Off-Shore Investing

Welsh Law Asset Protection and Creditor ProofingNot long ago, conventional asset protection, income tax avoidance mantra suggested taking a revenue producing asset (such as Patents or Trade-marks that can be licensed) off-shore to a low or nil income tax jurisdiction.

The idea was to earn royalties in a favourable tax jurisdiction and avoid U.S. or Canadian income tax on the income.

The off-shore vehicle could be a Family Trust, the sole asset of which is a foreign jurisdiction wholly-owned subsidiary corporation which owns the Patents/Trade-marks or intellectual property and pays (as would any foreign trust or corporation) no or little taxes in its foreign jurisdiction.

Favoured jurisdictions were, among others, Bahamas and Barbados, primarily because of political stability and proximity.

However, to plug that “hole” of lost taxes to Canada Revenue Agency on income essentially earned by Canadian citizens or residents, CRA introduced the concept of a “Foreign Accrual Property Income” or “FAPI”.  Essentially, the rules attribute to the beneficiaries of the foreign trust or the shareholders of the foreign corporation inputed sharing of the income earned by those foreign Trusts or corporations.

And that whether the Canadians receive the spoils or not.

The caution point is this:  Before embarking on any effort to avoid Canadian taxes by any structure that could result in the application of FAPI, be sure to get detailed legal and accounting advice.  The surprise, years later, can be a healthy tax bill with applicable penalties and interest.  Be cautioned and be aware.

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