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.

Imitating Warren Buffett’s Successful Investing

Warren Buffett’s success in the stock market using a common-sense approach is no secret. Nor is his enormous wealth he has accumulated through Berkshire Hathaway, the holding company of his middle-American companies, which he acquired in 1965 as a former textile and garment manufacturing company.

What are secret are his specific strategies to successful investing. But we can learn from Mr. Buffett by imitating 10 ways he openly does it, namely:

1. Simple logic does it. Anything that is used daily and entrenched in the economy is represented in the portfolio of Berkshire Hathaway. For instance, energy, retail, finance, utilities, insurance, manufacturing and railroads are industries which are essential to the ordinary consumer. More so with “grocery cart” brands which represent timeless needs and which Buffett translates into long-term, consistent values. Moreover, Berkshire Hathaway interests also include Duracell battery, GEICO insurance and Wells Fargo finance. For Buffett and his workers, if you use it often enough, why not own a part of it?

2. Character has real value. LouAnn Lofton, who wrote “Warren Buffett Invests like a Girl and Why You Should, Too”, says that Mr. Buffett invests only in companies whose management he likes and trusts. According to her, how the management treats its stakeholders and the public, in general, and how the public perceives the management as well, provide solid indicators of the excellent performance of the company. That company deserves an investor’s trust and investment.

3. Determine Core Value. Roy Ward, chief analyst of Cabot Heritage Corporation in Salem, Massachusetts, criticizes firms which often complicate their financial reports with one-time “extraordinary expenses”. Although you may not have the many analysts that Buffett has, Ward says that you can still detect the indicators of core value. She defines “core asset” as one which you would buy, be it a firm engaged in real estate or intellectual property. She advises the investor to monitor the “book value per share” of a company which represents the core value of the company compared to the current stock price.

4. Headlines are undependable. BAM Alliance director and author, Larry Swedroe, who wrote “Think, Act and Invest like Warren Buffett”, says that there is no lasting value in trusting what the financial headlines proclaim. He says it is better to walk a few steps ahead of the headlines. According to Swedroe, while it is difficult to predict what the market, the Federal Reserve and the government will do, any investor can tell that the government will act to stabilize the economy. Based on that general knowledge, the opportunities will come.

5. Learn fundamental performance metrics. Ward says that once you grasp the book value of an asset, determine how much the firm makes on its assets. If you are Buffett, you would want at least 20% return on the assets which eliminates so many companies from the picture, Ward adds. Likewise, monitor the trend lines, looking for firms that made 10% in the past and now makes 20%, as that indicates good performance. Why that is so is something you would want to know -- what Buffett is also interested in.

6. Be Patient. If you know of companies that fit Buffett’s targeted investments choices, keep your eyes on them, Ward advises, in order to see how they fare in the market and how their stock price is valued. If a firm consistently makes money but its stock price does not keep up with its book value, then you have a potential asset to buy and hold.

7. Opt for the long-haul. Lofton says that buying and holding eventually builds wealth although majority seek to gain over a short-term range. Buffett, according to Lofton, has his eyes on the everlasting results, which she describes as seemingly “lethargic or slothful”. She advises that for the rest of us, holding on for five years is enough. Statistics prove that it takes that long to complete a market cycle, she adds.

8. Monitor Buffett’s reports. In general, corporate annual reports are known for their slanted and toe-the-liner statements. Berkshire Hathaway reports, on the other hand, are simple and unpretentious. This is because Buffett tells his story in plain English, narrating what he and his team did, how they did it and why, keeping the reader interested.

9. Invest in index funds. In case the previous steps seem to require too much work, Buffett recommends buying index funds, according to Swedroe. This is because investing in index funds allows an investor to overtake majority of stocks and industries.

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