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Off-Shore Trusts

Off-shore trusts have become very popular in the last 5 years largely due to the tax minimization opportunities. The basic structure comprises of setting up a trust in an offshore country (Turks & Caicos, Bahamas & Costa Rico) which is usually exempt from the tax treaties associated with Canada. Since there is no income tax payable, your investments will grow at a faster rate.

The government of Canada is cracking down on this loophole and have imposed some heavy penalties on Canadian residents failing to report their offshore income. However, even they will admit of their inability to track down those investors who opt not to report their offshore holdings upon filing their tax returns. Due to the complexities associated with the accounting and legal perspectives of these plans, you should always consult with your professional advisors.

The 5 Myths
  1. Investing offshore is for the super-rich only. Not so. Offshore investing can be as simple as a bank account in another country.
  2. Money invested in a tax haven always grows tax-free. Not true. You may not pay tax in the foreign jurisdiction, but Revenue Canada wants a share of your worldwide income.
  3. Canadians place investments offshore primarily to avoid tax. While this may have been true in the past, the rules are much tighter now. Tax avoidance is extremely difficult without bordering on tax evasion. If youíve got a strong stomach and an aggressive streak, youíll no doubt find structures to suit your goals.
  4. What Revenue Canada doesnít know wonít hurt me. Bad philosophy. Stick to the premise that Revenue Canada knows what youíre up to. With recent changes to offshore investing rules and 75 auditors on the offshore trail, itís becoming more difficult to side-step the taxman, and the penalties for evading tax are very steep.
  5. Giving up Canadian residency is an easy thing to do. If you give up residency properly, youíll manage to avoid tax in Canada, but thereís more to it than you think.
    Simply moving to another country is not enough. Visit a tax pro to talk over the residency issue if youíre thinking of leaving.
The 3 Risks

Investment Risk: Investing offshore carries the same risk as investing onshore Ė you may lose some or all of your capital. Unlike onshore investing, you may find it harder to evaluate investment choices because of your lack of familiarity with international investment opportunities. Itís critical to find an investment advisor or fund company offshore that you can trust.

Currency Risk: Sorry, but you want Canadian dollars as the currency of choice when investing offshore. The U.S. dollar is most common. As a result, youíll be exposed to additional risk to the extent the Canadian dollar appreciates in value relative to the currency in which youíve invested.

Tax Risk: As a Canadian resident, donít forget that youíre required to report your worldwide income from all sources. If you fail to do this, or where you choose a structure that violates the intention or spirit of our tax law, you could face a battle with Revenue Canada.