Twice in the last week I've heard radio reports on financial issues dealing with offshore accounts and "hiding" money from the tax man.
As usual with financial matters on the radio, the summary was quite misleading, reminding me it's good to periodically review the rules to keep everyone on track.
So, today we will talk about Canadian rules on tax residency, what may really be going on with foreign bank and investment accounts, and the steps you need to take to legally pay no more Canadian tax.
First, let's review who has to pay taxes in Canada. Anyone who is a resident of Canada for tax purposes must pay tax on his or her worldwide income.
So, citizenship does not matter, and location of the income does not matter. Canadian residents pay tax in Canada, whether they are Canadian or U.S. citizens, or citizens of another country.
Further, all Canadian residents must pay taxes on all of their investment income earned, whether it is paid to them by the corner bank branch, earned through dividends on U.S. stocks, rent from foreign real estate properties, or on investment income earned on their secret bank account in the Cayman Islands. (Don't be paranoid here; I'm not singling anyone out.)
There are lots of reasons to have offshore accounts, but legally avoiding tax is not one of them.
Those rules are straightforward and black and white. People who do not disclose all of their interest, dividends, capital gains, rental or business income earned offshore are illegally avoiding Canadian taxes.
So why are there foreign bank and investment accounts? Sometimes it's as simple as a person wanting to have money where they spend their winter vacation, or they may have sold a business or a property in that location and decided to leave the money there.
Some people want to hide their money from creditors, ex-spouses or business partners. (Even that is getting harder. In the last four months, banks in Luxembourg, Cayman Islands, the British Virgin Islands, Bermuda, Jersey, Guernsey and the Isle of Man have all agreed to share information with governments in some manner.)
Other people have legitimately established businesses in so-called tax havens -- countries with little or no tax on business income -- so that they can report the profit on their businesses in that jurisdiction. There are complex rules for reporting and compliance but which, if followed, can result in significant tax savings.
However, just to show you that I'm not as naïve as I sound, I also realize that some people have placed large amounts of capital into investment accounts in countries with bank secrecy laws in the hopes of avoiding tax on investment income earned. However, by doing so, they break the law.
Canada's voluntary self-disclosure system requires every taxpayer to fess up about any foreign "property" with an original cost in excess of $100,000, and to provide details. This is a separate (and fairly recent) disclosure requirement from the one we mentioned earlier, which is the requirement to disclose all investment income earned on these accounts or properties, no matter what the value.
So how do you legally stop paying Canadian taxes?
Any Canadian taxpayer can do this, simply by permanently leaving Canada and becoming a "non-resident" of Canada for tax purposes. This requires severing residential ties. This does not mean becoming a Snowbird or traveling the world and returning to your house in Canada.
If there is a future dispute, which can often happen on a person's return to Canada in the future, CRA will look at a list of things as evidence of the original intent. These would include cancelling driver's licences, club memberships, selling properties and personal goods, closing bank and investment accounts, and all of the things that would prove that your intent was to leave permanently.
This is obviously not a step to take lightly. However, it's one more advantage we have over Americans. A U.S. citizen can never stop filing U.S. tax returns or avoid paying any taxes owing, no matter where they move in the world.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, advisor and Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.