How to Invest in Offshore Funds

With reference to the previous week’s article on our tax laws pertaining to offshore investment fund property (OIFP) rules and the recent court decision on Gerbro Holdings Co. v. The Queen, avoiding the OIFP rules, as Gerbro did, can actually benefit investing outside of Canada. In the case of Gerbro, the investor had valid reasons for offshore investment which aimed neither to reduce nor to defer tax – winning the case in the process. How will this affect you as an investor?

The rules

Under applicable rules, you will be taxed by adding to your income a certain amount per year in the amount of your offshore investment times the present 3 per cent interest rate. (The 3% rate is two percentage points more than the stipulated present interest of 1%).

You are entitled to deduct from this assumed income figure any other income (except for capital gains) included on your annual tax statement from the offshore investment. Moreover, any deemed income will be augmented to the adjusted cost base of your offshore investment. Ultimately, these requirements accomplish two things: First, you are paying tax before receiving the income, and second, they allow you to consider as regular income that which should be taxable as capital gain.

As an illustration: If you have invested $300,000 in offshore funds. Using OIFP rules, you pay tax, since a major goal of the investment is to reduce or defer tax, on the deemed income of $9,000 (3 per cent multiplied by $300,000). A payable tax of $4,500 based on a 50% marginal rate.

Under cases of tax deferral or avoidance as a primary objective for the investment – which means OIFP rules do not apply – taxes may still be applicable using the same rules, leaving you the choice to file a case in court. However, majority of investors will accede and pay the tax and will then decide to alter their investments in this case considering that accounting and legal fees to sue the Canada Revenue Agency will certainly be higher that the tax due under the rules in question.

CRA is well aware of this. It will not hesitate to harass taxpayers for as low as an imputed income below $10,000, showing how unfair and abusive CRA can become. Why should CRA take steps to unduly increase tax due and lead Canadians to choose investment options not designed to attain their long-term objectives.

Remember, CRA can pinpoint these investors using Form T1135, filed annually by investors outside of Canada in amounts above $100,000. CRA believes these investors are out to avoid tax. Heads up, CRA: Why would taxpayers report such investments on their Form T1135 if they mean to avoid tax? Look for evaders somewhere else!

Tips for Investing

Accomplish an Investment Policy Statement (IPS)

Ask an investment manager to accomplish an IPS for you, which is a vital document you need. An IPS must include specific investment information, such as your investment goals and risk capacity. Make it very clear that you have valid reasons for your offshore investment and that they do not include reduction or deferral of tax.

Discuss Your Documents

Sit down with your investment counselor to explain your investments goals and make it very plain that tax reduction is not among your primary reasons for your investment and include such discussions in your prepared meeting minutes. Those minutes should be kept on file as proof of your reasons for choosing the offshore investment.

Monitor your investment cost

For investments in offshore property below the total value of $100,000, you need not reflect such assets on CRA’s Form T1135, keeping you out of its screen. Keep dreaming of that time when CRA hikes up the golden standard below which the agency will not make any fuss about your intentions for investing in offshore funds.

How Do You Recognize a Potentially Good Investment?

A good investor needs to develop the discipline to buy low and sell high. Such discipline can only come from sufficient experience, particularly through the process of learning from one’s mistakes and gaining the knack for making with better decisions.

The mantra for successful investing is: Buy low, sell high. Obviously, this applies in almost all forms of enterprise. Yet, in investing, this rule is rarely observed by most people, making it hard for an individual to follow since the rule-of-the-mob prevails.

What to do? The following steps will help us recognize whether an investment has great potential or not:

1. Step one is to buy low. Determine what the base line is for an investment and bide your time until the buying price goes down below the reasonable level. This is the same time when people panic and sell as the stock market dips. That is your signal to hunt for buying opportunities. The best way is to buy an asset once the price drops substantially, waiting for a time when it climbs and brings a significant gain.

2. Step two is to sell high. Ideally, the right time to sell an asset is when the price rises substantially. During such time of stock market growth, people are buying everywhere. That is the best time to sell in order to maximize your gains. With the money in your hand, you can then repeat the process by looking for a low-performing asset or any secure investment.

3. Recover from your mistakes. No matter what you do, mistakes are bound to happen. Buying low and selling high, after all, is not a fool-proof method. Losing money happens wherever you go and whatever you do; so, try to roll with the punches and learn to pick up the pieces. After recovering from a hard fall or loss, slowly pace yourself back to your former condition by making some market gains through an index fund. Or perhaps, take time to evaluate carefully an investment prior to risking a sizeable amount of your money. Fear tends to terrify and immobilize a person and keep one from reaching your highest potential. Instead, let courage propel you to newer heights of success.

4. Do self-evaluation. Assess all the past investments you have made and determine how you can obtain better results in the future. Writing down your thoughts and insights will assist you to clarify in your mind how to avoid future traps along the way. Moreover, a visible road map will help keep you from making decisions based purely on emotional fancies. A professional investment expert or a financial planner and a tax planner can also help you evaluate your investment ideas, increasing the reliability and accountability of your financial plans.

5. Establish a plan and stick to it. Losing big-time in investing can lead to much regret. Likewise, you may also regret not having invested in an asset that has soared beyond your reach. Planning well and doing meticulous analysis will help significantly in preventing failure. A written plan will also serve as a firm guide to prevent you from being easily swayed by people around you. You may also utilize the planning stage to fine-tune your main aspirations in life and determine how your finances will become instrumental in realizing them.

People invest in order to achieve and sustain a lifestyle of their choice. Succeeding in your investment choices will build sufficient wealth for an early retirement or to escape an undesirable job. To assure your success in this endeavor, you must apply reason and follow a financial plan to build your personal wealth. On the other hand, being merely led by the latest investment trend does not comprise a solid plan of action. It is time to take control of your finances and your life.