Business

Taxing foreign havens

Ottawa wants 'truckloads' of new tax information

TOM FENNELL November 4 1996
Business

Taxing foreign havens

Ottawa wants 'truckloads' of new tax information

TOM FENNELL November 4 1996

Taxing foreign havens

Business

Ottawa wants 'truckloads' of new tax information

Taxes—and what to do about them—have callers to Hanson Lau’s popular Chinese-language radio show burning up the phone lines in Vancouver. Many of the more than 250,000 Hong Kong Chinese who have emigrated to Canada are enraged by a change to the Income Tax Act that will require them, like all other Canadian taxpayers, to reveal any foreign assets they have in excess of $100,000. Under the old legislation, taxpayers were required to report their worldwide income (and pay tax on it), but not their worldwide assets. As of Nov. 1, however, they will be compelled to reveal their foreign holdings as Ottawa seeks to track down taxable income generated by money invested outside Canada or tucked away in offshore tax havens. Taxpayers will have to list everything from a condo in the Caribbean to shares held in an offshore trust. Once it has the information, Revenue Canada expects to tap a deep pool of new cash that some analysts say could be worth billions of dollars.

Hong Kong businessmen and investors, huge numbers of whom have come to Canada in recent years, are particularly distressed. They became Canadian citizens in part to protect their assets from the mainland Chinese when Beijing takes control of the crown colony next July 1. They did not reckon on exposing holdings that they left behind, but still control from Canada, to scrutiny and potential taxation by Revenue Canada.

A delegation of them, speaking for various business groups of Hong Kong Canadians, met in Ottawa last week with senior department of finance officials to plead their case for having the disclosure level raised from $100,000 to $1.5 million. The Canadian Bar Association has thrown its weight behind the businessmen, claiming Revenue Canada is trying to collect so much information that it will drive investment from Canada. In the meantime, Lau’s phones keep ringing. “We’ve had more calls on this issue than any other,” says Lau. “The mood is very unhappy, very ugly.”

Although the loudest outcry is coming from affluent ChineseCanadians, many middle-income Canadians will be caught in the same net as Revenue Canada tries to find out how much cash and property Canadians own abroad. In the process, the department may stem the steadily increasing flow of money from the bank accounts of Canada’s middle class to foreign tax havens. Paul LeBreux, a partner in the Toronto firm Harris & Harris, which focuses on international tax planning, says billions of dollars are being parked abroad each year by Canadians. Much of the foreign income generated, LeBreux says, is never reported to the tax man.

The new foreign-asset provision is scheduled to become law in the next federal budget, but will be retroactive to Nov. 1. Between now and budget day, expected in February, Finance Minister Paul Martin will face a mounting lobby that wants him to scrap the provision entirely, or, failing that, to raise the disclosure level dramatically. But despite the angry reaction he has already encountered, Martin intends to push ahead. Says Donald Drummond, senior assistant deputy minister for the federal government’s tax policy branch: ‘There is income being earned by these people that is not being reported.”

Although many wealthy businessmen are threatening to move their assets out of Canada, Ottawa is making it more difficult for them to do so. A new withholding tax came into effect on Oct. 2 that is designed to help ensure that in the future the federal treasury gets a slice of money held in trusts that are transferred out of the country. The new rule requires individuals or companies transferring the funds to first post a bond with the government. The bond could then be used against future tax liabilities.

In May, it was revealed that in 1991 the Bronfman family of Montreal, which controls distilling giant Seagram Co., had moved $2 billion that was being held in trust out of the country without immediately paying capital-gains taxes on the money. Although the Bronfmans took the precaution of obtaining an advance ruling from

National Revenue on the legality of the transfer, the move caused an uproar when Auditor General Denis Desautels said the transfer may have “circumvented the intent of the law.”

But analysts say Ottawa will find it difficult to monitor the movement of assets out of the country because the government has no real way of knowing when large volumes of money leave Canada. “We’re not saying the money can’t leave the country,” said Drummond. “But we think if the gain occurred in Canada, the tax should be paid in Canada.”

The $100,000 disclosure rule and imposition of the withholding tax have sent waves of anxiety through accounting firms across Canada. Bill Lawlor, a partner in KPMG in Toronto, said that he expects taxpayers will become deeply angered this spring when they see the extent of the information that Revenue Canada wants them to start filing on their foreign assets. Other analysts believe the new tax measures are so draconian that they could drive investment out of the country. The bar association and the Canadian Institute of Chartered Accountants have submitted a joint brief to Martin, urging him to drop some of the foreign-asset reporting rules and modify the withholding tax. The brief also raises concerns over what Rob Spindler, a partner in the Toronto accounting firm Coopers & Lybrand, calls the “truckloads” of information that Revenue Canada will require from Canadians in the future. “It could have the effect of driving capital out of the Canada,” Spindler adds. “People may want to leave before their capital grows any more, or people may not want to bring assets into Canada in the first place.”

Since Britain and China signed an accord in 1985 to return Hong Kong to China in 1997, Vancouver has become a mecca for wealthy, but nervous, investors from the British colony. While they have homes in British Columbia, many of them continue to operate businesses in Asia. When they became Canadian citizens, these investor-immigrants were allowed to place foreign assets in trust for five years before they would become taxable.

Now they fear they will be trapped between their offshore business interests and the Canadian tax man. They worry that they will be forced to not only detail the extent of their holdings held in trust, but may also be hit with heavy capital gains taxes if they are forced to reveal the value of their holdings. “It’s a joke,” said Richard Lin, a Vancouver businessman and former president of the Taiwan Entrepreneur and Investor Association. “A hundredthousand dollars won’t buy a parking space in Taiwan or Hong Kong. This kind of move is bound to scare people away.”

Martin was concerned enough about the growing anger in the Chinese community to meet with a group of the unhappy businessmen in Vancouver in early October. They told the finance minister that they believed many well-off Asian Canadians will return to Hong Kong if Ottawa presses ahead with the changes. Although there is little evidence to support such claims, Lin said it may be significant that there are 1,400 houses for sale on Vancouver’s posh west side compared with 800 just a few months ago. Some Chinese-Canadians apparently are moving back to Hong Kong—but this may be in response to a growing belief that the colony may not fare as badly under its new communist rulers as was once anticipated.

Because of the extensive reporting that Revenue Canada will now require, some analysts believe the proposal may actually backfire. Tom Naylor of McGill University in Montreal, an expert on international flight capital, says there is a great deal of disenchantment with both politicians and the high levels of taxation in Canada. In fact, a Financial LW/COMPAS poll in May found that 77 per cent of Canadians would cheat on their taxes if they knew they were not going to be caught. With that kind of anger directed at the tax man, Naylor says, people who are determined to hide their assets will continue to do so. He also questions why the government would set the disclosure rule low enough to catch the middle class. “What right do they have to ask a plumber to declare how much he has in a Cayman Island trust when they let the Bronfmans take billions out of the country?”

LeBreux, the tax consultant, also says that many of his wealthiest clients will likely now move more money out of the country because they believe the government’s decision to hunt for assets abroad is a clear signal that it intends to eventually adopt full-blown currency controls to keep money in the country. Drummond says, however, that he believes Canadians will follow the new rules. Others are not so sure. “If people don’t file overseas income,” says Albert Cheng, a Canadian who recently returned to Hong Kong, “how do you get them to file on overseas assets?” This is a question that many people may find themselves weighing when they file their tax returns in the spring.

GETTING ZAPPED

Huge penalties under the Income Tax Act for failure to file returns or properly report foreign property transactions will go into effect in 1997. Fines can range from $500 per month to $ 12,000, with additional penalties up to 10 per cent of the value of the foreign property. Personal-use property is excluded.Taxpayers who should be concerned include Canadian residents who:

have established foreign trusts, receive or may receive payments from foreign trusts, use trusts, corporations, partnerships or direct ownership structures to hold foreign property worth more than $ 100,000.

TOM FENNELL

DAVID THOMAS