Feds draft new offshore trust rules

(July 19, 2005) The Federal Department of Finance has released its latest draught of rules aimed at restricting the use of offshore trusts to shelter assets. The proposed changes to the Income Tax Act are the latest move in a series of measures to address the long-standing issue.

“This has been going on now for over six years,” says Jamie Golombek, vice-president, taxation and estate planning, at AIM Trimark Investments in Toronto. “The federal budget in 1999 introduced changes to try to block Canadians from using what I would call questionable or sophisticated tax strategies to park money offshore in either non-resident trusts or foreign investment entities.”

The new rules are aimed at restricting the use of such offshore trusts to generate income which was not reported according to the old rules. Essentially, the new rules would limit the use of such trusts to those who operated a legitimate business, with real business revenues.

“There may still be opportunities on the offshore front for Canadians who own an active business that produces something,” says Golombek. “For the average or even sophisticated investor, you’ll be very limited in what can be done offshore as tax avoidance.”

“These are the most complex set of rules ever released under the Income Tax Act,” he says. “They are absolutely incomprehensible — forget the average Canadian — but for most lawyers and accountants who do not specialize in offshore. There have been many submissions from various entities that the rules should be scrapped altogether.”

The proposed changes have yet to be introduced as legislation and will likely be tabled in the fall parliamentary session. If passed, they would be retroactive to January 1, 2003.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com