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    Offshore Trusts: Too good to be true?
    Posted: 2012-07-11 05:00:29

    Individuals thinking about their children’s and grandchildren’s future often consider how to pass on their property. One method of doing so is by setting up a trust which is a formal agreement that requires another person (a trustee) to manage property for a certain beneficiary. For example, parents may ask their lawyer to manage a certain savings fund for their children and to give that money to them once the children reach a certain age.

    Trusts are subject to taxation. Whenever you move property into/out of a trust, there may be tax consequences. Furthermore, the income and appreciation of the assets may also be taxed. Therefore, it is always a good idea to consider the tax implications and minimize them whenever possible.

    With this in mind, it is not surprising that some individuals have gone to great lengths to minimize tax burdens by setting up offshore trusts. An offshore trust is a trust that is set up outside of Canada which are managed by trustees that are non-residents of Canada.

    Generally speaking, a trust will be considered non-resident if it is managed by a non-resident trustee.  The implications of this are that the offshore trust can avoid being taxed in Canada. This all sounds clever, yet so simple; however,  the spur of offshore trusts has made the Canadian government concerned that it is losing potential tax revenue. That is why it is constantly on the lookout for new ways to impose taxes on offshore trusts.

    Fundy Settlement v. Canada was a recent Supreme Court of Canada case that dealt with tax avoidance by an offshore trust. The case considered the question of whether a trust, managed by a non-resident for a Canadian beneficiary, would still be considered a Canadian resident for tax purposes. The court held that, yes it would!! The reason? The Court found that the beneficiary was the party that actually exercised control and management of the trust.

    The moral of the story is that you cannot escape the taxman! At least, not very easily. You would have to be very creative (and careful) about how you set up your trust offshore if tax avoidance is something that is on your mind. However, history has shown that creative schemes do not always work out in the manner in which they were intended.

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