- 'Offshore' And 'Illegal' Are Not Synonyms (Offshore Planning)

'Offshore' And 'Illegal' Are Not Synonyms

Subject: Offshore Planning
Number: 13-05
Date: 5/3/2013

as long as Canadian tax rules are followed

The media has created a great deal of confusion about the use of offshore trusts and offshore bank accounts by Canadians.

The key point, frequently missed by the media, is that it is not illegal for a Canadian taxpayer to set up an offshore trust or offshore investment company, or to open an offshore bank account. There is nothing illegal about having assets offshore and no reason why an honest Canadian taxpayer should worry, whatever the media may say.

Here are a few examples of possible reasons to do so:

An offshore trust may be set up for asset protection purposes – to keep assets away from future creditors.
An offshore bank account is often necessary when a Canadian is working in a foreign country with a “doubtful” local banking system. Cyprus is a current example. The Canadian banking system has limitations when dealing with other than the US and major European countries, so banking in a reliable offshore jurisdiction is often preferred by Canadians working overseas.
Canadians may wish to leave a legacy to someone, but do not want their family to know about it. An offshore trust may provide the solution.
An individual retiring in Canada may need a foreign bank account to receive a foreign pension. Some foreign pension authorities will require that pension payments be deposited in a local bank account.
A Canadian planning to retire outside Canada may start moving his or her assets out of Canada well before retiring. This may involve setting up foreign bank accounts, incorporating a foreign holding company and hiring foreign investment advisers.

These actions are perfectly legitimate, from a Canadian income tax standpoint, as long as Canadian tax rules are followed.

Canadians resident are taxable on worldwide income. Income earned by their offshore trust, investment company or bank account must either be reported annually as part of the Canadian’s worldwide income, or the trust must file a Canadian tax return and pay Canadian tax on its income.

Canadian taxpayers must report annually on their ownership of foreign assets (other than personal use assets) above a certain threshold. There is a specific question in the 2012 T1 tax return (and prior years): “Did you own or hold foreign property at any time in 2012 with a total cost of more than CAN$100,000”. Form 1135 must be filed if the answer is “yes”, and there are penalties for failure to file or for late filing.

The T1 return also includes the following statement:

“If you had dealings with a non-resident trust or corporation in 2012, see ‘Foreign income’ in the guide” because there are additional forms and disclosure requirements.

Canadian taxpayers who report foreign income and assets correctly on their T1 return and the other necessary forms have no reason to worry but can anticipate enquiries from the CRA.

Failure to report foreign income is tax evasion, which is a very serious matter. These situations can be corrected without risk of penalty or criminal charges by filing a voluntary disclosure (see Information Circular 00-1R3)

The so-called “leaks” of confidential banking and other information from foreign sources are very exciting for the media. The problem is that the media fails to report (or perhaps fails to understand) that there is nothing illegal in offshore activities if Canadians follow the law. The media seldom has information on whether a taxpayer has reported foreign income and assets to the Canada Revenue Agency, and so speculation may be reported as facts.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.