Using Tax Havens to Avoid Paying Tax

Tax havens are countries that impose very low taxes or in any case no tax on investments and income earned out of that country. This is done to encourage people from investing in the country so as to boost the economic status of the country.

Tax haven countries impose no tax or very low taxes in order to attract investment in their financial and other sectors. Most countries co-operate under international tax treaties by exchanging information about foreign investments. However, in tax havens, strict bank secrecy and a lack of information-exchange provisions can result in transactions and foreign investments being concealed from tax authorities.

This allows rich individuals, Canadian banks and resource companies to avoid paying billions of dollars in taxes each year. 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. What the CRA is concerned about are investments, transactions and schemes that use tax-haven countries to reduce, avoid, or evade Canadian tax. Using tax-havens for tax avoidance and tax evasion is a growing concern for Canada as it is for other countries. The CRA is working closely with tax administrations of other countries in focusing its efforts on identifying offensive arrangements and taking corrective action.

Tax havens can be used in very straightforward ways such as setting up an offshore bank account to hide assets and income with the intention of not reporting the income. This is tax evasion. Tax evasion is a deliberate attempt to conceal or distort net income. Tax evasion schemes involving tax-havens may also be quite sophisticated, and take many twists and turns. Often, tax-havens are used to set up trusts or to create corporations or other entities that are used to make tracing assets as difficult as possible, including foundations designed specifically to disguise the true ownership of assets.

These entities are often used as part of larger tax plans to hide critical parts of the transactions. Such plans and transactions fall under the category of aggressive tax planning and may constitute tax evasion. Aggressive tax planning is a challenge confronting all developed countries.

It can involve very complex structures with both domestic and international elements. The objective of this type of tax planning is to get tax benefits that were never intended under the normal application of the tax laws. Aggressive tax planning manipulates transactions to avoid crossing the line to tax evasion.

Know About Canadian Cross-Border Taxation

International or Cross-Border Tax Services can be a tricky thing to deal with, since taxes on certain things might be higher or lower than others. Tax is not only the concern of the big business units but also people with offshore saving accounts or in any way liable to international tax. In some countries, food is taxes, while in others it is not.

In the United States, the income tax system is based on either citizenship or residence. This is not the case in Canada. Canadians living or working in the United States may find themselves taxed on their “world income” in both Canada and the U.S.

The U.S. tax system, administered by the IRS, is complex with many compliance and reporting requirements that are quite different from the Canadian system, administered by the CRA.

Engaging tax specialists with expertise in both the U.S. and Canadian tax systems may not longer be an option for most Canadians that have to deal with these complexities – not an option, just good sense.

The Canada-United States Income Tax Convention and other amending protocols are intended to prevent “double taxation” and enhance cooper ration between the two countries. The 5th Protocol (set of changes) to the convention was designed to:

• Eliminate source-country “withholding” tax on cross-border interest payments

• Allow tax payers arbitration to otherwise insoluble double tax issues

• Ensure that there is no double taxation on immigrant gains

While the convention may provide for certain tax exemptions, this does not include exemption from filing income tax returns id the U.S. Failure to file as prescribed in the U.S. can result in the exemptions sought being denied by the IRS and other penalties being imposed.

While the American economy has been struggling, the Canadian economy has remained stable, and it is now easier than ever for smart shopping Canadians to take advantage of the American dollar. Besides the value of the American dollar versus the Canadian one, another financial benefit for the shopper is the lower sales tax rate in the United States.

If you are a Canadian Resident, then you are taxed on your worldwide income and filing of returns to the Canadian Revenue Agency (CRA) is mandatory. If you are a non-resident, the taxation policy is different and you have to declare all Canadian income while filing the returns. But to know how to file your taxes, you first need to determine your residency status for tax purposes.

If you are doing some offshore tax planning, by investing some money offshore, then you should be aware that almost all countries have signed tax treaties with Canada, and if you are a Canadian Resident, then income from these investments will also be calculated and considered as income and will have to be declared while filing the income tax returns. But if you are a non resident of Canada, there are options for you to do some cross-border tax planning, but it is always better to avail the services of an income tax expert to help you.

Few Important Facts about Taxation of Non-Residents in Canada

Canadian Income tax is levied on the worldwide income of Canadian residents. However, there are certain types of income that is earned from Canadian sources that are taxable for non- residents. The Canadian residents will have to use the T1 Tax and Benefit Return and it is the same for individuals and sled employed individuals. The amount of tax that will have to be paid by the individual depends on the value of their taxable income. The taxable income is calculated by reducing the allowed expenses from the gross income received.

When you live outside the country during a tax year and are a government employee, part of the Canadian Forces or staff of an overseas school chain, you need to check on the rules that apply for one. The rules are usually from other family members and dependent children as well. Such rules make it easy for people working in such institutions.

Often there is confusion regarding taxation of non-residents as to whether one would be deemed resident or nonresident of Canada for legal and tax purposes. One is deemed a non-resident of the country and a resident of another country with whom Canada has a tax treaty. In such cases, for taxation purposes, one is deemed a non-resident of Canada. Again, the definition of residential ties is important to understand for such purposes.

If one has a home in Canada or a spouse or dependent that stays in Canada and if you own personal property in Canada such as a car or furniture and have social ties in Canada, you become liable for nonresident taxation. The tax obligations in such matters are as per the income that one generates from different sources in Canada. The type of tax one needs to pay and the income tax return needed to be filed is dependent on the kind of income that one receives. The sections Part XIII and Part I tax policies apply in such cases. These sections can be easily referred to online and one can understand their tax obligations and even file their returns online to save on consultancy fees and time.

Also nonresident corporations who have business interests in Canada and generate revenue from a business that is located in Canada will have to pay corporate tax to the Canadian Government. The clauses that govern the corporate tax in Canada are a bit complicated and the complications will only increase if you are a non-resident. If you are ‘carrying on business’ in Canada either directly or indirectly then the profit that is earned out of the business will be subject to taxation. Like in income tax, the residency status of the corporation will have to be determined and the corporate tax that is levied will be based on the residency status of the corporation.

Corporation Tax in Canada – An Overview

Canadian corporations are taxed differently than other forms of business. The most obvious tax change is that as a corporation is a legal entity in itself, the corporation is taxed separately from the individual. (As a business owner, you file both T1 (personal) and T2 (corporate) income tax forms.) But tax-wise, there are also different types of corporation, and the type of corporation determines whether or not the corporation is entitled to certain rates and deductions.

Basically in Canada, there are Canadian-controlled private corporations (CCPCs), and then there are the others. When it comes to corporate tax, Canadian-controlled private corporations (CCPCs) are the Cinderellas at the ball while other types of corporations are the ugly step-sisters.

Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.) Corporations may deduct the cost of capital following capital cost allowance regulations.

Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Capital tax is a tax charged on a corporation's taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act (Canada) plus accumulated other comprehensive income.

From 1932 until 1951, Canadian companies were able to file consolidated tax returns, but this was repealed with the introduction of the business loss carryover rules. In 2010, the Department of Finance launched consultations to investigate whether corporate tax on a group basis should be reintroduced.

Canadian corporation tax includes taxes on corporate income in Canada and other taxes and levies paid by corporations to the various levels of government in Canada. These include capital and insurance premium taxes; payroll levies (e.g., employment insurance, Canada Pension Plan, Quebec Pension Plan and Workers' Compensation); property taxes; and indirect taxes, such as goods and services tax (GST), and sales and excise taxes, levied on business inputs. 

If you want to pay your corporation tax promptly and file the T2 return on time, you need to know the tax year end of your corporation. The fiscal period of a corporation or the corporation's tax year has to be less than 53 weeks. New corporation can choose the tax year end while filing the first T2 return and the subsequent tax year can be calculated according.

A Guide to Estate Planning and real Estate Tax in Canada

Everyone needs an estate plan. It’s the single, most effective way to preserve your wealth and transfer your worldly goods efficiently, tax-effectively, and according to your wishes. It’s not something you do for yourself, but rather for the well-being of your loved ones.

Depending on your needs and objectives, your estate planning should include a will, one or more trusts, and in many cases, powers of attorney for your finances and health care. In an effective estate plan, these elements work together to provide for the security of yourself and those you care about.

For most people, the greatest tax exposure exists with respect to the cash and investments which are sitting within an RRSP or RRIF. Generally speaking, the full value of these "registered" accounts at the time of death must be reported as "income" in the person's final income tax return. The amount of income tax actually payable will depend on the deceased's marginal income tax rate in his or her final income tax return. (However, there are a few important exceptions, such as when the RRSP or RRIF is transferred to a surviving spouse.)

Other assets can also attract tax in your estate. For example, if you own a vacation home that has appreciated in value, a taxable capital gain may eventually have to be reported by your executors in your final income tax return, because of the "deemed disposition" on death. Similarly, if you have a portfolio of marketable securities, some of the long-held stocks may have increased significantly in value. Such accrued but unrealized gains as of the time of death will give rise to income tax in your final income tax return, unless there are large enough offsetting deductions or tax credits, such as charitable donations.

For estate planning purposes, you need to think about the capital gains taxes that will be imposed on your estate in the future. Tax rates change from year-to-year, and it is anybody's guess what the income tax rates will be a year from now, let alone in five, 10 or 20 years. Estate plan is a long-term proposition, and there is no way of knowing how long we will live.

Many provinces in Canada levy real estate tax (or property tax) on real estate based upon the current use and value of the land. This is the major source of revenue for most municipal governments in Canada. While property tax levels vary among municipalities in a province there is usually common property assessment or valuation criteria laid out in provincial legislation. There is a trend to use a market value standard for valuation purposes in most provinces with varying revaluation cycles. A number of provinces have established an annual reassessment cycle where market activity warrants while others have longer periods between valuation periods.

Owners of real estate in Canada, who are non-residents are liable to pay real estate tax and must apply for a Canadian ITN number if they have not already obtained a Social Insurance Number SIN.)Non-resident must show significant social ties to Canada or intention to settle in Canada long-term in order to become resident for tax purposes there.

Canadian Residents are taxed on their worldwide income similar to Canadian citizens. Nonresidents are taxed only at source on their income from sources within Canada including property rentals and the conduct of a business in Canada and generally must submit a Canadian tax return.