Memories Of D-Day

Anthony Wilson-Smith June 14 1999

Memories Of D-Day

Anthony Wilson-Smith June 14 1999

The Tax Dodgers

Canadians are eyeing their taxes— and hiding their money offshore

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Jane O'Hara

When Patrick Cover drives to work at the Barclays Bank building in George Town on Grand Cayman island, there are always big white cruise ships lolling in the harbour a few blocks away. For Cover, a 25year-old former Torontonian who sets up offshore bank and stocktrading accounts for Canadians, these massive liners are a floating client base. By 8:30 a.m., when his workday begins, the herds of passengers will have come ashore, wearing baggy shorts and floppy hats, fumbling with their tourist maps as they overrun the narrow, twisting streets. Some are looking to buy duty-free goods, others trying to find the beach. But a certain number have landed in this bustling tax haven (downtown George Town boasts 650 banks in an area the size of a baseball stadium) with one main goal: to invest money in a tax-free location far from the prying eyes of Revenue Canada.

Pulling into the Barclays parking lot, Cover passes a swarm of ■ tourists. One of them could soon be a customer (Barclays is unquestionably the bank of choice for Canadians stashing cash in the Caribbean). “We have a lot of walk-ins—a lot of our clients don’t believe in calling or making an appointment,” Cover says, staring through a racy pair of metallic sunglasses. “An average day is crazy, hectic. Doctors, lawyers, anyone you can think of could walk through that f door. We see everyone. We get people in here with torn-up shorts and 1 torn-up T-shirts.” J

The dress code is optional these days when dabbling in the world of I

offshore banking. Although tax havens were once the sole preserve of the super-rich who transferred billions of dollars to offshore jurisdictions, they have been democratized and gone down-market. That may in part be due to the example set by famous expatriates who have settled in glamorous offshore tax havens: Grand Cayman boasts, among others, John Felderhof of Bre-X infamy, while the Bahamas is home to Canadian fashion designer Peter Nygard and best-selling Canadian author Hailey. Now, average folks who have paid off their houses, maxed out their RRSPs, sold a small business or simply have some extra cash want in on the action. Among the favourite vehicles, or “structures,” as they are known: offshore investment funds; hard-to-track companies known as IBCs (for international business corporation), which are usually used for trading stocks but camouflage ownership; and non-resident trusts, which shelter income and, on the face of it, are administered by an offshore trustee.

There’s just one catch. While investing offshore is not in itself illegal, moving money for the purposes of generating tax-free profits, and hiding those profits from Revenue Canada, is. It can make for sleepless nights: sneaking Canadian cash out of the country without leaving a paper trail, lying on income tax forms and hoping the tax man doesn’t come knocking. “You have to have big balls to play this game,” says ‘Vic MacLeod’ (who asked that his real identity be protected), a western Canadian businessman with a large personality and a zeal for the deal who opened an offshore shell company four years ago. “This isn’t for the meek of heart.”

Maybe not—but more and more Canadians appear to be living on the edge. Four years ago, when Vancouver lawyer Ken Finkelstein was laying the groundwork for his practice, he realized there were almost no small legal firms doing offshore work. “There were mainly the big law firms and the big accounting firms doing this and they were charging a fortune,” says Finkelstein, who recently wrote The Tax Haven Guide Book. “Because of the mystique around the offshore, people have been charging a premium.”

In 1996, when Finkelstein finally hung out his shingle, he began undercutting the competition— making the offshore affordable for average folks. (Even so, the services run between $7,000 and $ 10,000 for a basic investment vehicle.) Since then, he has had middle-class clients—teachers, engineers, high-tech workers, most of them male and ranging in age from 25 to 70—streaming through his office. “You name it, people are interested in this area,” Finkelstein says. His investment vehicles are legal, he adds—but the onus for paying taxes on profits falls on the customer. Finkelstein says he advises all his clients about their Canadian tax obligations. “If they get a blank look in their eye, I tell them again,” he says. “But once they walk out the door you can’t control them.”

Neither, so far, can Revenue Canada. “Of the

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The game of offshore investment has given the world’s 45 tax havens the furtive feel of speakeasies

people that I know who are using the offshore, 99.99 per cent are reporting squat,” says Gordon Laight, a former Torontonian who four years ago moved to Nassau, in the Bahamas, where he is now executive vice-president of Best Funds Distributors Inc., a mutual fund company. Says Laight, who is also the author of Offshore Advantage, a primer on the complex world of international investments: “It’s becoming outand-out tax evasion. Period.” Adds a Canadian accountant with more than 20 years experience in Bermuda: “A lot of people with assets offshore cloud the trail, masquerade the ownership. But no matter how much they obscure it, it is still an illegal event. They are not reporting income and the authorities would see through that if they ever found it.”

But offshore investment is a booming global business—one that is increasingly being chased by big banks. Under a deal announced last month with British Airways, the Royal Bank of Canada will begin canvassing the airline’s 40 million customers (the majority are European) for clients. The bank will offer offshore accounts, which will start at $20,000 and be administered by the Royal’s offices in the Channel Islands—an attractive opportunity for, say, a heavily taxed German investor. And Barclays—the London-based international financial behemoth—views smaller investors as the latest niche market. Six months ago, it started Premier Banking, a private service for financial minor leaguers. Among other things, it offers clients numbered accounts—the minimum investment is supposed to be $100,000 but is often far less—for trading stocks or bonds. Because of the strict Cayman laws governing banking secrecy, the taxable profits from the investments remain safely hidden.

Although federal government officials concede that the popularity of offshore investing is growing among Canadians, they will not offer an estimate as to how much is being lost in taxes. But particularly worrisome is the threat that some of the $ 1 trillion estimated to be coming to Canadian baby boomers in inheritances might disappear offshore. As a result, in last February’s budget, Finance Minister Paul Martin proposed a series of tough measures aimed at attacking the problem. They include stiff fines on lawyers, accountants and financial planners who set up tax-evading offshore structures, and a crackdown on offshore investment

funds and non-resident trusts (page 24). And Canada is only one of many industrialized countries taking aim at offshore tax evasion.

Will the get-tough approach work? Some potential investors may be scared off. But the reality is that many Canadians will continue to try to cheat the system, and assets already generating income in tax havens as far-flung as Cyprus, Liechtenstein or the British Virgin Islands are almost impossible—and prohibitively expensive—to chase down. Revenue Canada’s job will become even more difficult when online banking and online stock trading takes wider hold. The trend is already under way: the government of the Caribbean island of Anguilla recently started a fully electronic, round-the-clock service that will allow customers to create and register offshore companies from home.

Ottawa’s threat of tougher measures, meanwhile, is already sending offshore investment experts looking for new strategies. In July, hundreds of them will attend a two-day confer-

The hot spots

There are 45 tax havens around the world competing for offshore Investment— and harbouring an estimated $5 trillion dollars, about onethird of the international money supply. Among the favourites for Canadians:

1. Bahamas

2. Bermuda

3. British Virgin Islands

4. Cayman Islands

5. Cook Islands

6. Guernsey

7. Isle of Man

8. Jersey

9. Switzerland

10. Turks and Caicos

Source: Behind Closed Doors (1996) by James Hal

ence at Toronto’s Metro Convention Centre—at a cost of $1,200 a head—which will deal with the new rules on offshore investment. In true offshore style, one of the workshops will be cloaked in secrecy, held behind closed doors. Promotional material for the session features the warning: “Due to the exclusive nature of this material this workshop will not be audioor video-taped.”

Among those thinking of attending is Michael Schmidt, a tax lawyer from Kitchener, Ont. He says he is unsure whether even the brightest minds in the game will be able to bend the new rules. “Some sophisticated people will be looking at these new conditions,” says Schmidt, who has been giving offshore tax advice for 10 years. “Someone may find another loophole, but that loophole is looking pretty small.” But other lawyers and accountants who have been fielding calls from clients concerned about the new legislation say few of them seem overly concerned.

The illicit globed game of offshore investment has given the world’s 45 tax havens the furtive feel of speakeasies. In the Bahamas and the Cayman Islands, where dummy corporations shelter holding companies and shell companies are governed by mystery trusts, the veil of secrecy hangs over financial dealings. Conversations are in code. Few people agree to be quoted; fewer still want their names used. Offshore companies specialize in catering to their clients’ desire for privacy. Some provide customers with 1-800 numbers, which do not show up on an itemized home phone bill. Others ask if clients want a “hold mail” account so correspondence will not arrive in Canada to give them away.

Andrew Cowie, a 30-year-old Toronto accountant who works for a money managing company in the Cayman Islands, makes the offshore’s routine tactical manoeuvres sound like something out of a James Bond movie. “We set up individual numbered accounts for each client—and I have a decoder sheet to match them up with their real names,” says Cowie, a hockey fan who owns a Chihuahua named Gretzky and participates in a weekly ball hockey game for Canadian expatriates. “We have people who get quarterly statements on non-marked stationery in a nonmarked envelope. There’s a Cayman stamp, but no company identification so you don’t know where it came from.” At times, the intrigue and murky depths of the offshore scares clients away. Cowie says his very Canadian-ness gives him an edge in reassuring customers. “The big fear with offshore is that it’s foreign, that the money is kept in burrow bags,”

said Cowie. “We have a big advantage with the Canadian market because we know what Moose Jaw is. We know what the score was in the hockey game last night.”

In this shadowy world discretion is mandatory. Under law in many tax havens, people can be thrown in jail or fined heavily for disclosing information about offshore activities. Tax evasion is not a crime in these jurisdictions—discussing it is. In Nassau, a FrenchCanadian banker laughs when asked how his Quebec clients will get around the finance department’s tough new provisions. “That’s not the right question,” he said mischievously. “You should ask instead, what vehicles will be used to comply with the new laws.” A meticulously dressed director of a private European bank in the Bahamas was more taciturn when asked about the type of services he provides. “I’m a private banker,” he said. “Unfortunately, everything I say is private.”

If the offshore is like a speakeasy, the bootlegged commodity is money. The first rule Canadians follow when transferring funds: don’t use Canadian banks. The second, often referred to as the “Louis Vuitton” rule: don’t show up at any reputable foreign bank with a suitcase full of money. “The only way to scare a banker down here is to show up with a gun or a lot of cash,” says one Cayman islander. The fear is money laundering, a criminal offence, which can bring international police authorities crashing through the banking secrecy laws. But most of the large banks will accept a maximum cash deposit of $10,000 (U.S.) once every three months (with the right introductions, officials will turn a blind eye to larger cash deposits as well).

And there are as many ways to move money offshore as there are banks willing to take it. For average investors, it can be as simple as someone arriving at an offshore bank with proper identification—and $10,000 stuffed in a fanny pack. But often the funds take a more circuitous route. When one Vancouver man started investing offshore three years ago, he first wired $30,000 from his local bank to the cashier’s cage at a Las Vegas hotel. He then flew to Vegas and bought chips, minimally played the tables for appearances’ sake and cashed out. He then flew to Nevis, a Caribbean tax haven so tiny it barely appears on the map, where he invested in stocks.

Paul LeBreux, a 32-year-old lawyer with Harris and Harris in Toronto, has set up almost 1,000 offshore investment vehicles since he started doing international tax work seven years ago (most of them operate by deferring tax on offshore gains until the money is used or brought back to Canada). But he says he has turned away twice that number of clients because what they asked him to do was outright illegal. “And,” he says, “I’m sure that when they leave my office, they don’t stop— they bounce around until someone gives them the answer they want.” Like Vancouver’s Finkelstein, he says he cannot

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be responsible for the actions of his clients after he has helped them make their investments. “You don’t have control over your clients,” LeBreux says. “You’ll get individuals who’ll say down the road they aren’t happy just with the deferral situation—they want to pay no taxes whatsoever. And there’s not much we can do about that—if I set up a structure, I don’t know whether the person is flying to the Cayman Islands and withdrawing money each week. Nor do I have any obligation to police that.”

Some Canadians bypass the experts. That is the route Vic MacLeod chose when he moved his first $20,000 offshore four years ago to one of the Caribbean tax havens, where the white sandy beaches and margaritas give him an added incentive to visit his money every winter. He decided not to use a Canadian lawyer or an accountant, cutting out middlemen partly because of the cost, partly for greater secrecy. “I didn’t want to have to trust anyone but myself,” he says.

On the island he opened a bank account and registered an offshore company, which is tax exempt for 20 years. To hide the fact that he owns it, he found a local trustee at a cost of $600 per year (she formerly worked as the local government’s registrar of companies). “I set it up so that her little company is the sole shareholder of my company,” he explains. “That way I don’t have to declare ownership. My company has one share and technically she holds that share, but really she’s already signed it back to me and it’s at home in a safety deposit box at one of my banks.”

Like similar setups, MacLeod’s offshore company holds stocks (traded by his broker in Canada) that are paid for by his

bank account in the tax haven. That bank account receives regular infusions of money in ways MacLeod describes as being “fairly creative.” Since Canadian banks report any cash withdrawal over $10,000, MacLeod keeps well under that limit, withdrawing smaller amounts from dif« ferent accounts at different banks on I different days. Once he has the cash I in hand, he wires it via a private com| pany to his Caribbean account. When £ he confirms the money has arrived, he destroys the receipt, the only piece of paper connecting him to the transaction. MacLeod is betting Revenue Canada will never catch him. “I’m not sitting here thinking this is foolproof,” he says. “But I just hope that chasing this money is so aggravating, nothing’s going to happen.”

The subterfuge does not stop there. In fact, it intensifies if people who have been hiding money offshore decide they want to bring it back and use it without attracting the attention of Revenue Canada. According to one Toronto lawyer who does business in the Cayman Islands, money is often repatriated through purchases of Canadian real estate. The money trail is obscured when funds are moved from an offshore lawyer’s trust account to a lawyer’s trust account in Canada. The property is eventually re-sold and the money’s roundabout journey ends by being safely deposited in a Canadian bank account. But sometimes the funds never make it back. They can vanish when an investor dies, or evaporate in a shady deal. In the shadowy world of offshore investing, the tax department is not the only thing Canadians need to watch out for.

With Shanda Deziel in Toronto

Charting a course in the offshore world

Spiriting money out of Canada is only one challenge faced by ojfhore investors. Picking a good investment vehicle is another. Some of the commonly used schemes:

1. The investment trading account.

The simplest vehicle, it usually features mutual funds and is offered by most offshore banks, trust companies and mutual fund companies. The investor must usually travel to the offshore jurisdiction to open the account. There is often a minimum investment required, and sometimes associated charges or annual fees. Income generated is often rolled back into the fund and is not taxed. The accounts are held

in the name of the institution to guard investor anonymity.

2.The international business company (IBC).

An offshore company, it enables investors to conduct financial transactions while hiding the real identity of the owner. Company shares can be owned by an individual or, to further obscure ownership, another IBC. Canadians who own IBCs almost always utilize them for trading stocks—using their regular brokers at home. On average, the cost of setting up an IBC is $1,500. There are also annual maintenance and registration fees that can run about $800 a year.

3. The non-resident trust.

This vehicle enables investors, on the surface, to divest themselves of assets— cash, stocks, company shares, real estate—and cloud the question of ownership by turning them over to an offshore trustee (often a bank, established law firm or trust company) that then executes the precise terms of the trust document. The trust is designed with the highest secrecy—it is not filed with any government agency, while the names of the parties involved and the trust’s activities are protected under the tax haven’s laws. In reality, the investor usually runs the shop and directs the trustee to do his bidding. Setup costs can run about $7,500 with annual fees and charges about $4,000 per year.