COVER

OFFSHORE B ILLIONS

Canadians are finding new ways to hid heir money from the tax man

STEVIE CAMERON October 9 1995
COVER

OFFSHORE B ILLIONS

Canadians are finding new ways to hid heir money from the tax man

STEVIE CAMERON October 9 1995

OFFSHORE B ILLIONS

COVER

Canadians are finding new ways to hid heir money from the tax man

STEVIE CAMERON

Every time Lisa Kelly finds herself on one of the ferries that chug back and forth between Vancouver and Saltspring Island, where she lives, she takes the opportunity to scatter promotional brochures on the ferry seats. “Learn how to protect your privacy and keep what you’ve earned!” trumpet the flyers, which advertise seminars at which people learn how to set up offshore bank accounts, trusts and corporations. The response is excellent, claims Kelly, who works for a Toronto-based company called Fairway Business Incentive Resources Inc. At a recent introductory session in Kelowna, B.C., 250 people turned up; in late May in Toronto, her company charged 350 people $50 each to hear the same message. The full course, however, is priced at $2,700, including accommodation and meals.

For that, interested Canadians spend four days in a Nassau resort hotel, learning about tax havens, trusts and how to transfer money from one jurisdiction to another. “People are a little bit leery at first,” says Kelly. “But once they get all the information, everybody wants to sign up and bring their friends.”

Kelly’s company is tapping into a fierce determination among many middleand upperincome Canadians to reduce their taxes and protect their assets by moving their money offshore. In Canada, the law firm leading the way is Toronto’s Harris & Harris, which specializes in international tax planning and has opened an office in the Turks and Caicos Islands, a popular Caribbean tax haven. “We’re seeing a lot of inheritances among the baby boomers now,” explains partner Paul LeBreux, who adds that three or four clients a day come into his law office to set up offshore trusts. “People are coming to us with $400,000 to $500,000 in free money. If they leave the money in the bank, they pay tax on the income, but they’re also worried about currency controls and wealth and estate taxes coming in.” Another sign of the interest in offshore tax havens is the popularity of Take Your Money and Run!, a self-help book that Harris & Harris published in July, 1994. Written by former Bay Street financial analyst Alex Doulis, the $14.95 paperback has become one of the

best-selling business books in Canadian history, with 80,000 copies sold.

Seminars, self-help books, lawyers, bankers and accountants are making it much easier for middle-class and wealthier Canadians to learn the tax-saving secrets of the superrich. The message, simply put, is that money tucked away in an offshore tax haven is not only out of reach of Revenue Canada, but is also safe from the prying eyes of business partners, creditors, spouses and other individuals who might have claims on it. And money is not the only thing that can be protected. By transferring titular ownerfc., ship of other assets to offshore trusts and

corporations—such as houses, HÉËte*. businesses or art collections—they too slide beÍ yond the grasp of those pv who believe they are entitied to a chunk of them. A Wr simple example is a vacation j|f ' property bought in a tax haven: mr the Canadian owner can rent it, r keep the rental income offshore and spend the money as he or she pleases WÊF without paying taxes on it.

The hitch, of course, is that anyone who MT does that is breaking the law. Revenue Canada F requires Canadians who are resident in Canada to report their worldwide income, regardless of the source. But even tax officials admit that collecting the tax can be almost impossible. “The Tax Act is based

on voluntary compliance,” admits Bob Westgate, an international tax officer at Revenue Canada. In other words, the government counts on Canadians to tell the truth when they file their tax returns. “It’s difficult,” says Westgate, “but we do our best and hopefully that’s enough.”

It may not be. Westgate acknowledges that Revenue Canada has no idea how much money Canadians have stashed away in tax havens, adding that it is not easy to monitor Canadians’ offshore accounts, trusts and corporations. The government can march in and stake a claim on the assets if they are in such countries as the United States and Great Britain, with which Canada has signed tax treaties. But tax havens like Liechtenstein, the Cayman Islands, Switzerland, the Channel Islands, the Turks and Caicos Islands

and the Cook Islands northwest of New Zealand—because of stringent privacy laws, the new favorite—do not have treaty agreements with other countries. And because they will not disclose information about assets held by foreigners, it can be almost impossible for Revenue Canada to determine what is held there by Canadians. (Switzerland, once the haven of choice, is less popular than it used to be because the Swiss government has decided that it will not allow banks to knowingly launder money from criminal activities, and it will assist foreign governments investigating certain criminal cases. On the other hand, tax evasion by foreigners is not a criminal activity in Switzerland, and officials there say that it is not their job to help foreign governments collect taxes.)

While no government official or banking expert will—or can—say exactly how much Canadian money is pouring into tax havens, economist Tom Naylor of McGill University in Montreal, an expert on international flight capital and author of the 1994 book Hot Money and the Politics of Debt, estimates that the annual flow added to the wealth already accumulated offshore adds up to tens of billions of dollars. “There is no central record-keeping system,” says Naylor, “and efforts to estimate capital flight are all bogus.” Naylor and other financial experts agree, however, that the situation is alarming. Not only is it depriving governments of desperately needed cash, but it causes hardship for people with legitimate claims on income and property.

Three factors are fuelling the boom in offshore banking, says Naylor. Many Canadians simply believe that the tax system is not fair and are taking steps to ensure that they get the same breaks as the rich. Second, many have lost their faith in politicians and believe they are not getting value for money spent by governments. (In late May, a Financial Post/COMPAS poll found that 77 per cent of Canadians would cheat on their taxes if they could, and the main reasons given were disgust with corrupt politicians and pork barrel politics.) “And, finally, many Canadians don’t have a fear of being caught,”

Naylor says. “With the disintegration of the social contract between Canadians and government, there is no fear of social ostracism. In fact, there’s a sea change in our attitude to collective responsibility. In the old days, 10 or 15 years ago, people sent money offshore but didn’t brag about it. Today, they brag about it.”

‘Tax planning for the masses,” as Toronto tax lawyer Rosanne Rocchi acidly describes the phenomenon, is clearly catching on. Her partner, Susan Robins, says that what is taking place now in the income tax field is “an exact parallel to what we saw with cigarettes.” When the tax on a package of cigarettes drove the price up to roughly $6.50, people felt it was not fair, she explains, and smuggling soared—to the point where Ottawa caved in and slashed the tax by $5 a carton in February, 1994. “People feel cheated,” says Robins. “People work hard for their money, and at a top tax rate of 53 per cent, each and every year your net wealth is going down. It’s a problem. Tax rates have driven this very form of behavior.” Studies, she says, show that once marginal tax rates go above 45 per cent, tax revenues start to decline. “We’re creating a nation of cheaters,” she concludes.

But Robins and Rocchi will not help them do it. The two lawyers work at Miller Thomson, a large Toronto firm where former prime minister John Turner is also a partner. Robins says many of their potential clients ask about setting up offshore corporations or trusts. When they discover that the firm’s tax specialists will not perform that kind of work, they can become irritated. “Ethically, we can’t put together a structure for them,” explains Robins. “You know that what your client is trying to do is evade taxes.” Should a client get into trouble later with Revenue Canada, there is a risk that assets will be seized; the lawyer who drew up the structure can also be charged. “Some of this is really money-laundering,” she says bluntly.

What makes tax evasion possible for an increasing number of Canadians is the ease with which they can set up sophisticated offshore companies, trusts and bank accounts. Canada’s chartered banks all offer banking services in tax havens, with most of the action taking place in the Caribbean and Switzerland. The Canadian Imperial Bank of Commerce, for example, has a busy office in Guernsey. With electronic banking, computer modems and fax machines, it is not even necessary for investors to visit their chosen tax

DOING IT BY THE BOOK

I hit a nerve of great discontent,” Alex Doulis says bluntly as he explains why his book, Take Your Money and Run!, has become a Canadian best-seller, with more than 80,000 copies sold in the past year. “The people who are buying this book are 40-plus and worried as hell that there won’t be anything left for them when they get old.” The 56-year-old retired Bay Street mining analyst, who lives on a sailboat in the Mediterranean, became a non-resident of Canada six years ago to avoid taxes. Later, the law firm that helped him get established offshore, Toronto’s Harris & Harris, decided to start publishing how-to books on handling wealth—and Doulis’s guide became the first in the series.

An easy-to-read handbook, Take Your Money tells Canadians how to set themselves up offshore as non-residents and stop paying taxes. “The word-of-mouth on this book got around before it was even out,” said Carole Roach, manager of Vancouver’s Blackberry Books. “I had to scurry around to find enough copies.” Books for Business, a Toronto store catering to the financial community, carries several guides to tax havens and how-to books on setting up offshore corporations. Every time the Canadian dollar sinks, interest rates climb or tax loopholes are plugged, the demand for such guides goes up. “There was a mad scramble for the Doulis book last year,” said Michael Legris, the store’s manager, adding that there is still a steady stream of

buyers in their late 40s and early 50s. The book will soon be published in French.

Doulis acknowledges that people often question the morality of avoiding Canadian taxes. “I say, ‘Wait a minute—you made your money in Canada. At what point do you get your university education paid for? At what point are the roads paid for?’

I reached that point. When people ask me if I am shortchanging my country, I say, ‘Is your government shortchanging you?’ ” Doulis says he receives all of his book royalties tax-free through the offshore corporate structure he has set up. When he is in Toronto, he stays in a downtown apartment, which is rented by an offshore company. “They let me use it,” he says, laughing.

To capitalize on the interest in moving assets offshore, LeBreux and his partners have just published two more books. One, entitled Sudden Wealth, is a baby boomer’s guide to inheritances written by a Toronto financial planner, Jack Lumsden, and his sister Sue, a former

havens in person. “I just set up a corporation last week with a Canadian who is a house painter,” said Robert Bandfield, a partner in International Privacy Corp. (IPC), an Oregon-based company that organizes corporations in several different tax havens for a fee of about $1,800 and yearly maintenance charges of $900. Bandfield, who lives in Clackamas, Ore., trolls for tax-averse British Columbians with advertisements in The Vancouver Sun, The Globe and Mail and other newspapers, and says he has “hundreds” of Canadian clients. The Turks and Caicos Islands, where IPC is affiliated with a local law firm, is the haven he most frequently recommends for Canadian cash. “When we started forming companies for people in 1991,” he said, “there were just 8,000 companies of this type in the Turks and Caicos. Now, there are 16,000, and the bulk of the companies belong to Canadians. Hundreds and hundreds of millions of dollars have left Canada.”

Just exactly who are his clients? Angry Canadians, Bandfield replies, who believe they are overtaxed and who also want to protect their assets from creditors. “I have a lot of lawyers, physicians, dentists and accountants,” he added. “They believe their RRSPs will be taxed soon, and trusts will be next Canadians are looking at this and saying it’s not right.” According to Bandfield, many U.S. doctors and lawyers are parking their assets offshore to protect themselves against the huge malpractice settlements so often awarded by American courts. Worried Canadians, he adds, see the same trend developing here.

A desire for secrecy is another key reason why people set up offshore bank accounts, trusts or corporations. Not surprisingly, they tend not to want to discuss what they have done, or how or why. But some details have come to light about the offshore business arrangements of a few well-known Canadians. In 1991, U.S. sports writer Russ Conway reported that former hockey czar Alan Eagleson, who is now facing 32 charges related to his international hockey business, controlled a Swiss bank account. Conway’s stories, which appeared in the Eagle-Tribune in Lawrence, Mass.,

triggered quick action from Eagleson: he instructed his staff to send copies of the articles that mentioned the account to ‘Werner Schwarz a.s.a.p.” Schwarz was Eagleson’s banker at the Cambio + Valoren Bank in Zurich. By the end of January, 1992, the account had been closed. The paper trail for these transactions was recovered by RCMP Staff Sgt. John Beer, who spent several months gaining permission from the Swiss authorities to obtain the documents.

For his part, bankrupt Ottawa developer José Perez, who built the $170-million Canada Post headquarters in 1991, set up an offshore trust in Spain under his mother’s family name to hold many of his assets. Perez has told bankruptcy trustees that he does not control the Spanish trust and is not a beneficiary; his case is still before the courts. A few days before landing the Canada Post contract, he sent $1.2 million to a mysterious company called Mistport Ltd., whose ownership has been hidden through a number of companies based in London, Dublin and the British Virgin Islands. Mistport’s true owners have not yet been identified.

Another person who has learned the benefits of offshore banking and corporations is former Newfoundland premier Frank Moores, the most powerful lobbyist in Ottawa during the Mulroney years. Banking documents, contracts and real estate records made public last April identify the account he opened at the Swiss Bank Corp. in Zurich in 1986—soon after his client, Airbus Industrie, signed a contract to pay a Liechtenstein company an extra $500,000 (U.S.) for every aircraft sold to Air Canada and other Canadian airlines. There is nothing to suggest that any of the money was paid into the bank account opened by Moores. But the documents also show that Moores’s luxury Florida condominium was purchased through a related Liechtenstein holding company with which he is associated. Although Moores has said he rents the condominium, Florida real estate records show that the property tax bills are sent to his summer home in Ontario.

High rollers like that, however, are not the norm for Paul LeBreux. His clients range from actors and authors to dentists and other self-employed business people and professionals. Recently, for

CBC television anchor in Ottawa who now runs her own public relations firm. The second book is Tax Haven Roadmap, by Toronto tax planner Richard Czerlau, which offers contacts, names and phone numbers for those who want more information after reading Doulis’s book.

A competing guide is Behind Closed Doors by Toronto entrepreneur James Hal, 33. Twelve years ago, Hal dropped out of a pre-dentistry program at the University of Toronto to go into business importing novelty items, including costume jewelry, paper products and belts from Asia, and repackaging them for export to South America. More recently, he has used his experience in setting up offshore corporations as the basis for a guide for the public. With legal expertise from Toronto tax lawyer Ian Lebane, Behind Closed Doors was published in March. ‘The response has been tremendous,” Hal says. In June, he attended the American Booksellers Association convention in Chicago with a major U.S. distributor, Bookazine. Not only did the huge American chains Barnes and Noble and Waldenbooks agree to carry it, but Bookazine is now promoting the guide in its Christmas catalogue. So far, more than 4,000 copies have been sold at $50 each. So many people have now called him, Hal says, that he and Lebane have set up a new company to help people move their assets offshore.

S. C.

example, LeBreux set up an offshore corporation in the Turks and Caicos for a businessman who leases cranes, tractors and forklift trucks to construction companies. In the past, Revenue Canada collected half of his profits. But now that the offshore company buys the heavy equipment and leases it out, tax is no longer an issue. LeBreux’s client is entitled to take money out of his offshore company in the form of a dividend, and when he does he is required to pay taxes on it. But otherwise, the profits remain in the offshore company—earning interest and out of reach of Revenue Canada. A further benefit is that when the lease runs out, the offshore company can sell the used equipment to a company in, say, Europe or the United States. As long as the money remains in the offshore company, all the income is tax-free.

Or take the case of a computer consultant—a client of LeBreux’s— who has clients in Europe and Asia. If the consultant had set up his business in Canada, his income would have been subject to the standard Canadian tax rates. Instead, he set up an offshore business, which searches for consulting contracts and then hires him to fulfil them. Clients pay the corporation, which in turn pays the consultant an agreed-upon fee, which is taxable as income in Canada. Any remaining earnings stay in the offshore corporation, untaxed.

Toronto accountant Ralph Kydd, who specializes in setting up offshore accounts, says he has one client, a screenwriter in Nova Scotia, who recently won two Hollywood contracts worth a total of $2.7 million. All of that money will be paid to an offshore company that Kydd set up for the writer; a portion of it will be transferred to Canada, making it subject to income tax. The rest must remain offshore. “But there is nothing to stop the corporation,” Kydd notes, “from buying a villa in France and making it available to him for his exclusive use.”

Of course, Revenue Canada has rules that are intended to get around those kinds of deals. The clients renting the crane or hiring the consultant, for example, are supposed to withhold 25 per cent of their payments and remit the money to the tax department. That is known as a withholding tax. But tax experts say that the rule is often ignored, partly because there are so many allowable exemptions. And even if the tax is paid, it is often far less than the amount that Revenue Canada would collect if the full income was reported in Canada.

There is one group of business people for whom Revenue Canada does make a generous exception—wealthy immigrant investors. Newly arrived entrepreneurs are granted a five-year tax holiday on their offshore earnings as long as they keep those earnings out of Canada. When the exemption period expires, immigrant investors are required to declare their worldwide income like other residents of Canada. The problem for Revenue Canada is that taxpayers who set up foreign trusts, bank accounts and corporations are not required to report the existence of those entities. That makes it easy to “forget” to report the income from them.

So who is left to pay their fair share of taxes? The only ones Revenue Canada can count on for sure are those Canadians who earn wages or salaries from which taxes are deducted at source. That system worked well when Canada’s existing income tax structure was set up in the 1940s and 1950s, when the economy was humming along and words like “downsizing” and “restructuring” were not part of the national lexicon.

Most of those wage and salary earners were employed by big corporations, governments or manufacturing industries. And, until the 1960s, corporations collectively paid ■

more tax than individuals. That changed when corporate tax revenues as a share of total government revenue began to drop and personal tax revenues started to rise. According to a 1994 study by the Paris-based Organization for Economic Co-operation and Development, personal income taxes as a percentage of total federal tax revenues in Canada rose from 33 per cent in 1975 to 41 per cent in 1991, the latest year for which figures were available. During the same period, revenue from corporate taxes as a percentage of total tax revenues fell to six per cent from 14 per cent.

The top 10 offshore banking centres for Canadian residents:

Bahamas

Bermuda

British Virgin Islands Cayman Islands Cook Islands Guernsey Isle of Man Jersey Switzerland Turks and Caicos

In the late 1980s and early 1990s, when governments and companies struck thousands of Canadians off the payrolls, the tax base changed even more radically. Suddenly, there was a large and growing pool of self-employed workers, most of them in service businesses, which have generous tax writeoffs. And many of these self-employed people, determined to hang on to their money, are the ones searching for offshore havens. McGill’s Naylor sums up the situation succinctly: “When you combine the de-legitimization of government in the eyes of citizens, the widespread knowledge of how to evade taxes and a lack of fear of government response, then you have a prescription for fiscal and financial disaster.” The finance department in Ottawa is not ignoring the threat. In the last federal budget, the government proposed new reporting rules that would tighten up the Foreign Accrual Property Income regulations (known as “the FAPI rules”) and make it more difficult for Canadians to conceal offshore assets and income. Until the rules become tougher, however, the government has to fall back on the honor system. “You’d

be surprised at the number of honest people out there,” says department spokesman Bob Westgate. If the honor system fails, Revenue Canada sometimes can uncover offshore assets using so-called lifestyle audits, which go into effect when tax officials suspect high-profile people with lavish lifestyles have filed erroneous tax returns. Investigators can simply demand evidence of how luxury cars, homes, trips, jewelry, clothes and other goods have been paid for. In theory, lifestyle audits strike fear into the hearts of tax evaders, but in practice they are rare because they are expensive, time-consuming and tricky; the person being audited this way often fights back vigorously with lawsuits, putting tax officials on the defensive.

Although Miller Thomson refuses to help Canadians set up offshore trusts and companies, many banks, trust companies and other law firms, such as Harris & Harris, are not at all shy about chasing the business, and vehemently disagree that their clients are in any jeopardy with Revenue Canada. The firm’s biggest growth comes from doctors, lawyers and accountants who are trying to move their assets offshore to avoid the trend to the high litigation claims they see among their U.S. counterparts.

Still, it is not for everybody and it is not cheap, Toronto

tax lawyer Ian Lebane cautions, despite some of the cut-rate prices cited by Lisa Kelly and Robert Bandfield. ‘You would need a net worth of over $1 million to make it worthwhile,” he says. While there may be little or no cost in setting up an offshore bank account, most offshore banks want a healthy initial deposit and expect their individual clients to maintain fat balances—typically several thousand dollars. Lebane adds that setting up a trust or a corporation could cost as much as $50,000. There are legal fees, corporation setup fees, the cost of hiring an agent in the tax haven, compliance costs for such things as keeping company minutes and directors’ fees. “Everything has to have a paper trail,” says Lebane, who also teaches tax law to bar admissions students at Osgoode Hall in Toronto. “It’s not banking for the masses because the costs are too high.”

LeBreux disagrees with these high estimates, saying his firm charges between $2,700 and $4,000 to set up a corporate structure offshore, and roughly the same amount each year to maintain it His

clients believe the charges are worth it, even those who start with a relatively modest nest egg of $80,000 to $100,000. “That’s the breakeven amount,” said LeBreux, “and $200,000 is the norm. But some clients come in with $20,000 just basically to get the process started. They want something somewhere else than Canada.”

Like Naylor, LeBreux estimates that “billions and billions of dollars” are leaving Canada for offshore protection, much of it from large corporations. A few years ago, Harris & Harris acted for around 30 or 40 offshore corporations; now, the firm has between 400 and 500.

Most Canadians who set up offshore bank accounts do so because they believe they can use them to lower their taxes, but James Hal, author of another guide to tax havens, says that is not a good reason. “The prime purpose of going offshore is asset protection,” he says. “Don’t set up offshore to cheat on taxes. Do it because that way no one can take it away from you.” By moving what they have into offshore corporations or trusts, investors can hide assets even when there are judgments, liens or bankruptcies. Secrecy extends to protection from snooping government agencies, journalists and police. “Asset protection trusts” or APTs, are what Hal recommends to his readers. Even though they have been described as “the dark side of the business,” he writes, “one cannot deny that they are brilliant creations.” That is because the person

who sets one up is considered to be insolvent. As a result, no money or property can be extracted from him or her—even though the person setting it up, Hal adds, “has a beneficial interest in the assets and is allowed full control and management of them.”

It is just this kind of structure that both Robins and Rocchi warn against because clients, if caught, will have difficulty proving they are not benefiting from the trust. Still, as long as people file returns with Revenue Canada, all that can happen to them is that they might have to pay more tax, with interest. There will be no penalties. “People view this as a how-can-we-lose proposition,” admits Robins.

To maintain his nonresident status, Doulis spends most of his time cruising the Mediterranean on his yacht, but when he does return to dry land it is often to preach his message to new converts. Robert Bandfield has booked him to speak to Canadians at a three-day seminar in Orlando, Fla., in November: as both he and Hal have discovered, their message gets a warm reception in the United States, especially with audiences on the far right. “There’s a nut fringe to all this, a weird cultural side trip,” cautions Vancouver private investigator Adrian du Plessis, an expert on stock scams and offshore financing. Du Plessis offers a list of American newsletter writers who frequently get together for networking meetings about offshore opportunities. They tend to be vociferously antigovernment and antitax, and many of them, including Robert Bandfield’s partner, Arthur Priestley, belong to the far-right libertarian movement. “They’re constantly threatening economic Armageddon,” says du Plessis. “It’s the financial equivalent of Aryan Nations.” But many mainstream newspapers and magazines run advertisements from companies hawking their expertise on setting up offshore. As more and more Canadians educate themselves on the sophisticated rules of tax avoidance—and the relatively low risk that they will be penalized for offshore evasion—Revenue Canada will have to find even more inventive ways to outwit them. □