Taxes and Tax Haven

What Is Nonresident Tax

If you go to the definition of what is a nonresident tax, it is a return that comes to a state of which you are not a natural resident of. You might be working in an another state or country or you could make earnings in another state for which you need to file a nonresident tax return. If you fall into any of these categories, you might need to be clear about nonresident tax a bit more. You will then need to figure out the amount of income that you make in the nonresident state as well as the income that you make in the home state. Most of the federal returns even include the nonresident tax returns. Thus, it is necessary to complete one’s federal returns and then make a separate effort to file in nonresident tax returns. The legalities of filing nonresident tax returns may vary from country to country.

So how do you go about listing your income and deductions? In most states you need to first list out the total income as per the federal return in one column while in the other column one needs to write in the income that comes in as a nonresident. The total in both columns needs to be considered in order to calculate the percentage of the non-resident income as per the total income. Every state has its own laws by which one needs to allocate the taxable income or one’s tax liability accordingly.

What are Tax Havens

In such cases one often seeks out tax haven. These are countries like Anguilla, Nevis, British Virgin Islands, Singapore Hong Kong, Mauritius and other countries. Over the last two decades the number of tax havens has increased. These have evolved as most people search them out in order to protect their interests. The advancement of technology and communication has allowed these tax havens to come within reach of many people and they can avail of the benefits of storing their money and saving tax liabilities on them.

Their Characteristics

So what kind of services can you expect from a tax haven? They usually have the following characteristics:

• They are usually financial centers based offshore

• It can be a country or an organization that offers business services even to non nationals

• The business services consist of offshore trusts, registration of vessels, investment funds management, offshore foundations, offshore banking and others

• It is a legal as well a safe means of reducing one’s tax liabilities

When the economy is struggling and people are reeling under effects of low income and high tax liabilities, tax haven come to the rescue. People can resort to the offshore banking services of tax havens and get their money secured and away from unwanted tax liabilities. However, before one decides to approach such a country or organization, it is best to refer to the legal guidelines of their own country or state to understand the legalities involved.

Canadian Tax Rules That You Need to Follow As A Non Residents

There is always a provision in the income tax law books of most countries that any person who is working and living in a country and is not a resident of that country will have to pay non resident taxes. This is also the case if you live and work in Canada. Any non-resident who is living or working in Canada and who is not a resident of any place in Canada will have to pay nonresident tax according to the regulations and the norms that are printed in the nonresident taxation policy derived from the Canadian Revenue Agency. If you are a person who is living in Canada and rendering your services for a Canadian company in Canada, then you should be aware of the rights, obligations and the entitlements that you need to face when you receive your work wages or income.

Nonresident Taxation

If you are working and living in Canada and are offering your services in Canada, then you need to pay Canadian income tax on the income that you earn by doing your services for a company in Canada. You might have been hired by the company in Canada to render regular services for a long time or might be offered a job that requires your services for a stipulated period of time. There are different rules for different kinds of jobs that you do in Canada.

Withholding of Your Income

If you are employed in Canada on a regular basis for any company, then a certain amount of money will be withheld from your income by the person who is paying you the money. This will be deducted from your payment right at your employer’s end and an information slip will be handed over to you wherein the details of the amount deducted from your income would be mentioned. Generally, the percentage of the amount that is deducted from your income would be about 15% of your gross income and the employer who deducts the amount will need to remit the amount as a non-resident tax to the Receiver General of Canada.

This is the Canadian taxation of non-residents norms for deducting the income tax at source. It is the duty of the employer to remit the amount as non-resident tax to the concerned department dues, no matter if the employer is a Canadian citizen ore not. It is for the employer to not fail to deduct this amount from your income. If he misses the deduction, then he will have to pay 10% of the income tax amount as penalty.

Waiver of Withholding Tax Amount

• You can apply for a waiver of certain tax amount if you can show that you are covered by treaty protection.

• The tax could also be waived if you are able to prove that your expenses are bound to be more than the income that you have received after tax deductions.

• The tax waiver or reduction of taxes application has to be filed by you to the concerned tax related office in your area of 

service 30 days before you commence your service and not later than 30 days from the commencement of your job.

The Characteristics of U.S. Corporate Tax

Average Rate

When you run a business you need to be clear on matters of business taxation. Like all countries the US imposes a tax on the profit that the US corporations make and the rates vary from fifteen to thirty five percent. Much of the corporate income is often taxed at the minimum rate. Those who are corporate shareholders even pay individual income tax on the dividend as well as on the capital gains that they realize from the sale of the shares. The tax rate on dividends as well as on capital gains can go up to fifteen percent at a maximum. Both are scheduled to revert back to the levels that they existed in the period before 2001.

History

As per the federal revenue the following are the characteristics of the corporate income tax:

• This is the third largest source of revenue for the federal resources after the individual income tax and taxes collected from payroll

• The importance of the tax declined as a source of revenue between the period of the fifties and eighties

• Corporate tax accounts for two percent of the GDP in the US

If you are looking into the calculation of the corporate profits that are taxable one needs to equal the receipts of the corporation minus the expenses that it incurs. That includes the wages and the interest. The deductions of the inventory costs as well as depreciation of capital investments also need to be subtracted. Often many multinational corporations have their presence in other countries too and in that case nonresident tax may also come into the picture. The tax that one pays on the profits made on subsidies of foreign origin is deferred till the profits are repatriated or paid back in the form of dividends to the US parent company. The nonresident tax that may apply is usually at the individual level and not at the corporate level.

Different Features

There are other peculiar characteristics of the US corporate tax setup. For instance, there is little mechanism to prevent individuals from collecting income that is tax free within corporate. This is however discouraged as the corporate profits are taxed twice, once to the corporation and then again on the profits given out to shareholders. Again, another feature of the tax structure is that it encourages debt financing as compared to equity financing. That is mainly because the interest payments that are made by corporate are deductible while the dividends that are gained are not. Thus, it encourages corporations to retain their earnings than giving it out as dividends. Many organizations in the US are categorized as “flow through” businesses and they do not come under the purview of corporate tax.

These include partnerships or sole proprietor businesses. That is mainly because here the business owners are taxed at an individual level. At such levels nonresident tax may become applicable if they make earnings from a state that they are not resident of. It is usually calculated as a percentage of the total federal tax returns filed.

Canada-US Tax Treaty – Key Points

Canada has entered into tax treaties with a lot of countries, but none is considered more important that the Canada-US tax treaty. The importance of this treaty is largely because both the countries are neighbors and there are a lot of residents of US are living and working in Canada and vice versa. The first version of the current treaty was signed on September 26, 1980. There have been five amendments to that version of that treaty and these protocols were signed on the following dates.

• June 14, 1983

• March 28, 1984

• March 17, 1995

• July 29, 1997

• December 15, 2008

The United States of America and Canada have strong trade relations and therefore there are a lot of people who cross borders for their work. The need for the Canada-US tax treaty was recognized to be an important step in building relations between the two countries and to facilitate the ease in which citizens of one country could work and earn in the other country. Due to the many benefits the tax treaty has to offer we have a lot of corporations that are based in US who have interests in Canada and many Canadian corporations have branches and business interests in the US.

Income from Personal Services

According to the Canada-US tax treaty, income that is generated from personal services by a person who is a non-resident of one country and the resident of the other can be exempted provided the conditions that are mentioned in the treaty are met. Some of the exemptions that can be availed by a non-resident are

• An employee that is providing personal services in the other country is exempted from tax if the total payment that is made to the non-resident is less than $10,000 in a tax year.

• This does not apply to public entertainers and there are special rules that are drafted for them.

• A person who is earning more than $10,000, but has spent less than 183 days over a period of 12 months in the country is also exempt from paying tax.

Income from Self Employment

Any income that is generated from self employment is considered to be business profits and is taxed by the US or Canada government if it can be attributed to any permanent establishment in the country. The business profit will be applied to each country and is based on the permanent establishment and how it might be made into a separate entity. Article V of the Canada-US treaty talks about permanent establishments and how one can have them in the countries.

Other Income

Income that is gained out of periodic pensions or annuities that are paid to a non-resident from a source within the nonresident county will be taxed by the nonresident county. But according to the Canada-US tax treaty the maximum tax percentage that can apply for such income is 15% of the gross amount. There are a lot more exemptions that one can get out of the tax treaty.

An Overview On Canadian Tax Treaties

Tax treaties are agreements that are signed between the two counties to ensure that the residents of the country are not double taxed. There are many residents of a country who work in other countries and will be liable to pay taxes in the country that they work and will also be required to file tax returns and pay taxes in the country that they are a citizen of. In such situations there are possibilities that the individual will be taxed twice for the same income by both the countries and to avoid that such tax treaties are signed between the countries. Another advantage of these treaties is that there can be sharing of information between the countries about the financial dealings of the residents so that tax avoiders can be identified. Most countries have nonresident tax that has to be paid by non residents who earn income from the country and when the person files the nonresident tax returns, it will be shared with the country that he is a resident of, provided there is a treaty that has been signed between the countries.

What Do Tax Treaties Cover

Most of the tax treaties that are signed will be in respect with the income and the investments by citizens of other countries and will generally cover the following

• Establish the taxes that are covered and who is eligible for tax benefits

• Will help to establish who can be considered as a resident of the country

• Will help to reduce the tax that is withheld from royalties, interest and dividends that are paid by a resident of one county to residents of other countries

• Will help to limit the tax that is levied on business income generated by a resident of another country

• Will help set the guidelines and the rules that will govern the nonresident tax of a country who would be residents of another country

• Help to provide exemptions to certain individuals and corporations

• Will help to provide the necessary procedural framework in cases where there is a dispute and for enforcement

Canada Tax Treaties

Canada has signed tax treaties with a lot of countries across the globe and the list of countries that have a tax treaty with Canada can be found on the official website of the Department of Finance Canada. There will be detailed reports about the tax treaties that have been signed, amendments to the treaty and all the information that one will need about any tax treaty. You can also contact the International Tax Services Office and they will be able to help you out with any information regarding the tax treaty signed with your country by Canada or on the doubts you might have regarding nonresident tax filing.

Precautions While Filing Nonresident Tax Return

It is very important to not take things for granted while filing the nonresident tax and if there is any ambiguity in the various clauses of the tax treaty that has been signed with your resident country, contact the International Tax Services Office for clarification. It will also be a good option to avail the services of tax experts to help you with your nonresident taxation procedures as they will have the knowledge of the exemptions that can be availed by you. It will also make the process a lot simpler with you not having to run around to get your income tax return filed properly.

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.