High-Tax Country Resident Planning To Stay Put: Canada

The Canada Revenue Agency has done quite a thorough job of catching the income or capital gains from just about every kind of offshore or foreign investment that Canadian residents can get involved in. Taxes are either applied as gains are made, or they are applied when an investment is realised, with taxes being calculated back over the period of the investment and compounded forward to the time of payment.

Almost all foreign source income held in straightforward individual ownership is taxed under the FAPI rules (Foreign Accrual Property Income), and it is normal for income to be taxed as it arises and not when distributed. It's evident that any increased returns that may be possible from offshore investments may be eaten away by greater costs of capital, and possibly by higher tax rates. Canadians have to be very careful before making offshore investments.

Although Canadian citizens may still choose to set up offshore trusts, the rationale will be asset protection rather than tax minimisation. Trusts are caught by the legislation as much as other types of investment structure, and should be considered as tax-neutral at best.

As far as investment income is concerned, international tax planning for Canadian residents is therefore concerned with providing investment structures which are fiscally transparent, so that the gains from higher-yielding international or offshore investments can be taxed in the investor's hands on the same basis as domestic investments. Other than for mutual fund investments, this usually means employing limited partnership or limited liability company structures, which are provided by many offshore jurisdictions, which are usually un-taxed in the offshore jurisdiction, and which are treated as fiscally transparent by the Inland Revenue.

Offshore trusts are not much use for permanent Canadian residents, except as an inheritance tax planning tool when the benefactor is non-resident. The offshore benefactor sets up a trust in a tax haven for a Canadian beneficiary. The income of the offshore trust can accumulate on a tax-free basis and the capital can be remitted to the beneficiary without tax liability. First you need a rich, overseas relative.

Individuals who have significant 'active' business income may be able to make use of offshore corporate tax shelters.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 of the most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.