The U.S. Is a Good Tax Haven for Canadians
The U.S. meets virtually all of the requirements of a good tax haven for Canadians but it is rarely mentioned when discussing worldwide tax havens.
As I said in the introduction, I did a speech at a conference in Dublin, Ireland, a few years ago. Many of the retired Canadians in attendance wanted to know if it was practical for them to go offshore to one of the traditional tax havens. They had savings and pensions they hoped would last them for a lifetime; particularly if they were prudent and made the right choice of jurisdiction to live in.
They were seeking the opportunity to get away from the Canadian combined income taxes, sales taxes, goods and services taxes, and land transfer taxes. All of these Canadian taxes totalled were approximately 50 per cent of their income, which they had been forced to deal with their entire careers. These Canadians were seeking an answer to the question of whether there was relief available for them in retirement by moving to a tax haven, now that they had shed their businesses or jobs in Canada.
At the conference, the speakers mainly represented financial institutions from all the major tax havens and they spoke about the many possible tax benefits of their particular countries. The U.S. as a tax haven never came up in any of the presentations to the Canadian group until I had my turn to speak. Initially, many thought I was crazy in my presentation even to mention "the United States" and "tax haven" in the same sentence! The U.S. is the most overlooked tax haven opportunity under the layperson's definition of this phrase as described in section 2., and the chapters to follow will provide convincing evidence of this.
Do not fear the Internal Revenue Service (IRS)
The Internal Revenue Service (IRS) is one of the main reasons most Canadians and many of their Canadian advisors never consider the U.S. as a tax haven in which they can get substantial tax benefits. I wish I had a dollar for every time I heard a Canadian advisor tell his or her clients, "You don't want to move to the U.S. because you'll have to deal with the IRS."
Over the years, the IRS has done one of the best negative marketing campaigns ever to get taxpayers to comply with its many complicated rules. It has developed an incredible brand that I would classify as "fearful respect." As an example, the Union Bank of Switzerland (UBS) had a recent scandal where the bank was discovered to be encouraging Americans to fraudulently hide money in their UBS accounts. The IRS had a very simple but effective negative campaign to get taxpayers to comply with its rules. The IRS put a couple of derelict taxpayers in jail and/or heavily fined them and then made sure the story was printed in every newspaper and discussed on every TV news station in the U.S., in Canada, and around the world! The IRS was also successful in severely penalizing the UBS bank and forcing it to provide lists of all U.S. citizens or residents with deposits in the UBS. Much to the mortification of the long-time Swiss government's highly coveted bank secrecy laws, this opened the doors for the IRS to force other banks in Switzerland and around the world to also provide lists of U.S. citizens with deposits at their respective banks. The IRS was emboldened by the success with UBS and has attacked other Swiss banks in a similar manner, causing what has become a bit of a war between the IRS and Swiss banks, with many Swiss banks now refusing to allow any U.S. citizens to open accounts at their banks.
The IRS scared U.S. citizens and residents in a similar situation to the UBS scandal, who either deliberately or through ignorance failed to report to the IRS on deposits and investment accounts in foreign countries. The IRS then developed an amnesty program for people to voluntarily come forward and disclose their foreign holdings, specifically called the Offshore Voluntary Disclosure Initiative (OVDI). Consequently, to avoid being thrown in jail, many U.S. taxpayers subscribed to the amnesty program and had the penalties limited to about 20 per cent of their offshore, previously non-reported assets rather than risk the IRS tracking them down.
These types of IRS campaigns are very effective in collecting funds by coercing taxpayers all over the U.S. and the world to better comply with its rules voluntarily. In the two OVDI programs the IRS put out in 2009 and 2011, they collected close to $3-billion from thousands of U.S. citizens, many of whom were also dual-citizen Canadians who, innocently, did not know of these foreign-reporting rules. A high-ranking IRS official bragged that this was the lowest cost and most successful tax collection program the IRS had ever conducted. In 2012, the IRS added a third OVDI program to continue to build on its success of the first two programs to get U.S. citizens around the world into compliance, while at the same time enjoying some windfall tax collections.
When you think about this, it is a brilliant branding campaign by the IRS; it costs virtually nothing but gets phenomenal attention and results. A corporation would spend many millions of dollars to get its branding up to the same level that the IRS can do virtually for free! Canadians and their advisors take heed to the branding, and recognize the IRS as a force to be reckoned with, and avoid its ire where possible. This is exactly what the IRS wants: people to follow the rules and pay the taxes they are legally obligated to pay.
However, truth be known, for those who follow the rules and use them to their advantage, the IRS is as easy as or easier to deal with than the CRA. Taxpayers in the U.S. have many more basic rights than taxpayers in Canada. For example, the IRS burden of proof standards prevent the IRS from attacking the taxpayer without solid proof that the person is in violation of statutes. These kinds of rules are in place to prevent the government from harassing taxpayers without sufficient evidence of any wrongdoing. In addition, the IRS can actually be sued for cost recovery of legal fees through the appeals court if the IRS has been proven wrong, particularly when the IRS gets overly aggressive.
The IRS has a dispute resolution process that works very well to resolve complex or difficult tax assessments which cannot get resolved through the standard channel of calls, letters, and emails. This dispute resolution process is far superior, from the taxpayer's perspective, to the ombudsman program of the CRA. The IRS dispute resolution option allows the U.S. taxpayer to bypass all the normal channels after a certain period of time of non-correction to get the problem resolved in a matter of weeks. Under CRA rules, whether or not you are right or wrong, some problems seem to go unresolved with a great deal of time and expense wasted unnecessarily by both the taxpayer and CRA.
I do not know whether it is just my imagination or paranoia but there seems to be a definite change in CRA over the past several years with its appeals officers and auditors. From my observation, the employees have become very aggressive and less willing to negotiate with taxpayers over disputes. This change of attitude by the CRA dramatically increases the taxpayers' legal and other costs to fight for their rights. Often the only practical solution is to do what the CRA is demanding even though the CRA may be wrong.
There are more taxpayer rights in the U.S.; however, the IRS, similar to the CRA, is no picnic to deal with under the best of circumstances. My main point is, for those who generally follow the rules and do not push filing options past prudent limitations, chances of a timely and favorable resolution of tax problems are better in the U.S. when dealing with the IRS, than they are in Canada when dealing with CRA.
Taxpayers, along with their Canadian advisors, should not fear the IRS any more or less than the CRA unless they are intentionally breaking tax rules or are planning to do so. In Chapter 9, I return to this topic as many Canadian advisors create and perpetuate the myth of avoiding the U.S. because of the IRS in order to discourage Canadians from looking at the U.S. as their tax haven.
Copyright 2012 by International Self-Counsel Press Ltd.