Offshore accounts: The secret stash of the rich & famous

Being rich and tax-savvy is normally a pretty good gig, if you can get it. These days, however, some very wealthy people are quaking in their cashmere socks and calfskin boots.

The reason for their unease is a recent leak of offshore banking information that was gathered by an organization called the International Consortium of Investigative Journalists (not a group you’d want on your bad side). This was no small leak: the ICIJ managed to get their hands on some 2.5 million digital files covering 30 years of financial transactions in 10 international tax-haven destinations. The data identifies 130,000 accounts held by people living in about 40 countries. You can bet that not one of them ever expected their private pots of gold to be publicly exposed.

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Four hundred and fifty of those accounts are held by Canadians. The ICIJ handed all the data relating to Canadians over to the CBC. So far, the CBC has only named one of the Canadian account holders - Tony Merchant, the lawyer husband of Senator Pana Merchant, who has allegedly spirited some $1.7 million out of Canada and into an offshore trust in the Cook Islands.

Which leads us to two questions. First, who are the other 449 offshore account holders amongst us? Second, how the heck did they do it? Well, you’ll have to get in line behind the federal government to find out the answer to the first question. But when it comes to the second, well, here’s just how it’s done…legitimately and not so legitimately (visit this handy CBC interactive guide for even more details).

1) Find somewhere tax-free

The first thing you do is choose where you want to park your pot of gold. A number of countries in the Caribbean, Pacific Ocean and Europe are known as popular tax havens. Not only do these jurisdictions not charge taxes, they historically would not share information with other governments. This is changing however. Thanks to an increase in international tax treaties, most tax havens now have an obligation to report foreign investors’ assets back to their home countries (however, this requires time and resources and some jurisdictions are quite small). As a result, some tax havens are more, uh, thorough than others when it comes to reporting foreign assets.

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2) Establish your offshore identity

Generally, there are six types of offshore entities you can set up. Each has certain advantages and offers a different level of privacy. In some cases, an investor will layer them up to add extra privacy (such as a foundation that owns a corporation, etc.).

  • Individual bank account – Least privacy control, since your name is clearly on the account.
  • Off-the-shelf company – No fuss, no muss, a ready-to-go, pre-registered company that you make your own.
  • International business company – By setting up an IBC you have the flexibility to conduct business internationally and move assets around the world.

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  • Limited liability company – The assets earned within an LLC would not be deemed as your personal property, offering extra protection for those fearful of being sued.
  • Private foundation – An ‘ownerless’ non-profit account that can hold assets and continue to exist longer than you do.
  • Offshore trust – The most secure and private way to shield assets from prying eyes (and hands) and a tax-free way to transfer inheritance money. A trustee is appointed to manage the funds according to your instructions when setting up the trust.

3) Move the money

Whichever form you choose, the new offshore entity requires a bank account in its name. For extra privacy, some people keep the bank account and the company or trust in separate offshore jurisdictions. Canada, like most countries, attempts to monitor large sums of money moving across its borders. Here are some of the rules:

  • A big wire – The authorities can easily track a wire transfer, but since you have duly reported the money as income and paid tax on it, you have nothing to worry about.
  • A small wire – The government focuses mainly on transfers of $10,000 or more, but your local bank might look at you suspiciously if you start doing a lot of these.
  • Pack your bags – If you carry more than $10,000 in cash across a border, most customs officials expect you to report it.
  • Get sued – Some people have been known to set up a fake lawsuit with an offshore business or person. They agree to settle out of court, sending the settlement money out of the country where they can collect it later.
  • Mail it – It might take nerves of steel, but some people have been known to simply drop their cash in an envelope and mail it to their offshore bank.
  • Bank swap – You’ve heard of house swapping, how about bank account swapping? It’s pretty rare due to money laundering controls, but some people have managed to open accounts for each other in their home countries and simply swapped access, thus avoiding the issue of transferring cash across borders.

4) Spend the money

Here’s where things get really murky. Unless you report your foreign assets to the Canadian government and duly pay your tax bill, there is simply no legal way to bring that untaxed money back into the country. But of course, that doesn’t stop some people. Here are some of the ways they do it:

  • Join the cash – Leaving Canada and moving abroad is one way to access offshore money without ever paying taxes on it.
  • Roll the dice – Since gambling winnings are not taxed in Canada, some people have created fake gambling schemes to make it look like they won their money abroad.
  • Borrow from yourself – A back-to-back loan means you put your money in an offshore branch of a Canadian bank; then visit a Canadian branch where you take out a loan for the exact same amount. Sneaky.
  • Gift from granny – The offshore money is given to a relative who lives outside Canada. They set up a trust, naming you as the beneficiary. The payouts are deemed as a gift, which is tax-free.
  • Shady policies – Insurance payouts are also non-taxable in Canada. The offshore money is used to buy an offshore insurance policy on a relative who is dying, payable of course, to the person who bought the policy. Creepy.

There are no secrets

As we said earlier, holding an offshore account is not illegal. What is a crime is not reporting income, shipping money out of the country without paying taxes on it, and keeping its existence a secret from the Canadian government.

The 449 mysterious Canadians lay in wait as CBC does further investigations to determine which ones they can safely “out”; in other words, which ones they can prove are evading taxes and not just innocently parking some tax-paid money abroad.

When it comes to offshore investing, it’s kind of like how your mother always warned you (or how you warn your kids) – a “mother always knows”. No matter how sneaky you think you’re being, she will always, eventually, somehow find out what you’ve done. Those who have cheated the system must live in fear that eventually, somehow, the government, the media and the world will find out what they’ve done. And no matter how wealthy you are, that is no way to live. is a free personal finance and education site for women.

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