Why do the rich protect their assets?

In the dark world of offshore finance, some countries immediately come to mind when it comes to banking secrecy: Switzerland, the Cayman Islands, Luxembourg.

To this short list is added to Panama. The leak of 11.5 million documents from the law firm Mossack Fonseca has shone the spotlight on this country of Central America, and especially, on the names of people persuaded to have placed their fortune out of sight.

From the beginning of the revelations, voices were raised to remind that the mere fact of owning an account in a tax haven does not mean that its owner is brewing illegal business. In order to clarify the issue, we asked experts what motivates the rich to hide their money abroad – if not to defraud the taxman.

Why do rich people accumulate their money in offshore accounts?

Assuming everyone obeys the law and pays their fair share of taxes, the rich use tax havens for two main reasons: asset protection and financial secrecy.

Imagine that you own a mining company and that you fear being sued one day for non-compliance with environmental laws. Placing money in a Canadian trust could save you from losing everything, but trust in a tax haven is a better safe.

“From a legal point of view, what is in a Canadian trust is no longer yours and the creditors will have a hard time touching it,” says Geoffrey Loomer, assistant professor at the Schulich School of Law. Dalhousie University. But the law can still be changed … An offshore trust does not even appear on the creditors’ radar screen. “

So if someone wins a $ 20 million lawsuit against you, your Canadian assets may be seized, but the rest of your wealth will be untouchable.

A similar ploy can be used to guard against the consequences of a possible divorce. But if your ex-spouse discovers the existence of an offshore bank account, you risk getting entangled in a legal quagmire.

The secrecy surrounding tax havens also attracts wealthy people who do not wish to exhibit their wealth in their surroundings. “If you do not want your children or your brother to discover the existence of your money, there is a certain logic to place this one out of sight, notes Mitchell Stein, assistant professor of accounting at the Ivey Business School. Your business does not affect them, and it’s the same for your money. “

Do Canadians have to report to Revenue Canada their assets abroad?

Yes. The rules on this subject were however much more permissive 15 years ago, says Geoffrey Loomer, and the documents revealed by the Panama Papers cover a period from 1977 to 2015.

However, for the extraterritorial accounts disclosed in the leak to be legal, their owners would have to have absolute integrity in all their tax returns.

“That’s the problem of the Panama Papers,” says Geoffrey Loomer. Maybe people were honest; maybe they were not. If they are members of organized crime, they probably belong to the second category. But if it is wealthy people who invest in tax havens, it is less clear. We need to establish why they needed this secret. “

Is there really a legitimate reason for wanting so much confidentiality?

A wealthy person might say that it’s not your business to know that she rents three Bentley’s or that she owns two Vancouver-facing properties, says Geoffrey Loomer. “You cherish your privacy, you do not want to be in the newspapers, so you buy the auctioned Picasso at Sotheby’s using a company whose shares belong to a [ offshore ] trust of which you are the beneficiary.”

How much money does it take for an account in a tax haven to be worth it?

Offshore accounts can be very lucrative … if your wallet is thick enough. The majority of Canadians do not fully utilize their own completely legal tax shelter: the Tax-Free Savings Account (TFSA). Better to maximize it before paying to have an account in the Cayman Islands …

“[For it to be profitable], you must have accumulated capital that generates significant investment income,” says Geoffrey Loomer. Most middle-class people do not have one. “Even a doctor or lawyer earning $ 250,000 a year would probably not be a winner, as legal, accounting and administrative fees quickly pile up in tax havens.

“It becomes interesting when your family wealth exceeds five million dollars and generates profits of more than 5% per year,” says the professor. And that’s exactly why he believes everyone has the right to be angry at tax havens. “It’s a two-speed system that, moreover, is not transparent. Imagine that the rich are officially entitled to a lower tax rate than everyone else. It would be completely unfair. People would be outraged. This is what offshore accounts do but in an opaque manner. “

About the Author