Temporary Residence Planning International Trust • Avoids U.S. Gift and Estate Tax, GST • Transparent for U.S. Tax purposes unless funded more than 5 years before becoming U.S. person • have trust invest in deferred annuity: tax-free accumulation while in the U.S., no exit tax when leaving, cash in once out of U.S. tax net Rest of World including Canada U.S.

25. $$$ 3 pecuniary distributions to specified beneficiaries or distributee trusts International Trust • annual income not taxed in U.S. • pecuniary distributions made tax free • excess income taxable when distributed Non resident parents International Border $$$ American Children U.S. Inbound Planning Rest of World U.S.

26. Thank You !

27. RBC Contacts Mr. Pierre J. Dansereau Senior Manager, Int’l Services RBC Global Private Banking 1, Place Ville-Marie 6th Floor, East Wing Montreal, Quebec H3B 1Z5 Tel.: 514-874-7731 FAX: 514:874-6954 E-mail: pierre.dansereau@rbc.com www.rbcprivatebanking.com RBC Private Bankers (Atlantic) Ms. Peggy Gates-Hammond 902-421-4966 peggy.gates-hammond@rbc.com Ms. Heidi Hogan 902-421-4143 heidi.hogan@rbc.com Mr. Sylvain Levasseur 506-870-3723 sylvain.levasseur@rbc.com Ms. Lynne Simmons 902-421-4034 lynne.simmons@rbc.com

28. This presentation does not represent or replace a comprehensive financial plan or represent any type of financial planning service. The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness. This presentation is not intended as nor does it constitute legal or tax advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that your own circumstances have been considered properly, and that action is taken on the latest available information. Interest rates, market conditions, tax rules and other investment factors are subject to change.