Secrets of the International "HNWI" Tax Specialist

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Category: IM Interviews

Published on Wednesday, 19 October 2011 10:05

Written by Greg McNally

Today, I’m very happy to bring you an interview especially for our Canadian readers. It features Greg McNally, an experienced Toronto-based tax planner that helps High Net Worth Individuals “HNWI” effectively negotiate the development of their own international structures.

Secrets of the International "HNWI" Tax Specialist

International Man: Tell us a little bit about yourself and how you came to be involved with international structuring?

Greg McNally: In 1986 I enrolled in the joint MBA/LLB program at the University of Windsor in Ontario, which is a four-year program. In my fourth year, I looked into a cooperative program between the University of Windsor and the University of Detroit wherein you could get your US law degree using credits from law classes at the University of Windsor. I applied for that program and was accepted, but had to do the equivalent of a year and a half at the University of Detroit.

So I doubled up on my law classes in my fourth year, enrolling in seven courses a semester and then I stayed for spring and summer school at the U of D. It was a tough year, but by September 1990 I had both my Canadian and US law degrees plus an MBA.

After law school I went back to my hometown of Calgary and articled with a very good firm called Burnett, Duckworth & Palmer, before being called to the Alberta Bar in 1991. After articles I started sending my resume out to various firms in Bermuda and Cayman, because I had a feeling I wanted to do something on an international scale with my two law degrees. Within a few months I was hired by a law firm in the Turks and Caicos Islands.

I soon realized that practicing in an overseas jurisdiction requires a balance between legal work and business.

Most law firms have their own trust company and corporate management firm that allows them to implement the tax planning they're dealing with. Our firm had both of those operations, but I saw an opportunity to expand into asset management. Therefore we incorporated a securities firm, mortgage fund and ultimately an insurance division.

After 10 years, my wife and I decided to move our family back to Canada to raise our three children. I tried to start a branch office of my TCI office in Toronto, but that didn't work out. So I sold my shares to my partners and finished my LLM in international tax, which I had started at Regent University in Virginia.

After finishing my Masters in tax law, I was approached by Royal Bank of Canada to be their Senior Manager of International Services in Ontario. Basically, the job was to help implement tax planning using RBC's international divisions in the Caribbean and Channel Islands. It was a great position because I got to deal with some of the wealthiest individuals in Canada and I could compare how implementation is done with the big multinational firm versus a small shop like the one that I ran in TCI.

Things were going well at RBC, but after a couple of years I felt that I wanted to get back on my own. So after dabbling in a couple of real estate projects, I started a tax consulting firm, which is what I operate today.

IM: Can you describe exactly what it is you do?

GMN: I basically act as a quarterback helping to coordinate tax planning advice with practical implementation. In today's post-UBS world, it is suicide to try avoid paying taxes without proper planning. However, it is also fairly difficult to find planning that suits a person's individual needs. Most tax lawyers practice corporate law, not private client tax, and those that do are usually specialized in a particular area like trusts, insurance, or special purpose vehicles like foundations or guarantee companies. Quite often, I have seen a client “shoe-horned” into a particular tax plan that doesn't necessarily fit his or her fact scenario. Also, my tax colleagues now charge up to $1,000 per hour, which doesn't leave a lot of room for devising or implementing plans.

As a result, most clients are simply stuck using the overseas service provider that the tax advisor has always used, whether that provider is good, bad or indifferent.

The first stage is to enter into a file fee arrangement with my clients wherein they pay me CDN $3,500 upfront to create a customized tax plan for them. I start with a detailed fact-finding exercise, after which I contact certain advisors who I feel would have the proper tax plan for the client.

This saves the client from approaching the wrong advisor and it benefits the advisor in that much of the groundwork has already been completed. Once the proper plan has been ascertained, I then approach certain international service providers who I know can properly implement the plan and I get a quote from them.

At this point, I finalize the memo for the client providing the relevant facts, the name of the professional firm which would provide the tax opinion (either a law or accounting firm), the quote for the tax opinion, the name of the service providers to be used to implement the plan (including structure, banking and asset management) and the quote for implementation - both set up and annual.

At this point the client decides whether to pay for the tax opinion, which is stage two of the process.

After obtaining the tax opinion, the client then decides whether to finalize the implementation of the structure, which is stage three of the process.

After implementation, I stay on with the client to help manage the structure on an annual basis. By having me still in the picture, the client is assured of being able to utilize his or her structure to the best advantage possible. Also, I keep an eye out for any changes that need to be made to the structure due to changes in legislation, either domestically or overseas.

I also act as a contact person for the client's family in the event that something happens to the client. I had a couple of situations where the client has died and the family has had me make certain changes to the structure.

IM: What are some of the most common questions you get from someone new to the idea of moving overseas for asset protection and tax planning?

GMN: Generally speaking, the clients want to know that the planning works and that their assets are safe. I always tell the clients that there are two types of risk: the first is legal, the second is practical.

When it comes to legal risk and you are dealing with tax planning, there is the need to make sure the plan has a legitimate basis under the domestic tax laws. When you are dealing with asset protection, there is a need to make sure that the plan will not be subject to fraudulent preference or family law legislation.

When it comes to practical risk, you must deal only with known service providers with good reputations. You must limit the exposure the staff of those service providers have to the client’s assets. Even the best service providers have had staff members who have stolen client funds.

You also need to make sure that every service provider you deal with has E&O insurance [Errors & Omissions Insurance], which should go without saying if the service provider is worth dealing with in the first place.

Clients also always ask about costs. They want to weigh the cost-benefit analysis.

IM: What are some of the main differences between American and Canadian clients?

GMN: As a culture, I think Canadians tend to be a little more conservative than Americans. I have come across a number of different tax planning concepts that are being pitched in the United States, some of which border on the insane - like the constitutional right not to have to pay taxes. You just don't see that as much in Canada.

Also, Americans have had a lot more disposable income over the years and have ventured into investments around the world, which has made them more comfortable in some ways with international dealings. Americans have had a big jump on doing international tax and asset protection planning compared to Canadians, just because of sheer wealth.

Lastly, there are specific provisions in the US Tax Code that provide for international tax planning, such as captive insurance, which doesn't exist in the Canadian Tax Act. Traditionally, the US has had a much more favourable legislative stance towards taxes than Canada, which has been more socialist by comparison.

However, it is also my experience that Americans can be a tough sell in respect of planning that does not have an American "feel" to it. By that I mean tax or asset protection planning that does not specifically relate to some part of their culture, or does not have a substantial track record with other Americans. Perhaps it is that they are not trusting towards non-American establishments.

IM: What are some of the most common jurisdictions for Canadians?

GMN: Usually Canadians tend towards common-law jurisdictions based in the Caribbean or Channel Islands. On the private client side, you see many Canadians using jurisdictions like the Bahamas, the Turks and Caicos Islands, Cayman and Bermuda in the Caribbean and Jersey and Guernsey in the Channel Islands. On the corporate side, Canadians tend to favour Barbados the most.

I think Canadians feel more comfortable with British-based or Commonwealth governments. I also think a reasonably close time zone also plays a part.

IM: What makes these jurisdictions better for Canucks versus the havens the US experts constantly pitch to Americans?

GMN: The overseas jurisdictions traditionally pitched by US experts have strong asset protection legislation or confidentiality provisions. Examples include the Cook Islands and Nevis for asset protection trusts, and Panama or Switzerland for banking.

Although the Cook Islands and Nevis have some specific provisions in their legislation that is advantageous in terms of asset protection and insurance, generally speaking, they don't have the breadth of infrastructure that the common Canadian jurisdictions do, including legislation service providers and legal advisors.

Panama, as a civil law jurisdiction, has not had the same appeal for Canadians as it has had for Americans. Switzerland is well used by Canadians for banking, but it is limited in terms of its use for creating structure.

IM: In your mind, what's the biggest risk in using overseas structures and tax planning products?

GMN: Fraud #1 and Process #2. Tax planning should never be seen as a product. It is a process and requires specific tax advice from an advisor in writing. With written tax advice [i.e. a tax opinion], under normal circumstances clients cannot be charged with penalties. You can only be reassessed for taxes that you would have been obligated to pay in the first instance plus arrears interest (which is fairly low these days as is based in part on world interest rates.)

And as noted above, once the plan is in place, it must be properly implemented. People who don't follow the right process usually end up trapped in some fraudulent scheme.

IM: What are some of the "tax plans" and other "programs" you recommend people avoid as they start the process?

GMN: Stay away from things that don't make common sense, like charitable, art or software write-offs that give you a deduction far in excess of the money actually paid out. Or investment products, like prime banknote guarantees, that pay out double digit interest each month.

Generally clients should stay away from any plan that has a specific "promoter ID number", which is reported to CRA.

IM: What kind of person tends to get the best benefit from the sorts of services you can provide?

GMN: Clients with more than $2 million in investable assets or retained earnings, or clients who are earning in excess of $250,000 per year. My average client tends to be in the $5-$10 million range, with a few bumping up to somewhere around $50 million. Once they get north of $50 million net worth, they tend to have a "team" of advisors around them, which makes it difficult to take concrete action at times.

Also at that level, I see a distinct shift in the client's cost-benefit analysis between engaging in sophisticated tax planning (which could really create a lifestyle shift) and simply paying taxes owed without planning.

IM: For those who don't necessarily have the $3,000,000 in assets or $250,000 a year discretionary income, what steps can they take themselves to begin the process of internationalizing?

GMN: Here are the 5 steps I would take in that position:

1. Open up banking and investment accounts outside of your country of residence. You don't need to have large sums invested, but you need to experience what it is like to operate on a global level.
2. Consider the strategic placement of legal title to your assets in a specific person's name, a family trust or an international asset protection vehicle.
3. Make sure that you have adequate insurance coverage to protect your assets and for the event of an untimely death or unforeseen situations, such as disability or "tortious acts".
4. Try to create alternate streams of income to reduce your dependency on one area. Better yet, if the alternate stream was derived outside of your country of residence. If you are a professional, such as a lawyer or accountant, you might try getting qualified in a second jurisdiction.
5. Obtain a second citizenship or permanent residency in another country. Many Canadians have ancestral rights to second citizenship. St. Kitts and Nevis offer citizenship simply for the purchase of qualified real estate of approximately $350,000, which is delivered in about six months. Also, the purchase price can be financed.

IM: Any other words of advice before we leave it for today?

GMN: Take just one step towards a tax or asset protection plan. Once one step is completed, then focus on the next one. Don't try to focus on everything all at once. You will definitely become overwhelmed.

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