November
1995
the CEN-TAPEDE
david ingram's US/Canadian
Newsletter
Pages 129-136
OFFSHORE TAX HAVENS
ASSET PROTECTION TRUSTS
UPDATED
May 11, 96 - (readers of this newsletter should also read the March, 1996 CEN-TAPEDE)
What Is An Offshore Tax Haven? Page 129
What Is An Asset Protection Trust? Page 129
Why Would YOU Have One? Page 129
Are Offshore Tax Havens Legal? Page 130
Why Do So Many People Have Them? Page 131
How Much Does It Cost? Page 133
Where Do You Go? - Who Does These Things? Page 133
Do You Save Any Tax LEGALLY? Page 134
After All That, My Recommendation! Page 134
Protect Yourself For Out Of Country Medical. Page 134
Further Information - Discount offer. Page 135
WHAT IS AN OFFSHORE TAX HAVEN?
Offshore
tax havens are usually bank accounts, corporations, or trusts set up in
countries which are known for their banking secrecy laws and / or minimal
corporation or trust reporting laws. These countries also usually have the
further advantage of having little or no income tax.
WHAT IS AN ASSET PROTECTION TRUST?
An
Asset Protection Trust is a trust set up with "someone's" assets
owned by the trust. An Asset Protection Trust may be set up in one's own
jurisdiction. There are, for instance, many family trusts in Canada which
can protect a family's assets against lawsuits started against an individual
member of the trust.
The
trust is a special kind of legal entity holding assets. It is established by
a "settler" or donor. The trust is then controlled by trustees who
may be corporations, individuals or any combination thereof. The trust is
managed for the benefit of beneficiaries who are usually related to the
grantor or settlor of the trust and who may include the grantor.
The
kind of asset protection trust which is currently being touted is usually in
the Turks and Caicos or the Bahamas or Bermuda and is set up to avoid any
number of eventualities. When set up in the aforementioned (plus another 50
or so) countries, one can be assured that the details of the transactions,
including actual owners, directors, and financial information, will be kept
secret. In countries like the Bahamas, it is a criminal offense for anyone
to give out any bank account, trust or corporation information to anybody.
WHY HAVE ONE?
Legitimate
reasons for having an OFFSHORE or FOREIGN ASSET PROTECTION TRUST would
include but not be limited to:
1.
Flexibility of income splitting among beneficiaries;
2.
Easier settlement on death;
3.
Reduction and even total elimination of probate fees;
4.
Total privacy of affairs upon death;
5.
Protection of assets against lawsuits.
ARE THEY LEGAL?
The
establishment of one of these accounts, corporations or trusts is almost
always legal under the laws of the jurisdiction where the account or entity
is established. The exception to this rule might be a Bahamian trust which
is established after a problem has already occurred. For instance, if you
had $1,000,000 in Canada and were suddenly being sued for $2,000,000, you
might be tempted to "take your money and run" to the Bahamas and
establish a Bahamian Asset Protection Trust. After all, their secrecy laws
will protect your assets, right? WRONG! Three factors stop you from
protecting all your money in such a trust at this point:
1.
Even though you may have put all your assets into a Bahamian Asset
Protection Trust and the institution accepted everything you gave it, under
Bahamian law you may NOT put ALL or even a majority of your assets into
the trust. That law does not state, but implies, 49% would be a maximum.
2.
If a prior claim exists, the Bahamian Bank Secrecy laws do not apply. Show
up in the Bahamas with evidence that John Smith owed you the $2,000,000
BEFORE John set up his trust and the trust CAN be broken.
3.
If the money is there as part of a criminal action (under Bahamian law), the
trust can also be broken. Since removing money from Canada to avoid
creditors or to hide it in, during, or immediately before bankruptcy
proceedings can be a criminal offense, it is possible that the Asset
Protection Trust could be broken at that point if a government claimed that
the money was part of a criminal activity. Remember here that just because
you have never met someone who hid money before or during a bankruptcy and
went to jail, hiding money or assets before a bankruptcy is a criminal
offense and punishable more severely than a spontaneous robbery of a bank,
supermarket, or jewelry store where no planning was involved.
A
VERY high profile example of breaking bank secrecy laws over alleged
criminal activity would be the recent incidents which have resulted in Brian
Mulroney, Canada's Prime Minister for 9 years, suing the Canadian government
for $50,000,000 for libel. The reason? The Canadian Government wrote to the
Swiss Government on official stationary and seems to have named Brian
Mulroney as the possible recipient of bribe money in 1988 when Air Canada
bought 30+ AIRBUS aircraft for its fleet. Brian Mulroney has sued for
$50,000,000 and will give $25,000,000 to charities if and when he wins. Since
the largest libel award ever issued in Quebec was less than $200,000, it is
unlikely that there will be a $50,000,000 settlement or award, but it sounds
good.
In
the meantime, the Government of Switzerland has frozen the bank accounts in
question and is apparently preparing to release the paperwork as requested
by Canada. So much for those "secret" Swiss banking laws. Remember
that similar details were released by Switzerland in the Clifford Irving
"fraudulent" ex-president Nixon / Howard Hughes case. In this
example, Clifford Irving was forced to pay back money he had in a Swiss bank
account because he was convicted in the United states of fraudulent
misrepresentation with regard to the relationship he had claimed in a book.
Unfortunately
for Irving, he happened to be in Switzerland when the suspicions arose. He
was kept for a significant time in a Swiss jail without bail. Remember, in
Switzerland, you are presumed guilty until you prove yourself innocent.
The
reason that trusts are protected is that most of the Tax Haven countries
will not honour a judgement issued by another jurisdiction. For instance,
Bermuda might recognize a Canadian family maintenance order for $1,000 a
month from a Canadian Family Court, but would not recognize a $1,000,000
income tax bill confirmed by the Supreme Court of Canada. The Bahamas will
not recognize judgements from any non-Bahamas jurisdiction. However, it
is possible for a person who feels that they were wronged by the owner
of the FAPT (foreign asset protection trust) to take the action to the
Bahamas and apply to the Bahamian court for leave to sue in the Bahamas
under Bahamian law. If the wronged person won in the Bahamas, they could
collect.
Governments
have a lot of ancillary powers to pressure institutions.
In another incident, I sat in the office of a senior
vice-president of the Bank of Nova Scotia while he talked to the United
States Justice Department about a B of NS client in the Grand Cayman
Islands. The U.S. government was assessing a $25,000 U.S. per day fine
against the Bank of Nova Scotia which was using Grand Cayman bank secrecy
laws to refuse to divulge information about their client to the U.S. Justice
Department. Although not there when it happened, I understand that the Bank
of Nova Scotia finally settled with U.S. Justice for "just under"
$3,500,000 U.S. and had given the requested information to the U.S.
authorities.
Please
note that the U.S. Treasury Department did not levy the fine against the
Canadian or Grand Cayman branches of the bank. The fine was levied against
the conveniently located Miami branch of the Bank of Nova Scotia.
Recently,
Revenue Canada has told all of Canada's chartered banks that they must issue
T-5 slips to Canadians and give the details to Revenue Canada for every
Canadian with an account in an offshore branch of a Canadian bank.
To
date, the banks seem to have told Revenue Canada to "go fish" and
have cited the bank secrecy acts in the foreign jurisdictions. However, in
light of my Bank of Nova Scotia item above, and because of another situation
in my office, I do not believe that the secrecy will last long with Canadian
Chartered Banks or ANY BANK OF ANY COUNTRY THAT HAS A TAX TREATY WITH CANADA
OR THE UNITED STATES. This would include BARCLAY's Bank, CITIBANK, and many
of the other "safe" banks preferred by users of offshore trusts.
A
lady client came in to report a "whole bunch" of undeclared income
from a Caribbean branch of a Canadian Chartered Bank. She had had the money
offshore for a looong time and when I asked her why she was pulling this
large amount out of the bank and reporting it after all these years, she
told me her brother had told her to take her money home. When I asked her
what her brother did, it turned out he was the manager of the actual
Caribbean "branch" bank where the money had been all this time. (I
have to wonder. Does the banker brother know something?)
Another
person wanted his trust brought up to date so that he could pay the tax
under Canadian law. In this case, a daughter-in-law about to become an
"ex" daughter-in-law was using the trust as leverage in a divorce
action. With two other possible divorces coming up, the settlor of the trust
decided that paying tax to Canada was cheaper than semi-legal blackmail.
In
both cases above, the bank account and the trust were legal to create and
hold. However, because of "secrecy" in the past, both persons had
found it easy to forget to report their earned income to Revenue Canada.
Last
month's CEN-TAPEDE dealt with this subject for U.S. citizens and in
particular with regard to how the U.S. government requires Canadian RRSP
income to be reported. However, in case you did not get around to reading
the October 95 CEN-TAPEDE, I will tell you that the U.S. Treasury can
impose an "up to" $500,000 fine PLUS "up to" 5 years in
jail if they find that a U.S. citizen even has an undeclared foreign bank
account, let alone an undeclared Foreign Asset Protection Trust.
Why do so many people have them, (including American citizens)?
1. Catastrophic events
Mr
Brown is a structural engineer and he will always be subject to claims
beyond most peoples' imagination. The family house is already in Mrs Brown's
name as part of a legitimate pre-marital contract. Mrs Brown is also the
owner of the large life insurance policy on Mr Brown's life.
Mrs
Brown has absolutely nothing to do with Mr Brown's business and if something
like the following goes wrong, her assets should be protected from seizure.
After
spending 23 years working diligently at his craft, Mr Brown finds that he is
involved in the collapse of a shopping centre roof (like the Save On Foods
roof) or the collapse of a bridge (like the Second Narrows collapse in
1956). Mr Brown finds all his assets wiped out merely defending the action
even though he is found "not to be involved." If Mr Brown had
established an Offshore Asset Protection Trust (on which he paid Canadian
tax on any earnings), those assets would have been untouchable in the above
situation, even if he was found liable for damages.
2. Director's Liabilities
Do
you remember when all the directors resigned from CANADIAN AIRLINES? Well,
one of the reasons that this happened was that the directors could be found
personally liable for back wages for all employees of the airline and they
could be found liable to Revenue Canada for up to two months of payroll
deductions and unpaid corporation taxes if they did not take all necessary
steps to make sure that the payments were made on time to Revenue Canada.
(Payroll deductions are supposed to be held "in trust" for the
government - the directors are held liable for failing to protect the trust
accounts). Directors of public companies can buy insurance for this type
of event, but in 31 years, I have never seen a director of a friend's
company protected in this manner. People accept directorships with no
thought to the possible total financial disaster to which they are exposing
themselves. They do not even ask about director's liability insurance, let
alone buy it.
Shareholder's
Appropriation comes into the equation here as well. My own requirement to
settle with Revenue Canada over my 1979, 80 and 81 tax returns (accounting
looked after by Chartered accountants) has been caused mainly by having
corporations in the way. No corporation, no tax bill!
Environmental
Mr
Smith is a businessman who spends 40 years of his life running his own
logging company. He is also the sole director. Two of his 40 employees allow
chemicals to escape into a fish stream. He is found personally responsible
for the fish kill because, even though he was not there, it is found that he
did not provide proper training in the handling of hazardous chemicals for
his employees.
Workers Compensation Board
Different
types of businesses have different WCB requirements. In this case, WCB rules
state that employees must have a "tool box" safety meeting every
two weeks. The directors of XYZ Company fail to have tool box safety
meetings as required by law. When a worker (with more experience than the
directors and who could have taught the BCIT electrical course) is
electrocuted in an industrial accident, the directors are held personally
liable for the award because they failed to hold the safety meetings.
3. Friendly Accidents
Ms
James is a hairdresser and buys a duplex which increases dramatically in
value. She takes her new profits and parlays the amount into $2,000,000.
Someone is visiting her house FOR A PARTY AT WHICH SHE SERVES LIQUOR. A
slightly inebriated guest decides to jump off the roof into the swimming
pool. She pleads with him not to jump, but he does anyway. The guest is
seriously injured when he misses the pool. He sues her and the courts award
$3,000,000. Her insurance policy on the house only covers $1,000,000. She is
broke. (This paraphrases a true Toronto story).
4. Car accidents
Seventy-five
year old Mrs Jones is hit by a motorcyclist who is speeding when she turns
in front of him. She is found liable for $3,000,000 of damage and her car
insurance is only $1,000,000. She loses her home and everything else she
ever had. (In this real life British Columbia incident with slightly
different circumstances, a law firm was held liable for some $300,000 of
damages for failure to represent the lady properly, and at last word, she
has been allowed to live out her life in her house).
5. Hiring a worker around the house
Sarah
and her husband want their yard cleaned up. They see an advertisement in the
local paper for "two students with truck". They end up hiring
these "self-employed" students to clean their back yard and cut
down a fairly large tree and pile it up for firewood. The 19 year old kids
are both seriously injured when the tree splits and a cable cuts a foot off
one of the "kids" and breaks the other's back.
Sarah
and John did not register as employers and pay Workers Compensation
Premiums. (Actually to be clear, the premiums are not paid until the end of
a pay period which may not have occurred yet at the time of the accident,
but Sarah and John did have to be registered).
Sarah
and John are held liable for lifetime support for both individuals at
$30,000 a year, even though Sarah and her husband thought that the kids were
self-employed. That's right, any individual or business who hires someone to
work on their premises had better either check for WCB registration of the
company hired or just be sure that they (themselves) are registered and
build WCB premiums into their costs. (This should make anyone
think twice about paying cash to "avoid the GST".)
6. Unauthorized use of a car, boat, motorcycle,
etc.
You
loan your car to a friend while his car is being fixed. He gets drunk and
kills seven people in a car accident. You are responsible for all damages
(could be $5,000,000 or more) and there is no insurance because the car is
uninsured when driven by a drunk driver. Of course, the driver does not have
to be a friend. The driver could be your spouse, your brother, your sister,
your father, your mother, your child or even your daughter's boyfriend who
is driving your car because - well - you know, just "because".
7. Etc.
Other
lawsuits an Asset Protection Trust can protect against would be from
divorce, joint ownership pitfalls, involvement in partnerships, something
that happened even ten years ago, negligence, sexual harassment and any
other novel legal theory someone might come up with.
HOW MUCH DO THESE VEHICLES COST?
How much do you have? Fees to get
started seem to run from $1,000 to $50,000 U.S., depending upon what is
involved. For instance one company's fees to open a Bahamas International
Business Corporation and a couple of bank accounts are (in U.S. dollars):
Bahamas International Business Company $1,300
Opening Barclay's Bahamas Account (requires personal appearance)
N/C
Opening Barclay's BWI Bank Account (min $500 US deposit) 200
Opening Euro Bank Cayman account (min $1,000 US deposit) 200
Federal Express Documents 30
Deluxe Corporate Book 79
Total 1,809
In
practical terms, you can assume that it will cost you $5,000 to $10,000 to
get up and running by the time you consult with a couple of professionals
and maybe even take a plane trip.
Remember,
any costs to establish such a corporation or trust are NOT deductible
against Canadian taxable income in any manner. They are all CAPITAL in
nature.
WHO
DOES THESE THINGS? You can always talk to us of course and you will see
lots of advertising for seminars in the paper.
The
best "set-up" operation I have seen to date is that of Jerome
Schneider in Vancouver. His Premier Corporate Services is highlighted in the
March, 1996 CEN-TAPEDE. His "OFFSHORE Seminar" I attended in
March, 96 was the best run seminar I have attended out of some 4,000
seminars I have been at or given myself. He specializes in Americans (as we
do remember) and you can get hold of him at 900-1285 West Pender, Vancouver,
V6E 4B1, (604) 682-4000 - Fax to (604) 682-7700. Read the March 96 CEN-TAPEDE
for more details.
Fred
Sharpe Fred Barrett
250-1075
West Georgia 101-1001 Broadway West
Vancouver,
B.C., V6E 3C9 Vancouver, B.C., V6H 4B1
(604)
688-5533 Fax 688-1576 1-800-685-3964 Fax (407) 223-9103
Jeremy
and Pamela Northcote, Attorneys McLean, McNally, Attorneys
Box
25, Britannic House 2001 Leeward Highway
Providenciales
Providenciales
Turks
and Caicos Islands, BWI Turks and Caicos Islands, BWI
(809)
946-4566 Fax (809) 946-4500 (809) 941-3334 Fax (809) 946-4484
Delaware
Business Incorporators Inc Azaria Financial
Box
5722 1238-3422 Old Capital Trail
Wilmington,
Delaware, 19808 Wilmington, Delaware, 19808
(302)
996-5819 Fax (800) 423-0423 (617) 327-1593 Fax (617) 327-1593
Safe
Haven Consultants Mr William H Blankenship Jr
The
Granary, 112 Lakeshore East World U.S.A. Ltd
Oakville,
Ontario, L6J 6N2 101-2005 Old Greenbrier Road
(905)
338-7431 (800) 540-4785 Chesapeake, Virginia, USA, 23320
Fax
(416) 844-6322 (804) 420-9611 Fax (804) 420-9645
DO YOU SAVE ANY TAX LEGALLY?
The answer is likely no!, unless you have an active business
operating offshore. If you are a Canadian and control a
company, trust, or account in another country, that account, trust or
company IS TAXABLE IN CANADA if it is owned or controlled by Canadians. I
know that Doulis said (in his book TAKE YOUR MONEY AND RUN), that you can
establish these offshore operations and hide the ownership by tearing up the
bearer bonds, etc., but IN MY OPINION, that is merely subterfuge and fraud.
If you control it, the offshore entity is taxable in Canada on its own. Your
failure to report and account can lead you to massive penalties in the
future. Tax Authorities have long memories and long arms as the next two
actual pages show. Page 136's $194,000 US example is from Alaska and deals
with 1986, 87 and 88. The first time our client heard of it was in January,
1995. Page 135's $19,000 US is from Las Vegas (everyone is/was a Canadian
Resident at the time). The first time our client heard about it was in
March, 1995 for the years 1988 and 89. OFFSHORE Tax Shelters are
like AIDS, the problems show up 6, 7 or 8 years after the good times.
Canada
has just introduced legislation and penalties for Canadians with offshore
investments. The new form which is effective from Jan 1996 will have to
filed with the 1996 income tax return by any Canadian with investments of
over $100,000 outside of Canada. Failure to file the form will carry a fine
of $500 a month to a maximum of $24,000, at which time, the penalty
increases to 10% of the value of the property outside Canada AND any
accountant or lawyer or advisor who has participated in the
"non-reporting" is liable for the same fine as his or her client.
In
her recent article in Maclean's Magazine, Stevie Cameron pointed out
prominent law firms such as Miller Thomson in Toronto whose tax specialists
refuse to form FAPTs because of their interpretation of the tax law and
their suspicion that they will only be used for tax evasion.
MY RECOMMENDATIONS!
A
Foreign asset Protection Trust is a good idea for the wealthy and people who
are subject to lawsuits. Establish your FAPT now BEFORE you have problems
that would make it illegal. But, don't get carried away with tax EVASION.
File your returns and report any profits to Canada. Your money is protected.
Revenue Canada can't touch it. A creditor can't touch it. AND, you are still
in Canada and can use our very valuable medical system, our roads, our
schools and not have to sneak around to make it look like you are not a
Canadian resident.
PROTECT YOURSELF FOR MEDICAL
As
I write this I have just received a call from a "70ish" lady with
a property "just across the U.S. border." The property has been in
her family forever and she has spent years of her life there. She heard me
being interviewed by Rafe Mair on CKNW on Sept 13, 95 and phoned B C Medical
to check on her situation. An unidentified clerk assured her that she was
fine and would be covered because she was so close to the border that if
anything went wrong she would just be taken to a Canadian hospital. Last
June, hubby had a heart attack at their U.S. cabin. At the time, some sort
of border dispute would not allow a U.S. ambulance into Canada and because
of this dispute, he was taken to a U.S. Hospital which was about 17 miles
further away than the closest Canadian hospital. He was in the American
hospital for just TWO days.
B
C Medical paid $600 of the doctor's $4,000 bill and she has an unpaid
$48,000 US hospital bill. If you or someone you know is spending ANY time in
the U.S., make sure that they are covered by a total medical plan and if
they are not covered, do not let them go south. The same thing happened to
my Mother In Law (reported in Dec, 91 Reader's Digest).
The
easiest way to cover yourself is to have a Gold VISA or MASTERCARD or
AMERICAN EXPRESS CARD. Most of these cards have out of country travel
insurance built in. I think the best is the CIBC Gold VISA Card Plan but
that is today and could change tomorrow. (My 1992 BORDER BOOK suggested that
the ROYAL Gold VISA Card was best. Some have the coverage included with your
annual fee. Other cards require specific application and payment for the
coverage. Check your card. Please note that most cards no longer cover
seniors.
If
you do not have a gold card and are a traveling to the US for a short
period, you can usually buy adequate insurance from the Auto Club in your
area, or your local travel agent will have a John Ingles policy which is
quite adequate.
If
you are a senior and/or a "SNOWBIRD" or someone with a seasonal
home in the U.S., your temporary policy or your travel plan may not be
adequate. Strictly speaking, you are not "traveling". If this is
your position, get hold of the MEDIPAC INTERNATIONAL PLAN of the CANADIAN
SNOWBIRDS ASSOCIATION at 1 (800) 563-5104:
The above is an example of going after 1988 and 1989 returns 7
years later. The next page comes from Alaska and goes after a Vancouver
resident back to 1986. For both individuals, this is their first
correspondence from the IRS.
