How (and Why) the Rich Get Even Richer! :CRA SOTW
Alan Baggett
Canada's offshore tax dodge
Diane Francis, Financial Post
Published: Saturday, May 03, 2008
For nearly 40 years, Canada's richest individuals have been able to
get off scot-free from paying income taxes. So have their children.
The fix is not difficult and some areas where reforms can be imposed
are outlined below. Even so, Canada's politicians and policy wonks do
nothing.
Since 1972, a series of court decisions have attacked rules, eroding
them to the point where rich people can move offshore for a couple of
years, move back again to use our health care and other services, and
still never pay taxes. Simple legislation would change this
immediately by adopting U.S.-style rules.
But dodging taxes is easy: The taxpayer pays a one-time 25% hit on his
wealth by declaring he is moving to a tax-free jurisdiction; he puts
the direct management of his money in the hands of financial
intermediaries or trustees. Canada Revenue Agency regards this as
arm's-length offshore trusts and, therefore, untaxable when
distributed, even back to Canada.
"It's easy to get out of taxes," said offshore expert and consultant
Alex Doulis. "A wealthy Canadian will leave and become a non-resident
for tax purposes, pay a 25% departure tax [on all his or her wealth
except for the value of his principal residence or Canadian-based
corporations] and never pay taxes again. They also have someone set up
a trust offshore and put capital into it so their children or
grandchildren can be sent distributions from the non-resident trust to
Canada tax-free in perpetuity."
In other words, Canada's tax loopholes actually encourage departures
because wealthy Canadians pay a one-time 25% taxation rate on their
RRSP, which, if they did not leave, would net 46% personal income tax
rates when withdrawn. The U.S. tax system does not allow such tax
dodges.
Even worse, wealthy Canadians can dodge taxes but also still live in
Canada up to 181 days a year. In other words, Canada Revenue Agency
lets them have their cake and eat it, too: Cold months in the sun,
warm months back home and all their money and investment profits tax-
free. And their offspring and other beneficiaries never have to move
offshore but can live completely tax-free in Canada on offshore trust
fund income and be entitled to use Canada's health care, education and
other services paid by taxpayers.
Canada also allows people to leave "permanently" for tax purposes,
then come back without penalty. That's why it is not unusual for old
expatriates, or those with serious illnesses, to return to poach off
Canadians for health care because they are medically uninsurable
abroad.
"Fortunately, for every one of these guys there are 10 of us who don't
do this," said Seymour Schulich. "My family's here, my grandchildren
are here and I made my money here. Say what you want, I think you owe
allegiance to the place which gave you the opportunities. I would say
to these guys who leave, 'It's okay to take your money and run, but
don't ever come back.' "
Anyone who leaves Canada as a tax resident should be allowed to rejoin
our health-care systems only if they pay a huge re-entry fee,
equivalent to the taxes saved while abroad. That's what private clubs
do when you take a leave of absence. Canada should do that, too.
That's just for starters. Next week I will write about another issue
of tax leakage and unfair entitlements that Ottawa ignores or is
ignorant of.
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