The Best Jurisdictions for Canadians

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Category: Global Perspectives

Published on Thursday, 09 February 2012 09:49

Written by Greg McNally

We get a lot of questions but by far, one of the most common goes something like this:

"What is the best overseas jurisdiction for me?"

Of course, the answer will depend on a variety of factors - not least of which includes your citizenship and residency, as well as your goals and your personal preferences.

Today, Toronto-based tax planning expert, Greg McNally, is here to guide us through some of the options available, specifically tailored to our Canadian readers.

What Are the Best Jurisdictions for Canadians?

As an international tax lawyer, clients always ask me which jurisdiction would be best for them. The answer depends on where the client is resident, and what the client is trying to achieve.

Corporate Tax

In relation to tax planning for active businesses, probably the most popular jurisdiction for Canadians is still Barbados. The popularity of Barbados is based on the extremely low tax rate it charges corporations that operate outside of its jurisdiction, and the fact that Barbados is a treaty partner with Canada. Canada's domestic tax laws allow subsidiaries of a Canadian parent company incorporated in a treaty partner jurisdiction to "dividend profits up" to the Canadian parent without additional tax in Canada. Therefore, if the treaty partner jurisdiction (i.e. Barbados) does not levy tax on the subsidiary, then a Canadian corporation operating through such a subsidiary can avoid the bulk of Canadian corporate tax.

Barbados is unique among the majority of Canada's treaty partners in that it does not levy significant tax on certain of its corporations and trusts. However, a potential challenge on the horizon to Barbados' favoured status is Canada's proposed treatment of Tax Information Exchange Agreement (TIEA) partners. TIEA's are information exchange agreements with countries that generally do not levy income, dividend or capital gains taxes on their trusts and corporations and therefore would not have a normal tax treaty with Canada.

Canada has negotiated a number of TIEA's with traditional tax havens such as Bermuda, the Bahamas, and the Turks and Caicos Islands. As "treaty" partners, they will now be eligible for exempt surplus status similar to Barbados and therefore provide more options to corporations.

Trust Planning

In relation to trust planning for Canadians, I favour the Bahamas as a jurisdiction.

The use of non-resident trusts for Canadians is evolving from tax planning to asset protection planning. As such, the Bahamas offers a number of features that other competing jurisdictions do not. Not only does it have an effective statute of limitations provision set at 2 years, but it also has important supporting legislation which neutralizes fraudulent conveyance claims by creditors including ex-spouses. Moreover, the Bahamas does not recognize foreign judgements rendered in Canada, forcing a plaintiff to re-litigate in the Bahamas.

Holding Companies

As far as holding companies go, I tend to use the Turks and Caicos Islands (TCI). It has basically all of the provisions that a volume jurisdiction like the British Virgin Islands offers, and yet, it is much more accessible to travel to. A holding company is generally the entity that manages the assets contained in either a tax or asset protection plan. As such, the client should make an effort to get to know the service providers operating that company and feel comfortable with the jurisdiction.

TCI has daily flights from Canada and anyone who has ever been to TCI knows that there is a strong Canadian presence there, which makes due diligence procedures for Canadian clients uniquely more effective.

Another Trio Worth Noting

Three other jurisdictions worth noting for Canadians are the United Arab Emirates (UAE), Nevis and the Isle of Man (IOM).

The UAE has a very favourable tax treaty with Canada that provides for a low rate of withholding tax on dividends paid from Canada to a parent company in the UAE (5%). Once received, the UAE does not levy tax on this income, nor does it apply withholding tax on secondary dividends paid out from the UAE entity to a third party outside of the UAE. This favourable treatment at three separate levels makes the UAE an attractive jurisdiction to use to incorporate a holding company for Canadian businesses. Some of my colleagues use certain European jurisdictions for this same purpose, but I find these jurisdictions more expensive and restrictive to operate in (which precludes their effectiveness for the medium-sized owner/operator).

Nevis is unique in relation to its insurance legislation. Private placement insurance is fast becoming one of the most popular plans for both tax savings and asset protection for Canadians. However, most jurisdictions offering insurance are relegated to whole life products and even so, are restrictive in the use of assets in the policy and in some cases leave the assets at risk. Unlike any other jurisdiction in the world, Nevis offers a statutory regime similar to trust company legislation that protects both the client's assets and the capital of the service provider (i.e. the insurer). This allows the insurer to be much more flexible with both the type of product that can be used in a given plan, and the management of the assets that are held in the plan.

The Isle of Man offers access into the EU, and in particular the United Kingdom, for special purposes such as the payment of Value Added Tax on a favourable basis. There is no corporate tax in IOM, which makes it attractive as a jurisdiction for a subsidiary which can register for VAT on products sourced in third party countries such as China and sold via the internet into the UK. While this particular use for the IOM favours everyone including Canadians, it is worth noting.

Picking the Right Jurisdiction

There are a number of excellent overseas jurisdictions in the world. Some of them cater to specific jurisdictions - such as the United States or the EU - while others are differentiated by client type (private client versus multinational corporate). Residency/citizenship status and planning objectives also come into play.

Regardless of the jurisdiction, equal attention must also be paid to the individual service provider that is chosen within that specific jurisdiction. Even the best jurisdiction in the world can't save someone from a crook.

About N. Gregory McNally, BA, LL.B, MBA, JD, LL.M (Int'l Tax), TEP: A Canadian by birth, Greg McNally is an international tax lawyer by training. He has earned various degrees, including law degrees in both Canada and the United States, a Masters of Law in International Tax and a Masters in Business Administration. He practiced law in the Turks and Caicos Islands for 10 years from 1992 until 2002, when he returned to Canada and joined the Royal Bank (Global Private Banking) as their Senior Manager of International Services in Toronto. In 2004, he started an international tax consulting firm called N. Gregory McNally & Associates Ltd., where he now oversees the development and implementation of customized international wealth management solutions on behalf of high-net-worth and ultra high-net-worth clients.

PLEASE NOTE: The information contained within this article is based on the best research we could find as of the date of publication. However, the world changes fast and information can become out of date relatively quickly. So, two points... First, before undertaking any action described in this material, please conduct your own due diligence and verify all facts. Second, if you happen to spot an out of date fact or figure (or even suspect something is out of date or false), simply get in touch with us and we'll look into it. International Man is a network made up of some very smart people - tax specialists, accountants, lawyers, analysts and many other talented individuals. As a group, we can create and maintain a very accurate and highly actionable resource for internationalization.

Tags: Bahamas , Barbados , Canada , Canadian , Greg McNally , Holding Companies , Isle of Man , jurisdiction , Nevis , Tax Planning , Trust Planning , Turks and Caicos Islands , United Arab Emirates