Topic: Growth Stocks

Approach offshore investing with caution

There are, in some cases, ways of structuring your business affairs using offshore investing companies or trusts that can cut or defer your taxes. You may also be able to protect your assets from legal judgments rendered in Canada if you move them to accounts in certain foreign jurisdictions.

Earnings in an “offshore account” are generally lightly taxed, or not taxed at all, by the country where the bank or brokerage account is located. This includes jurisdictions like Switzerland or the Cayman Islands.

However, Canadian residents are obliged to report any income they earn through foreign investing on their Canadian tax returns. (You can only claim tax-exempt “non-resident” status without giving up your citizenship by staying outside of Canada for more than half of a tax year.)

Offshore investing banks generally do not provide reports on your investment income to the Canada Revenue Agency. So it’s up to you to comply with these reporting requirements.

However, the reporting rules for foreign investment property are complex, the information required is extensive, and the penalties for non-compliance are steep in offshore investing.

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You’ll need to consult a tax advisor or lawyer in order to correctly structure the shelter. Note, however, that some law firms and tax advisors sell tax shelters to their clients as part of their businesses. It’s a major profit centre for them, so they are operating under a conflict of interest. Impartial lawyers or tax advisors may, and often do, disagree about the legality and/or practicality of those shelters.

What’s more, the fees involved in setting up and maintaining offshore investing accounts may offset a lot of your tax savings. That’s true even if the funds are already in a taxable account, and you don’t face a major tax cost of moving them into offshore accounts, as you do with an RRSP withdrawal. It’s also harder to evaluate and obtain adequate information on an offshore investment.

An offshore account may help you defer or avoid taxes on investment profits, legally or otherwise. However, when you invest money with any offshore investing company, you need to carefully investigate and make sure you have adequate safeguards. Otherwise, you may have losses rather than profits.

Let’s put it this way: we strongly advise against doing anything illegal to cut taxes. Moreover, when you engage in offshore investing with the intention of evading taxes, you may be risking losses that exceed the taxes you would have paid.

Something else to consider: If you discover that you’ve been cheated while offshore investing, you may not be able to complain to authorities without admitting your own involvement in tax evasion.

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