As wealthy Canadians find it less profitable to send money offshore, they are discovering a new tax haven on their doorstep. Kim Moody, ...

As wealthy Canadians find it less profitable to send money offshore, they are discovering a new tax haven on their doorstep.

Kim Moody, a prominent Calgary tax accountant, told Private Client Management that growing sums of money from Ontario and other provinces will soon start to flow into Alberta as wealthy Canadians set up trust structures through their private banks in an effort to benefit from the relatively low taxes of that province.

"We are by far the lowest in terms of income tax. Most of our provinces have a graduated tax on net income. Alberta, on the other hand, has no graduated income tax; it’s a flat rate tax. The provincial government has countered charges that its income tax system is unfair and regressive by having a high exemption limit of about Can$12,900 per annum. In the other provinces, income tax kicks in at about $4,000 or $5,000 per annum.

"Alberta is rich in resources, its government has few debts and its population is relatively young. This will probably allow us to stay at the bottom of Canada’s league tax table."

"The highest rate of federal income tax is 29 per cent, everyone has to pay that. The highest rate of Alberta income tax is 10 per cent. 29 and 10 makes for a 39 per cent income tax all told."

The top marginal income tax rate for most states begins around $100,000 per annum. The combined federal and provincial top rates for income tax are: Alberta 39 per cent; British Columbia 45.7; New Brunswick 46.84; Newfoundland 48.64; Nova Scotia 47.34; Manitoba 46.4; Ontario 46.41; Prince Edward Island 47.37; Quebec 48.72; and Saskatchewan 45. There is therefore a six per cent difference between Alberta and Saskatchewan, its nearest rival, and an 9.64 per cent difference between Alberta and Newfoundland.

Alberta is bottom of the heap with taxes on capital gains as well. When the federal tax figure of 14 per cent is added to provincial figures, the results are: Alberta 19.5 per cent; British Columbia 22.85; New Brunswick 23.42; Newfoundland 24.32; Nova Scotia 23.67; Manitoba 23.2; Ontario 23.2; Prince Edward Island 23.69; Quebec 24.36; and Saskatchewan 22.5.

"The difference between provincial tax rates is now so significant that owners of businesses or HNW persons would be motivated to look at strategies to shift their taxable income to a residence with a lower tax rate," added Moody.

"Residency is everything"

The snag is that HNW individuals from other provinces who want to be taxed in Alberta have to argue that they reside there. The individual can open a private bank account there, but a court is unlikely to see this as evidence of residency in itself. Moody explained: "The rule in Canadian law is that your province is wherever you’re resident on 31 December each year. I know of at least one man from Quebec who makes the annual pilgrimage to Alberta at the end of each year, but I think he would be in trouble if he was ever challenged by the tax authorities in Quebec.

"Residency is everything in this instance. You could get your private bank to set up a trust in Alberta, but our common law definition of residency looks at where your ties are. This includes where your kids are, where your home is, where your life is in general."

Moody did admit, however, that nobody seems to have been challenged on this score in the courts. He said that the federal government collects its taxes wherever the HNW individual is and therefore does not care. The provincial governments have not been at all active in clamping down on this kind of ‘provincial arbitrage’ either, although some experts expect Quebec to realise that it is losing revenue.

The big stick

Why should Canadians be bothering to invest their income in another province instead of through a private bank offshore? Moody was in no doubt: "If you’re a Canadian resident and trying to move assets offshore, it’s very challenging to avoid Canadian taxation on those offshore earnings. The American IRS is now searching through people’s Amex and MasterCard records which Caribbean private banks arrange to let them tap those earnings.

"Because Canada has tax treaties with the US, those people who have dodged taxes and placed money in the Caribbean are going to get sideswiped. My advice to them is to get a lawyer and ‘fess up before they’re caught."

Canadian HNWs are even more likely to find ‘provincial arbitrage’ attractive after the federal government has passed a statute designed to make it virtually impossible for them to profit from foreign tax havens. The bill was originally published on 22 June 2000, went through a consultation process and is now on the second stage of its passage onto the statute book.