China-Canada Estate Planning: Obstacles & Opportunities

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China - Canada Connections: Estate Planning Obstacles & Opportunities

February 12, 2021

By Catherine D.A. Watson Coles, QC, Partner at McInnes Cooper

An ever increasing number of people originally from China now reside in Canada. It is more important than ever to recognize and understand the estate planning obstacles – and the estate planning opportunities – for people connected to both China and Canada. Examples of typical China – Canada connections include:

The Canadian resident owner of a company listed on the Shanghai and Hong Kong stock exchanges who still has family living in China, and also family living in the U.S.
A Canadian resident who came to Canada from China via the U.S. and still has significant personal assets and wealth in China.
A person residing in China whose children live in Canada.

Here’s a look at the key estate planning obstacles and estate planning opportunities for people with China – Canada connections.

Key Estate Planning Obstacles

Chinese citizens now living abroad typically encounter two very obvious estate planning obstacles:

Currency Control. China has complex laws and regulations for financial processes. The exchange and transfer of money in and out of China is only permitted in accordance with strict guidelines and rules. In part, these rules are designed to prevent large sums from leaving China. Such rules are promulgated by a myriad of Chinese regulators, including the People’s Bank of China, the Central Bank, the State Administration of Foreign Exchange, the National Development and Reform Commission, the Ministry of Commerce, and National Development and Reform Commission. Two key examples of such currency controls are the following:

Annual transfer and overseas withdrawal limits. There are limits on direct bank transfers and debit card withdrawals from foreign ATMs. Every Chinese citizen is subject to an annual foreign exchange limit. While there are ways to transfer money out of China in accordance with Chinese law, the steps are complex and the Chinese regulators must be engaged in the process of approving any such transfer. In the absence of such approval, exceeding the annual transfer limits and/or the overseas withdrawal limit can have significant punitive ramifications. For example, exceeding the overseas withdrawal limit can result in the suspension of all cash withdrawals for the current and subsequent fiscal years. There are various strategies Chinese citizens commonly use to overcome China’s stringent currency controls, and to extract money from China. These include using family and friends to multiply the annual withdrawal limit, and the use of online platforms such as a PayPal and Swapsy. These strategies are, of course, not approved by the Chinese government, and employing them involves risk that many would prefer not to take. As a result, these restrictions remain a high estate planning obstacle for those with significant assets still in China.
Prohibited Transactions. Certain outbound investments are prohibited altogether unless expressly approved by an appropriate regulator. Examples of such prohibited outbound investments include investments of US$10 billion or more if they fall outside a Chinese investor’s core business, investments by limited partnerships, and investments for quick-established-in-and-out transactions by companies with short corporate histories.

Stock exchange restrictions. China connected people are arguably more likely than others to own stock listed on one of the two Chinese stock exchanges, Shanghai or Shenzen. Both the Shanghai and Shenzen exchanges have strict foreign ownership restrictions. This means that when planning for the owner of shares listed on one or more of these exchanges, it’s advantageous to depart from typical Canadian planning and move into more customized solutions. For example, in typical domestic Canadian estate planning, a Canadian based family trust might assume ownership of the assets of the Settlor (the person who established the trust). There are various Canadian tax benefits associated with this sort of structuring. However, when the assets include shares held on either of the Chinese stock exchanges, this structuring does not work because of the strict foreign ownership restrictions associated with those exchanges. For this reason, customized and bespoke solutions are more effective for China – Canada connected people in these circumstances.

Key Estate Planning Opportunities

There are also unique estate planning opportunities for people with China – Canada connections.

Trust Planning. Canada has a strong and well developed trust law framework, and hundreds of years of experience and judicial consideration related to trusts. This is in contrast to China’s much more recent adoption of the trust concepts and ongoing development of its fledgling trust industry. Once the China – Canada connected person is resident in Canada, their planning will be based on Canadian planning concepts, with their various international connections (assets, business interests, and family members) taken into account and planned for accordingly. A Canadian resident Chinese person therefore has far greater access to Canadian planning tools, including trusts, to meet their planning needs. Trusts offer a variety of useful estate planning solutions and provide a number of benefits, including the ability to: divide the tax liability on income earned in the trust among family members; control an adult beneficiary’s use of inheritance; protect inheritance from creditors or from a marital breakdown of the beneficiary; and deal with challenging family circumstances, such as a disabled or spendthrift beneficiary.

International Planning. When individuals have connections to more than one country, money will often cross international borders, either during the individual’s lifetime or upon their death. When money crosses international borders, estate planning and tax planning opportunities arise. In circumstances where either a significant amount of money will come into Canada, or a significant amount of money will go out of Canada, there are tax planning opportunities that often greatly benefit the individual and their family. In these situations, structuring a trust in a more tax preferred jurisdiction could be of benefit to the family. There may be additional international tax planning opportunities for people with China – Canada connections; a tailored plan to meet individual needs is typically the most effective approach.

Please contact your McInnes Cooper lawyer or any member of our Estates & Trusts Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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