For many wealthy Canadians, borders are meaningless as their interests and investments span many countries.
If you are considering investing in opportunities abroad but are still determining the risks associated with such investments and the Canadian tax laws governing it you have come to the right place to get the answers you need.
What Are Offshore Investments & Why Are They Appealing For Canadians?
An offshore investment is when an individual invests money in a country or region where they aren’t considered a resident.
While the media has always demonized offshore investments as being the tool of choice for tax-evading individuals this is far from the truth.
Offshore investments are perfectly legal as long as the income generated from those investments is reported to the Canadian Revenue Agency (CRA) for tax purposes.
In fact, for many wealthy Canadian families offshore investing can provide a multitude of benefits to help them address their often-complex financial needs and the primary reason for offshore investments is risk diversification, not tax evasion.
While offshore investments do provide certain tax benefits, they also help in diversifying investment portfolios and offering privacy and asset protection.
This makes this type of investment ideal for Canadians who are:
- Moving to another country either permanently or for the long run
- Looking to expand and diversify their existing portfolio
- Improving tax efficiency and tax planning
Pros & Cons of Offshore Investments
There are many reasons why wealthy Canadian families and high-net-worth individuals invest offshore. These reasons can include:
Tax Benefits
There are several countries and regions around the world that are considered tax havens for investors. Countries like the Cayman Islands, Monaco, The Bahamas, and more, actively incentivize foreign investors by offering much lower and favorable tax rates. These countries heavily depend upon foreign investment to increase economic activity and have attractive foreign investment policies to continually bring in foreign wealth.
With Canada having such a high tax rate, offshore investments, and their associated tax benefits can help shield income from being heavily taxed allowing individuals to keep a larger chunk of their hard-earned money.
Asset Protection & Privacy
Setting up an offshore corporation, trust, or foundation is an effective means of protecting assets from creditors, lawsuits, and foreclosing lenders. By restructuring the ownership of assets and making on-paper ownership transfers, wealthy Canadians can safeguard themselves from domestic disputes and seizures.
Countries that are tax havens also have strict laws regarding banking confidentiality and while this secrecy is what often gives offshore investments a bad rep, the high level of secrecy can be highly advantageous for deep-pocketed investors who don’t want others to know what stocks they may be investing in.
It is important to note, that if your country of residence feels that you may be involved in criminal activity, any foreign country will allow for identity disclosure.
So, despite what you hear in the media, having shell corporations in foreign countries isn’t about hiding illegal money or evading taxes, but rather these corporations are used to provide several strategic advantages to investors who want to keep things discreet and away from domestic complications.
Portfolio Diversification
Having an offshore account can also provide investors with unlimited access to invest in all types of international markets and take advantage of all the major stock exchanges.
In countries like Canada, certain regulations restrict how much international investment can be made by a Canadian citizen. By having an offshore account wealthy Canadians are no longer restricted by these regulations and can take advantage of opportunities all across the globe.
Cost & Regulatory Scrutiny
While there are plenty of advantages to offshore investments there are also some drawbacks. Offshore investments have come under heavy scrutiny in recent years, with new regulations closing down on many of the existing tax loopholes.
Opening up an offshore corporation or an offshore account also has a sizable cost attached to it. Individuals can incur legal fees, registration fees, and may even need to buy property or invest a sizable sum of money in assets in the foreign country they plan on operating in.
Canadian Tax Laws Governing Offshore Income
According to the Canadian Income Tax Act, Canadian citizens are required by law to pay income tax on their worldwide incomes, not just what they have earned in Canada. Citizens are no longer allowed to avoid paying taxes by transferring their tax liability to a foreign country and have to report any offshore assets over $100,000 on their T1135 tax form.
Citizens are also required to report and pay taxes on any offshore capital gains, which can include the selling of real estate, stocks, and other assets. Canadians who own property in the United States will be subject to paying U.S. estate tax for the property when they die.
Even off-shore corporations may be subject to Canadian tax laws, especially if their management and/or higher operations are being conducted in Canada.
The Tax Implications of Unreported Offshore Assets
Failure to report offshore income and investment gains can result in a legal battle between you and the CRA. If you are found to be intentionally hiding offshore assets and investments and not reporting them you could face extensive penalties, fines, and even jail time.
Achieving Tax Efficiency With Offshore Investments With Eastport Financial Inc.
While offshore investments can provide strategic advantages for wealthy Canadians, it is essential that the reporting of offshore income is done in compliance with the Canadian Income Tax Act.
The best way to ensure ongoing compliance is to consult with a tax lawyer and/or financial advisor who can help guide you on the rules and regulations governing foreign income for your financial situation.
Nova Scotian investors seeking to set up an offshore corporation or offshore accounts for investment purposes should seek to consult with an investment management firm in Halifax such as Eastport Financial Inc.
With decades of experience and a long list of satisfied clients, we aim to provide a holistic and collaborative approach to helping you achieve your financial goals.
To speak to one of our advisors call us at 902-474-5433 or email us at info@eastportfinancial.com.
