Why is a business client giving consideration to offshore planning opportunities? The primary motivations will likely include the pursuit of profit and opportunity, the overall minimization of tax, the pursuit of the right of privacy in the face of state or societal scrutiny and the pursuit of personal security in the face of risk. The more desperate may face actual or threatened litigation, obligations to creditors which the debtor cannot pay due to insolvency, obligations to creditors which are currently being satisfied but will not be met in the near future and guarantees or indemnities given for debts where it is known or anticipated that the guarantees will be called upon.
The documentation of motivations is helpful in resisting potential claims by creditors or claimants arising from concerns of fraudulent intention. The fact that a transaction may have the effect of insulating assets from future claims does not lead to a necessary inference of a fraudulent intention to do so. The possible non-asset protection motivations could be
- economic diversification;
- the achievement of a low profile or anonymity with respect to wealth;
- the avoidance of forced disposition;
- pre-marital planning;
- the preservation of entitlements;
- marital property planning;
- tax planning;
- planning for the contingency of changing one's domicile or citizenship;
- participation in investments that are not otherwise available to Canadian investors;
- preplanning in anticipation of currency controls or restrictions on ownership of gold;
- liability protection;
- tax planning or strategic advantage in the context of an active trade or business abroad.
There are often specific business, investment or tax reasons and implications for using offshore companies to carry on particular business functions or to hold assets. Domestic rates of return on investment may appear less attractive than foreign opportunities and individuals may wish to pursue asset and investment diversification or otherwise access the international market. There may be trading or service opportunities to be pursued through related foreign companies. Offshore banks and captive insurance companies are established for risk management and other reasons.
Foreign tax havens may offer generous tax incentives to encourage the transfer of wealth. The use of offshore business, investment or holding companies may present opportunities to minimize corporate or personal tax obligations. Indeed, many inquire about offshore initiatives as a way of evading or minimizing income tax. More than a few taxpayers have initiated ill advised tax motivated strategies based solely on offshore professional advice without the benefit of meaningful review by a Canadian lawyer and/or a Canadian accountant. The failure to obtain Canadian professional assistance or second opinion can be dangerous.
There may be a desire to maintain confidentiality and anonymity with respect to personal and business holdings. It is not only the rich and famous who are reclusive or value privacy. Removing wealth from obvious sight and reach may be permissible if done in advance of any known creditors or claimants and without intent to defraud. The pursuit of privacy or anonymity runs afoul of recent public policy demands for transparency. Some believe that their offshore bank accounts are private, confidential and completely secret. Certainly, debtor friendly jurisdictions have legislation intended to limit access to confidential banking information. The creative use of numbered accounts and intervening captive entities or willing agents may obscure the identity of the true owner of an account. International concerns over tax evasion, proceeds of crime, drug activities and most recently, terrorism, have resulted in a number of legislative and treaty initiatives to compel disclosure of banking information in Canada, the USA and in a number of offshore jurisdictions.
Risk concerns are a significant motivation for asset protection initiatives. Success in life may be seen by some as the stimulation that comes from overcoming the challenges of events and competition of others together with the reward of an affluent or at least comfortable lifestyle and retirement. Anticipating and managing risk plays a significant contribution in achieving success. The more altruistic recognize the importance of good stewardship or philanthropic pursuits and prudently seek to preserve capital assets and income for good works and beneficial pursuits of different descriptions. Risk may arise from potential unrest and economic uncertainty. There are lessons to be learned from those who have faced adversity and sought to geographically diversify their assets holdings and provide safe harbours and nest eggs should domestic problems intensify. Risk may arise from potential adverse changes in business circumstances. Business activity can be segregated into separate companies in order to engage in international operation and thereby minimize risk while pursuing opportunity. Some engage in activities which by their nature may carry significant potential risk. Some businesses, for example, carry the potential for significant contamination. Many environmental statutes impose significant potential liabilities on the owners or operators of contaminated sites as well as directors and officers. This liability may be retroactive and absolute regardless of compliance with environmental standards and practices at the time the contamination arose. This liability may only be disclosed long after the underlying property has been disposed of. There is also the risk of evolution in standards to render unlawful what at the time was lawful in terms of permissible activities and levels of contamination. Risk may arise from potential adverse changes in personal circumstances. Some engage in professions which attract the potential for future liability for which liability insurance may be inadequate by reason of coverage limits or gaps. Such professions include accountants, doctors, architects, engineers and lawyers.
The "what" defines the specific goals or objectives of the engagement or retainer. It may be necessary to prioritize the goals from the more important to the less significant. Is the real concern potential claims or liabilities and, if so, what specific types? Is the goal preservation of a specific asset? Is the goal confidentiality and privacy? Is the goal maximization of profits? Is it minimization of worldwide taxes? Is it estate planning or business succession? Is it asset diversification? It is important to define and rank the goals and objectives in order to properly establish priorities. Different jurisdictions and structures may be more suitable than others for particular objectives. Some risk may have to be assumed or advantage foregone in order to achieve the priorities. No jurisdiction is ideal for all purposes.
Asset protection planning may be defined as the process of organizing one's assets and affairs in advance so as to safeguard them against risks to which they might otherwise be subject to. It is impossible to overemphasize the importance of engaging in preemptive rather than crisis management. Simply put, the timing of the decision may be as important a consideration as the substance. Potentially effective alternatives may be rendered ineffective by delay. With the passage of time potential risks may become a reality. An asset protection plan should ideally be put in place well in advance of any problems. The best time for planning is before a future possibility becomes a present reality. Some individuals will actually encounter adversity. They may have existing creditors with significant claims and litigation may be contemplated or ongoing. The reassessment of aggressive tax schemes may be on the horizon. Attempting to hide assets from present or known creditors may violate fraudulent transfer laws including section 392 of the Criminal Code.
There may be a number of ways and means to achieve goals. Each may have relative advantages and disadvantages. The simplest form of offshore planning may be a non--interest bearing chequing account in different jurisdictions with a balance of less than $10,000 which is typically the minimum threshold for reporting requirements. Such accounts are for emergencies.
Offshore asset protection initiatives can be complicated and expensive. Many foreign trustees who operate asset protection trusts refuse to take business unless of a minimum value are invested. The costs of administration of a private offshore trust are significant and may not be justified if the property settled is not valuable. Offshore banks have been plagued by banking scams and may have inadequate reserves to back accounts or even phony deposit insurance companies providing the impression of account support. Thus, there are a number of preliminary matters to be considered prior to providing any recommendations and making final decisions. Performing due diligence requires the individual to consider many issues. In addition to fraudulent transfer, income tax and marriage issues, basic information with respect to net worth and solvency should be sought and obtained.
The individual may engage in a claims review. The individual should investigate his or her motives and financial situation and assess the exposure to civil and criminal liabilities. Asset protection initiatives are inappropriate where they amount to a fraudulent conveyance, preference or settlement. Accordingly, it is prudent to identify real and threatened claims and to be satisfied that the individual is solvent. Asset protection with respect to excess amounts above existing and potential obligations is appropriate absent concerns over criminal activity. A reasonable reserve should be established to meet the claims of all such obligations.
The individual may undertake an asset review. Once the real or threatened claims have been identified and a value placed on such claims, the individual's assets should be identified and valued in addressing the question of solvency. Any assets that would be protected in whole or in part from creditor claims under provincial or federal law should be identified including exempt personal property, life insurance and annuities, retirement plans that qualify for protection from creditors and property held in valid protective or spendthrift trusts for the individual's benefit. To the extent such assets are exempt, they can be removed from the individual's asset list for the purposes of determining solvency. Indeed, exempt assets may be part of the assets transferred. As the result, it is the value of the client's assets less the value of the protected assets less the value of existing and potential liabilities which are considered for the purposes of offshore asset protection.
Confidentiality is desirable with respect to offshore structures. This includes the existence of the structure, its terms, the value and nature of the assets in the structure, the location of the assets, the identity and activities of any trustees, protector, settlor and beneficiaries and associated entities. It is at best the first line of defence. Any structure should be designed to withstand disclosure and legal challenge. Indeed, proper planning should contemplate the potential for early and full disclosure of the structure and its details to suspicious creditors and claimants on terms of strict confidentiality in order to facilitate resolution of their claims.
The where is often one of the final considerations in the analysis. The term "tax haven" comes to mind when one thinks about offshore transfers. This is typically a very small country which has deliberately created a virtually tax-free environment to encourage the use of the jurisdiction as a conduit for international transactions. The more generic term "offshore financial centre" is perhaps more accurate in conveying an expanded definition of potential destinations which includes major commercial centres which have peculiarities in their legal and taxation systems that allow them to be effectively used in international planning. Offshore financial centres may have legal and financial systems with relative strengths and weaknesses in providing for asset protection, tax minimization, banking, confidentiality investment and other objectives. Jurisdictions with the strongest confidentiality laws may not offer the highest degree of the asset protection or opportunities for tax minimization.
Selecting the jurisdiction in which an offshore protection trust or other vehicle will be located is very important. Trust work requires the jurisdiction that has the appropriate laws and service providers with credibility and experience. Traditionally, the most well-recognized destinations for asset protection have been the Bahamas, Bermuda, the Cayman Islands, Cook Islands, Gibraltar and the Isle of Man. The Isle of Man and Liechtenstein have been seen as offering superior confidentiality and the Channel Islands and Switzerland superior banking opportunities. Pacific islands like the Cook Islands, Vanuatu, Nauru, and the Marshall Islands are well known. The current laws in such jurisdictions and the comparative advantages and disadvantages must be considered before making the final selection. The general laws of such offshore centres are often hostile to enforcement of foreign judgments, abbreviated status of limitations; restrictive fraudulent transfer laws, an antipathy or reluctance to enforce foreign subpoenas or examination orders, and confidentiality laws prescribing criminal consequences for divulging by financial institutions of customer information absent an order of a court of that jurisdiction.
The costs of establishing an offshore vehicle in a foreign jurisdiction can be substantial. There are the expenses in setting up the vehicle and complying with required formalities. There may be a tax burden associated with the vehicle. The perceived benefits associated with the vehicle must be weighted against these costs. There are a number of factors that effect the selection of a possible country for an offshore trust or assets. They may include political and economic stability, taxes, tax treaties and the potential for future taxation, exchange controls, the business, banking and legal environment, language, location and accessibility, transportation facilities, and likely set-up and maintenance costs and fees. Attractive legal features include trust recognition and asset protection legislation including restrictions on enforcement of foreign judgments and recognition of Canadian bankruptcy court orders.
Legislation is enacted and amended.
Treaty obligations are assumed. Foreign legislation and treaties may
have tax and asset protection implications. Accordingly, it is important
to confirm current and anticipated developments prior to making a
decision with respect to a particular jurisdiction. Jurisdictions that
may not have historically enjoyed reputations as financial centres or
asset protection havens may seek to solicit offshore planning business
through enabling legislation. Others may abandon previous protective or
tax friendly laws in the face of international pressures. Control is a
significant factor in offshore planning. Many individuals resist
surrendering control of their assets to a foreign trustee for valid
reasons and concerns. However, the greater the relinquishment of
control, the greater the degree of asset protection for the individual
as a matter of law. The greater the degree of the de facto or de jure
retention of control, the greater the risk that the trust will be found
to be a sham and the entire structure successfully challenged.