Types of Tax Haven Arrangements and Offshore Tax Planning Misconceptions

The number of tax haven countries and territories that are available in the world is on the decline as more and more countries are signing international treaties that will allow them to share the financial information between them and this will bring transparency to the financial transactions that are done across the globe. In general, using such countries and territories was considered as an offshore planning exercise by many, but the fact is that it not regular tax planning but an aggressive one and will be considered to be a form of tax evasion.

Tax Haven Arrangements

There are different arrangements that are possible when it comes to the use of such havens and some of them are being reviewed by the Canadian Revenue Agency.

• Tax Shelters – This is a sort of a gifting arrangement or acquiring a property where the tax benefits that are available to you will be equal to or more than the cost that you have had to spend for it.

• Offshore Investment Entities – These are companies that are located in tax haven countries and are used to reroute the investments and it is done to delay the taxation that one will have to pay for the income that is earned from these investments. It is wrongly attributed to offshore tax planning and is in fact a type of aggressive planning.

• Welfare And Health Trusts – There are payments that are made to trusts in safe haven countries and are reported to the tax authorities as payments made for employee health plans for tax deductions.

• Spousal Trusts – To avoid capital gains that are made from the sale of shares of any Canadian business, taxpayers will resort to the emigration of trusts or use of trusts in safe haven countries.

• Arranged Loss Trading Schemes – Capital gains that are gained when dealing with agents or brokers who are in the haven countries are not reported, but if there are any capital losses, they report to the CRA. This is to help to save tax by showing losses incurred during the year.

Offshore Tax Planning Misconceptions

There is a basic thought among tax payers that using tax haven countries is a form of offshore tax planning and that they will be able to project them offshore investments if they are brought up by the tax authorities. The fact is that international tax planning is very complex in nature as it will involve a lot of procedures and approvals to be put in place in a legitimate way and it is definitely not in any way related to the countries that provide a haven for people who are looking to save tax in an illegal way. Offshore tax planning is considered to be a legitimate way to enhance your business and personal assets while ensuring safety of the assets.

Offshore Tax Planning Methods

There are many different options available to people who are looking at offshore investments to help them reduce the tax that they will have to pay in a country. But one as to ensure that only legitimate route are chosen as there are many illegitimate activities that can be done when we consider offshore tax planning. It is also known as international tax planning as you take your funds to an international location to operate a business or to invest in an existing business.

Characteristics of An Offshore Trust

Many are not aware of what is an offshore trust. The definition in the modern sense does not differ much from the traditional concept. However, today it is held at an offshore financial instruction. The offshore trust functions like a normal tourist. The offshore assets are protected which is a great advantage of having an offshore trust. It is formed through an arrangement that is entered into by a person or a group that is referred to as a trustee. The trustee and the settler come into an agreement. The settler is a group of people or a distinct person. The provisions are made in the form of a legal agreement. It is known as a deed of trust that is formed between the trustee and the settler.

Why form A Trust Fund?

Why an offshore trust formed and what are the benefits? Overseas trusts are formed due to the distinct asset protection that is provided. One can hold assets as well as funds and property and these assets are then managed in accordance with the rules laid down in the deed of trust. There are offshore tax benefits that one can avail of as well which are preferred to the taxes residing in one’s country. The distribution of the funds or the benefits of the assets among the group of persons who are known as beneficiaries of the trust fund is also dictated by the deed of trust.

Characteristics of Overseas Trusts

Thus, when you are talking of offshore trusts the following characteristics are highlighted:

• One will get additional benefits in terms of offshore asset protection than what is available onshore

• The tax benefits are better in case of an offshore trust as compared to onshore tax liabilities

• The trustee of a trust fund as well as the offshore trust company is entrusted with the management of the trust

• These parties are bound by fiduciary duty to uphold the terms of such an agreement

• There are requirements that are set out in the deed of trust

• There is a trusting arrangement which is in writing and by its terms they need to provide for the beneficiaries

Reasons Behind Such Funds

Why are offshore trusts formed? It is formed for a variety of reasons and many of the clients use such a trust in order to ensure their financial security in their retirement time as well as to provide funding for school fees, university fees and other requirements. When one has decided to set up an offshore trust, they need to decide what kind of trust it will be as well as the duration of the trust and other criteria regarding a trust. One also needs to decide on the following criteria:

• Will the trust be revocable or not

• Will the trust be discretionary

• Specifying the rights as well as duties and obligations as well as expectations of the trustee.

These points need to be considered when setting up such a trust fund.

Nonresident Taxation for Non-Residents Rendering Services In Canada

Any nonresident that offers service in Canada and earns an income out of it is liable to pay nonresident tax as per the regulations that are cited in the nonresident taxation policy of the Canadian Revenue Agency. So if you are a nonresident who is offering services or plan to offer your services in Canada then you should be aware of the entitlements, the rights and the obligations that you face when receiving such income.

Nonresident Taxation

If you are a nonresident of Canada and you render services in the country then you are entitled to pay income tax on the income that is generated by you by providing the services in the country under the provisions of the nonresident taxation policy. There are regular continuous services that one might render and there are also some services that are rendered for a short span of time. If you are a consultant, or a lecturer providing your services then you will have to pay your taxes and will have to file your returns for the income earned in Canada. For people who are involved in the movie industry, they will have to refer to the Film Advisory Services to identify the tax credit that is available to them before filing the returns.

Withholding Requirements

• If you are employed in Canada on a regular and continuous basis then a certain percentage of your income will be withheld from the person paying you and will provide you with an information slip with regard to the deduction made from your income.

• In general the percentage that is deducted is about 15% of the gross payment that is paid to you and that amount will be remitted by the employer to the Receiver General of Canada as a type of nonresident tax.

• This is a form of non resident tax deduction at source and it is the duty of the employer whether he is a Canadian citizen or not to deduct the tax and duly pay it to the concerned department.

• Failing to deduct the required amount will result in penalty and the employer will have to pay 10% of the amount that has to be deducted as penalty.

• Employers will have to file T4A-NR return to the department and will have to issue T4A-NR slips to the recipient before the end of February of the following year.

• The employee can file tax returns to report the net taxable income and in situations where excess tax has been deducted, a refund is provided by the Tax authority.

Waiver Or Reduction of Withholding

The nonresident taxation policy in Canada considered 15% tax deduction at the source to be a rough estimate of the nonresident tax liability of the person. If you are covered by treaty protection or can show that your expenses are bound to be more you can apply for a waiver or tax reduction request to the concerned department. A waiver application will have to be filled and submitted to the tax services office that is responsible for tax related functions in the area that you provide services in. The application will have to be filed 30 days before receiving the first payment and no later than 30 days from the start of providing the services. If the required details are in order then the tax office will give you a waiver or deduction certificate that can be given to the employer.

Overview On Canadian Nonresident Tax Filing

Income tax in Canada is levied not just on Canadian citizens but on non-residents too and the income that nonresidents earn from Canadian sources will be taxed. Nonresident tax is levied only on the income that is received from sources in Canada and the worldwide income of the nonresident is not considered for taxation. For most of the nonresidents that income tax is deducted at source from the gross pay when being paid to them by the employer and the tax that is deducted is deposited by the employer to the Canadian Revenue Agency (CRA). To know if you are liable to pay nonresident tax, you will first have to determine your Canadian residency status with regard to taxation.

Ascertain Your Canadian Residency Status

There are a lot of factors that are considered while determining the residency status of an individual in Canada. The most important factor is said to be the residential ties that the non-resident has in Canada or is in the process of establishing. Some of the factors that are considered to be residential ties to Canada are

• Having a home in Canada

• Having personal property in Canada (car, furniture, etc.,)

• Have economic ties with Canada

• Have a spouse or dependents or common-law partner in Canada

• Having social ties in Canada

• Canadian driving license

• Canadian bank account or Canadian credit cards

• Health insurance with any of the Canadian territories or provinces

If you still are not able to identify your residency status then you can fill in the Form NR74 or NR73 and then send it to the International Tax Services Offices to seek clarity on your residential status.

Getting the Relevant Forms Needed for Tax Return Filing

If you have to file nonresident tax then you will require obtaining a few forms like the Canadian T4 form that is supposed to be given to you by the Canadian employer. The T4 form will have a summary of all your earnings and deductions that have been made by the employer and are usually mailed to the address that is given by the nonresident to the employer. These forms are important for international tax filing and therefore ensure that the correct address is given to the employer to receive them. Employers will issue the T4 form generally between January and March so that you can file the nonresident tax return by April 30th.

Completing and Filing the Tax Return

You will require the T1 Return form to file your nonresident tax and the tax package that is required will contain forms like 428 forms, Schedule 1 Federal Tax form, Schedule A form and the T4 form. If you are not comfortable filling in the form, then you can always avail the services of a tax accountant of taxi companies who will get your form filled for a small fee. Once all the forms are filled and checked properly you can mail the return forms along with the original T4 form that is received from your employer to the International Tax Services Office.

Defining Corporate Taxes and Tax Treaties

In every country the definition of corporation tax deferrals. It is a tax that is levied on the profit that a firm generates. There are different rates that are used against the different profit levels.

• Corporate taxes are those which are earned against the profits generated by businesses during a given period of taxation.

• These are then generally applicable on the operating earnings of a company. The operating earnings of a company are calculated after the necessary expenses and depreciation are deducted from the revenues earned.

• Corporation taxes are those that are levied by the state as well as national governments. The laws and the tax rates tend to vary around the world as per the different corporate taxation policies that the different governments adopt.

• Countries that are in favor of lower corporate taxes usually adopt such a policy in want of generating greater economic wealth for the country and thus, the companies in such countries need to pay less corporate taxes. Other countries that levy higher corporate taxes see it as a way of subsidizing the government programs and spending for the citizen of the nation.

What Is A Tax Treaty

When it comes to tax treaty, the US has formed a number of tax treaties with different foreign countries. Under such programs to residents who are not necessarily citizens of the foreign country are taxed at a reduced rate or are even exempted from US income taxes in certain accounts even when they receive income from sources that originate within the US. The tax treaty formed varies with different countries and also as per the specific items that act as income generators.

Characteristics of Such A Treaty

When a tax treaty does not cover a particular form of income or there is no treaty between a country and the US, then one is liable to pay income tax the same way as it is applicable to most non residents. There are many sources online that help one to understand whether their country falls under a special tax treaty or whether other rules apply for them. The Gods of taxation for aliens and non residents are to be found online. Every individual state in the US is known to apply income tax rules for their residents. Many states honor the provisions of the tax treaties formed between US and other countries while others do not.

Benefits of Tax Treaties

Tax treaties are beneficial in the following ways:

• They provide exemptions for nonresidents of US

• As per the source of income the tax exemptions differ

• States that honor the tax treaties usually are preferred by non residents than those who do not

One needs to consult with tax lawyers in order to know what kind of taxes would be liable for payment to the particular US state that they reside in. Tax treaties help to reduce the tax burden for foreigners who live and work in the US. There is detailed information online that one can refer to for their advantage.

Canada Real Estate Taxation for Non Residents

Canadian Taxation Policy For Non Residents

All non residents of Canada who are liable to pay taxes must apply for a Canadian Individual Tax Number (ITN) if they have not yet obtained the Social Insurance number (SIN). If you a nonresident who is planning to settle in Canada, then you have to show a significant amount of social ties to Canada or you have to show the intention to settle long term in Canada. For non residents their income taxes at the source that exists within Canada and the nonresident has to file a Canadian tax return to claim a refund. The Canadian Residents will be taxed like Canadian citizens on their worldwide income.

Canadian Real Estate Taxes or Canadian Property Taxes

• Canadian real estate tax is that taxes are levied annually in the provinces and the rates at which the taxes are levied are different in each of the provinces.

• The Provinces have been given the authority to levy any rate that is deemed fair by them as long as the rates do not interfere with the laws of Canada.

• The real estate tax is calculated by using the value of the real estate that will be assessed by the provincial assessment authority and applying the rate of property tax that exists in the province to it.

• The real estate taxation amount can vary every year as the rate keeps differing. The general rate of property tax is between 0.5% and 2.5%.

Purchasing And Letting Out Property In Canada for Nonresidents

Most of the provinces in Canada do not have any restrictions against purchasing land or property in Canada. There are taxes that will have to pay to the government while buying property and the rate is between 3% to 5% of the value of the property. The rental income that is received for letting out property or real estate by nonresidents are taxable in Canada and the taxes have to be deducted at source by the tenant or property manager.

Income Tax On Rental Income In Canada

Rental income that is acquired from real estate property in Canada is taxed and it is the duty of the tenant or the property manager to withhold 25% of the gross rental income that will be paid to the owner who is a non-resident of Canada. As per section 216 of the Income Tax Act of Canada, the nonresident can file a separate tax return with the Income Tax Department to show their rental income and expenses and claim a refund if the tax collected is more than the tax due. If the returns for the rental income are files then the taxes will be levied only on the net rental income and not on the gross rental income. Expenses that are accepted to be genuine can be added in the return and after the returns are accepted and checked, any excess amount that has been deducted as tax will be refunded to the taxpayer. All returns under Section 216 have to be filed within 2 years from the end of the year during which the rental income was received.

How Canada Is Losing Billions of Dollars to Tax Havens

What Are Tax Havens?

A Tax haven is a country that allows individuals from foreign countries or foreign businesses with very little or no tax liability in an environment that is economically and politically stable. Another important aspect of such countries is that they do not provide information about the financial transactions to foreign tax authorities. For a person to benefit from the tax havens tax policies he or she need not reside in the country and this is an advantage to people looking to save tax. No financial information shared and no requirement to stay in the country acting as the tax haven will make it possible for a citizen of another country to run a business in the tax haven without his home country tax officials knowing about it. Countries are aware of these countries and are trying to ensure that they do not lose tax that is due to them because of the tax havens. However, even after continued efforts of the G20, tax haven countries are still operating with ease.

Which Countries Are Considered As Tax Havens?

There were very few countries that were tax havens about two decades ago. But over the past decades there has been an evolution in tax haven countries and there are many countries sovereign and non sovereign those are considered as tax haven countries. Some of the countries are

• Bahamas

• Panama

• Luxembourg

• Cyprus

• San Marino

• Monaco

• Seychelles

• Liechtenstein

• British Virgin Islands

• Mauritius

• Isle of Mann

• Belize

• Singapore

• Hong Kong

• Anguilla

How Canada Is Losing Tax Revenue Due to Tax Havens

Tax havens that allow rich individuals, resource companies and Canadian banks from paying billion of dollars in taxes every year are on the rise and according to recent estimates, it has been found that the Canadian federal and provincial governments are denied as much as $80 billion in tax a year. The amount that is lost is huge and accounts to about half of the national budget for health care in Canada. Canadian residents who have used tax haven countries for their offshore business activities will not declare the income from such businesses and therefore will not pay tax. A Canadian citizen or resident has to pay taxes for his or her worldwide income and as such countries do not share financial information with Canada, they can get away without showing the income generated from tax haven countries.

Steps Taken to Counter Tax Havens

With the use of tax havens becoming a global problem, there are many initiatives that are being taken by other countries including Canada to counter these countries, but in vain till now. But Canada is leading the way and has started a few initiatives like to publish the estimated tax lost due to such countries and what impact it has on the federal and provincial treasury. Canada has planned to increase the resources that are available in the compliance division of the CRA to enable them to track tax cheats. Canada is also pushing for strong action to be taken against tax havens at the G20 and in the United Nations.