What in the world is offshore investing?
Part 1 of a three-part series
by Tim Cestnick
It's no secret that the minister of finance and his department are on a mission, along with the Canada Customs and Revenue Agency (CCRA), to change the way Canadians think about and utilize offshore investments.
It would take two hands and a foot for me to count the legislative changes dealing with offshore issues introduced by the Department of Finance in the last few years, about four days for me to explain to you these changes in detail, and all of three minutes for you to fall asleep during the ordeal.
While it's important to understand some of the recent tax changes that will affect any decision to invest offshore, I think it's important first of all to define what offshore investing is.
Offshore investing defined
Offshore investing can take on any number of forms. It can be as simple as opening a bank account in the United States, or any other locale outside of Canada for that matter.
In a nutshell, offshore investing can be thought of as purchasing or placing some of your investable assets in a location outside of Canada. If you've already done this, then I'll refer to you as an "offshore global investor."
Being an offshore global investor is a whole lot different than being an "onshore global investor." While an onshore global investor has an international perspective, he or she simply uses onshore institutions, like Canadian mutual fund companies, to invest money abroad. In that case, it's the mutual fund company that goes offshore on behalf of the investor.
Reasons to invest offshore
In fact, there are five common reasons why Canadians who have gone offshore with their investments have taken this leap.
Tax avoidance
Let's not beat around the bush. Thousands of Canadians have moved some of their hard-earned dollars to offshore accounts in one manner or another, all in the name of avoiding the long arm of CCRA. It's the mystique behind this endeavor that has attracted so many Canadians to at least wonder about offshore investing, and whether it might be possible for them.
Asset protection
Many Canadians are concerned with protecting accumulated wealth from future, unknown creditors. After all, malpractice actions, claims against corporate officers and directors, environmental liability and divorce settlements are all too common today.
Asset protection trusts, when properly structured offshore, can offer protection by making it more difficult for a creditor to reach the assets while providing the settlor a greater degree of control over the assets than is otherwise available with a domestic trust.
Privacy and confidentiality
I was taken aback recently when I glimpsed just how much the government knows about me. I was renewing my driver's licence at a computerized terminal, not unlike a banking machine, and after I hit a few buttons, the machine spit out a new licence - complete, to my surprise, with my picture and signature.
It was all on file. So much for privacy in Canada.
Offshore investors understand that some jurisdictions have very strict secrecy laws that will prevent institutions that you deal with from divulging information about you. Who wouldn't appreciate this privacy?
Access to global markets
No doubt, you've heard it before: Canada represents about three per cent of markets worldwide - that's all. So, this leaves 97 per cent of all worldwide investment choices available only to those who look outside Canada's borders.
The fact is many of the best investment funds and other securities cannot even be purchased through accounts in this country. An offshore investment account could open a whole new world of investment opportunities.
Estate planning
One of the problems with dying, besides the obvious, is the appearance of the tax collector and the undertaker at your door at the same time.
You will be deemed to have disposed of all property that you own at the time of death, at fair market value immediately before death. This could trigger a tax hit.
In addition, you may have probate fees to pay, where your province levies this "tax." And don't be surprised if, one day in the future, our Department of Finance decides to reintroduce an estate tax in Canada. An offshore trust could reduce taxes and probate fees on death by taking those assets out of your hands during your lifetime.
Offshore investing can include owning real estate or other investments located outside our country. At the extreme, offshore investing can include giving up Canadian residency and moving yourself, your family and your investments to another country.
Next topic: Who benefits from offshore investing?
This article first appeared on Quicken.ca on November 06, 2001
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game, Winning the Estate Planning Game and Winning the Education Savings Game. He is Managing Director, Tax Smart Services, at AIC Limited. He can be reached at tcestnick@aicfunds.com. |
