Offshore tax havens: Myth vs. reality

The search for ways to minimize the tax man's bite and maximize refunds at this time of year can lead to curiosity about tax havens. Offshore accounts are legal, but their usefulness as shelters is mainly shrouded in myth — for the majority of Canadian taxpayers, at least.

Andrew Rogerson believes people have a somewhat romanticized, but outdated, perception of tax havens. "A lot of this stuff is sensationalized," says the Toronto-based lawyer who specializes in offshore trusts.

"The public perception of tax havens, I think, is more or less from John Grisham novels – the Cayman Islands and that sort of thing."

He goes on to note there is "no law against having an offshore bank account. There's nothing sinful in it."  

The sin, however, is if the account is used to evade paying taxes.  

The Canada Revenue Agency addresses the issue on its website in a document titled Using Tax Havens to Avoid Paying Taxes: Worth the Risk? 

The answer, predictably, is No. The report makes it clear that using offshore financial institutions for the express purpose of not reporting taxable income is against Canadian law.  

As the CRA defines it, a tax haven is an institution or a country that has no tax or very low rates of taxation, strict bank secrecy provisions, a lack of transparency in the operation of its tax system, and a lack of effective exchange of information with other countries.  

"There are legitimate reasons why a tax haven might be used and tax administrators have no view on where Canadians invest as long as they comply with Canada's tax laws," the report states. "What the CRA is concerned about are investments, transactions and schemes that use tax-haven countries to reduce, avoid or evade Canadian tax."

The legitimate reasons

The legitimate reasons for employing a tax haven include setting up immigration trusts offshore for non-residents moving to Canada.

These trusts, designed to attract senior executives and shelter their investment while they are in Canada, give immigrants a five-year tax exemption on that income.  

An inheritance trust can also be set up offshore for those Canadians whose parents never lived in Canada or made their money here. It is designed to ensure the beneficiaries will not have to pay tax on their inheritance, since the money was accumulated somewhere else.  

Rogerson said the most important and popular use of tax havens, or offshore financial centres as they are now commonly called, is asset protection.  

The rules pertaining to an offshore account make it easier to "avoid people who might be tempted to take money off you in frivolous court cases or divorce settlements," Rogerson said.

These so-called debtor-friendly jurisdictions shorten the period of time in which a creditor can bring proceedings against the establishment of the trust.

Tougher rules now

In 2010, a joint investigation by the CBC and The Globe and Mail found more than 1,700 Canadians may be using Swiss bank accounts to conceal taxable income. But using tax havens just to avoid paying tax is becoming much more difficult for Canadians.

In the past, people were drawn to these offshore accounts in places such as Switzerland and Liechtenstein because of the financial secrecy promised. These countries did not have banking treaties with places like Canada that would require the release of private banking information.  

Today, as a result of the international crackdown on terror groups and the drug trade, many institutions have adopted "know your client" rules, which include background checks and information on the source of funds.  

"Someone walking in with a briefcase now, they're not even going to get to square one," says Toronto-based tax lawyer Mary Anne Bueshchkins. "No one would accept that kind of client because there are so many regulations that are necessary."  

The international pressure on tax havens started following the Sept. 11, 2001 attacks. Many jurisdictions, including Canada, began focusing on the international movement of money for terrorist activities and money laundering.  

The Liechtenstein tax evasion scandal in 2008 also brought renewed scrutiny of tax havens. The scandal came to light when a former employee of the Liechtenstein bank LGT Group stole four computer discs filled with secret information on clients from around the world and sold them to German tax authorities.

The Germans were hoping to crack down on German tax evaders and ended up sharing the information with other countries, including Canada where the CRA launched what it called Project Jade. The investigation involved 106 Canadians and is ultimately expected to bring in $20 million in back taxes and penalties.

Also, in 2009, Swiss banking giant UBS formally accepted responsibility for helping Americans hide assets from the U.S. government and agreed to pay $780 million US in fines and restitution.

Tax lawyer Robert Kepes said that, with the recent crackdowns, it's becoming more difficult, particularly in Switzerland, for Canadians and Americans, to open accounts.  

"A lot of them, even if you have a Canadians passport, they won't open an account for you. It's actually becoming much harder to open these foreign accounts," Kepes said.  

"Even the U.S. banks are making it [harder]. I think they just don't want the regulators to come and accuse them of money laundering."