High net worth individuals have been criticized (especially during election years) for not paying their fair share of taxes. These individuals often take advantage of legitimate tax planning strategies to lower their taxes. A portion, though, utilize evasive strategies that rely on a general lack of tax transparency between countries and laws that promote secrecy.
Tax transparency involves the sharing of financial and personal information between countries. It seeks to minimize the misuse of bank secrecy and trust and other laws in order to minimize tax evasion. Common examples of abusive arrangements include depositing undeclared income in bank accounts in countries with strict laws against disclosing account information and using trusts in offshore countries to improperly disguise true property ownership and to avoid reporting income earned on such property.
In 2014, Canada demonstrated its commitment to reducing international tax evasion by introducing a new program which offers rewards to whistleblowers. And in 2015, Canada signed the Multilateral Competent Authority Agreement (MCAA) which provides for a common reporting standard (CRS) for the automatic exchange of personal and financial information. Currently, information is generally exchanged on request only, and such requests are not always granted. Seventy-nine countries have signed the MCAA to date--the U.S. is a notable exclusion. The CRS is similar to the U.S. Foreign Account Tax Compliance Act (FACTA), which we previously wrote about in our June 2013 post and our July 2014 post.
Under the CRS, Canada is required to provide certain financial and personal information to foreign tax authorities about residents of those countries and Canada is entitled to such information in return. Financial information includes investment income earned (e.g., dividends and interest), account balances, and proceeds from sales of financial assets. The CRS also applies to trusts and their trustees, beneficiaries, and settlors, but the reporting requirements (including who is required to report) depend on a variety of factors, such as whether the trust is administered by a professional trustee, the residency of the relevant persons, and the nature of each beneficiary's interest (i.e., fixed versus discretionary). The CRS will begin to apply on July 1, 2017, with the first exchanges of information beginning in 2018.
Evasive tax planning often comes undone after death when executors are faced with the decision of whether to assume the tax liability associated with such planning or make a voluntary disclosure to the CRA (which results in a reduction of penalties and some interest). While a voluntary disclosure protects executors, it is not without its drawbacks--it is a costly process and often causes significant delays in the administration of the estate. And with the recent trend towards greater tax transparency, such planning is now more likely to come undone prior to death.
Tax minimization is an important estate planning objective. Where it drives the process, though, other important objectives are often sacrificed and, in some cases, family members are left to sort out a messy tax problem. Simply put, the amount left is one part of the equation--how that amount is left is another important part.
Please join us for our next blog post when we discuss annual reviews and asset alignment.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.