Aug 16th, 2023
Jan 31st, 2013
The notion of going offshore, whether for a Canadian individual or a Canadian corporation, holds a certain allure, in particular the prospect of attaining significant tax savings. But, as they say, the devil is in the details. Put simply, in order to achieve the intended objective, one has to be prepared to "walk the walk" so that steps taken are not considered to be ineffective on the basis that they are mere window dressing.
For an individual, relinquishing Canadian residency generally means being prepared to give up all substantial personal and economic ties to Canada; for example, the personal residence must be sold, any dependants should not be left behind in Canada, memberships in Canadian clubs and similar social ties should be discontinued, Canadian bank accounts and credit cards should be closed, other economic ties should be reviewed, and so on. But it is not sufficient to simply give up such ties in Canada, as similar ties must also be established in the new home country in order to assert residency there.
Also, planning to deal with the impact of the Canadian departure tax should be considered well in advance. Finally, from a practical perspective, some may find that their new home country, while attractive from a tax perspective, falls short of what they expected as a place to live if they did not wish to make significant changes to their lifestyle upon leaving Canada.
Meanwhile, a Canadian corporation experiencing significant growth in non-Canadian source income (e.g. sales to foreign markets) may choose to establish a presence outside of Canada in part so as to benefit from lower tax rates as well as from potential business advantages (such as being closer in proximity to target markets or suppliers). However, the corporation must be prepared to invest in a proper office with real staff in the foreign location, so that the operation has the capacity to do what it purports to do (i.e. a mere post office box will not do).
As such, the selection of the foreign location must be practical for both business and tax purposes. If the non-Canadian operation does not have real substance and it is apparent that its management continues to be directed from Canada, no benefit will have been achieved for tax purposes. Clearly, there are a number of tax and business issues that must be addressed in executing such planning, and any Canadian tax costs that may be incurred in migrating necessary assets to the foreign location (backed by a valuation of such assets) will also have to be taken into account.
In sum, whether contemplating a personal departure from Canada or business expansion to a foreign country, careful tax planning along with a consideration of related practical concerns are essential in order to achieve the intended objectives in a sustainable manner.
Steven Sitcoff is a tax lawyer at Spiegel Sohmer who has experience with a variety of corporate and personal income tax matters, including voluntary disclosures to the federal and provincial tax authorities.