Skip to main content

As long as you follow appropriate Canada Revenue Agency reporting rules, there is nothing illegal about offshore bank accounts.Alex Kalina

An offshore account may seem like an intimidating prospect, and one that could lead to trouble if it isn't done right.

But experts say that as long as you follow the appropriate reporting rules set out by the Canada Revenue Agency, offshore bank accounts can be a practical and, in some cases, necessary way to deal with your finances.

"When we hear about offshore, we think tax evasion, palm trees and tax havens," said Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.

"But there's certainly no problem with having an offshore bank account to do offshore banking, for example, if you vacation or if you own a property outside of Canada.

If you have a place in Florida or a place in Arizona it makes a lot of sense." Setting up an account in the U.S. or abroad is no different than opening a bank account in Canada and, if it's simply being used as a checking account, there aren't any additional fees.

That's not the case, however, if someone earns money in the U.S. or elsewhere, keeps those earnings in an account in that country and fails to declare the income on their Canadian tax return.

"The most common issue that we have in Canada is the offshore reporting rules," said Golombek.

If someone has more than $100,000 in foreign investments, whether it's money in a foreign bank account or an investment account, property that's rented out or even shares of a foreign company held in a Canadian account, a specific form must be completed along with filing taxes.

If income isn't reported properly, the penalty is $25 a day with a maximum of $2,500 a year, plus interest.

But there's a common misconception that money sitting in an account will be taxed when, in reality, the government will only tax on income earned.

"If you're just transferring money from Canada to the U.S. account, then you'd only be taxed on the income of that U.S. account," Golombek said.

"If you'd earned money in the U.S., say from renting out your U.S. property, then that rental income is taxable in Canada."

Peter Megoudis, a tax expert at Deloitte & Touche LLP, says there can also be legitimate tax planning reasons for setting up an offshore account.

For example, he said, a grandmother living in another country who has a lot of assets has a number of choices when it comes to helping her family in Canada.

"She can transfer the assets directly to the children in Canada or she can transfer assets to a trust that's located outside of Canada. Those assets that are in a trust located outside of Canada do not attract Canadian tax if you designed it carefully and don't distribute the income in the year that it's earned."

There are also ways to avoid U.S. estate tax, which are valid as long as the Canadian reporting rules are followed.

And while setting up a regular bank account away from home is straightforward, it may be best to consult an expert in some cases, Megoudis said.

"If you're going to be investing in something a little bit more sophisticated, you should have tax advice, not only to make sure that you're doing it correctly, but (also) so . . . you're not double taxed," he said, noting a person can be subject to both Canadian and foreign tax.

Megoudis also warned against taking a gamble on non-reporting to avoid taxes.

"There's an increased emphasis on sharing tax information between Canada and the U.S., as well as Switzerland," he said.

"So, whereas maybe 10 years ago people who wanted to cheat had a good chance of getting away with it, that's less and less the case now."

The United States has particularly severe penalties and could go as far as wiping out your entire bank account for failing to report.

So go ahead and set up an account or trust if you have a need for them – just make sure you're up front about it to keep the tax man happy.