By Robert Keats
If I have learned anything from my many years of providing financial advice to families of all types, sizes and levels of wealth, it is that lifestyle and family needs to trump tax planning nearly every single time.
Once people get to a certain level of wealth (that level of wealth is subjective and different for every individual and family) the amount of taxes they pay and their cost of living goes down several notches in priority for family decision-making. The preferred lifestyle appropriately rises to become the primary criteria in any decisions of where they are going to live and with tax reduction and cost living reduction positioned clearly in the background. I firmly believe this pecking order of priorities is not only the correct one, but also the one that leads to the happiest and most well balanced individuals and families.
If lifestyle is not paramount, you have the tax haven tail wagging the family lifestyle dog, which virtually guarantees an individual, couple or family will not achieve their desired level of life contentment they have earned. It makes very little sense to me for a family to work hard over their lifetimes to generate the level of wealth that they desire and then not be able to live the lifestyle they choose. They need to enjoy the wealth rather than be caught up in a complicated tax haven scheme that dictates where, how and when they can enjoy their wealth. It is for this reason the traditional tax haven islands/countries and the type of lifestyle necessitated through conventional Canadian advisor tax haven planning and books like Alex Doulis’, Take Your Money and Run, fail most families entirely to help them fulfill their lifetime dreams.
Took His Money and Ran
In February 2011, the reader of popular financial column in a major Canadian newspaper wrote in to explain what happened to him when he executed the Alex Doulis Take Your Money and Run! strategy seven years previous. I thought it was worthy to summarize this person’s experience with Take Your Money and Run and use of the traditional tax haven strategies for Canadians. I do not know this person or their name, he was referred to in the financial column as E. C. I am only going to attempt to gather what I feel was the main intent of his writing to the financial column.
The primary and not surprisingly most important lesson this reader found by going offshore was, one should never leave Canada just for saving taxes because as noted earlier in this article, lifestyle and family or at least it should for most people, always trumps tax savings. From my experience and that of many clients I have dealt with, the only ones in which a traditional tax haven strategy such as the, Take Your Money and Run, approach might work for is a married couple with no children, no living parents and few close relationships with siblings and friends. Any personal relationships with family or friends are bound to suffer with that traditional tax haven strategy because of the simple geography of living on an island in the middle of nowhere or bouncing around from port to port in a yacht attempting to keep ahead of the proverbial taxman.
E.C. Found that the assumption that there are no taxes in the off shore so-called tax haven jurisdictions is a myth; there are a myriad of hidden taxes and taxes just because you are living in a foreign country outside of Canada and the US. For example, E. C. found that Canadian dividends and trust income originating in Canada face Canadian nonresident withholding taxes at 25%. There is also 30% withholding from the IRS for US sourced dividends and similar income, Switzerland takes 35 % withholding on this income for residents of tax havens with no treaty protection. Old Age Security pension is subject to the 100% clawback tax rate and QPP/CPP/OAS face nonresident withholding tax of 25% that can reduce these pensions dramatically. On top of all this, E. C. reiterates the fact that before one departs from Canada, they are subject to a departure/exit tax on the day that they leave Canada on certain taxable Canadian assets that have unrealized and yet to be taxed at capital gains. Although these taxes can be deferred by giving the CRA suitable collateral there is a great deal of paperwork and hassle to deal with these exit taxes effectively.
E.C. also found that food and housing costs on the offshore island were higher than in the US or Canada and the selection and availability of foods and other consumer goods much more limited. This cost of living increase reduces and often negates potential tax saving of traditional tax havens and the lack of choice noticeably reduces one’s lifestyle enjoyment.
Since E. C. and his wife enjoyed spending time in the US, he was finding they had to count the number of days they were in the US and avoid Canada almost entirely. They had to do this to ensure they did not become taxable by the IRS in the US or the CRA in Canada on their world income under the substantial presence regulations of the IRS/CRA. The Canada/US Tax Treaty could not help E.C. under the treaty resident tiebreaker rules since they were no longer residents of Canada even though they remained Canadian citizens.
Take Your Money and Drive
Stories like E.C. and his wife in conjunction with many years of practical experience dealing cross-border financial planning between Canada and the US inspired me to write, A Canadian’s Best Tax Haven: The US: Take your money and drive! (Cross-Border) This book shows Canadians looking for the cross-border lifestyle, whether it is a shorter-term/Snowbird situation or a permanent move to a warmer climate, both the lifestyle and the other tax haven benefits that E. C. and his wife were seeking are available much more readily in the US with better tax savings and lower costs.
E.C. and his wife clearly enjoyed spending time in the US and its many tropical islands. Had they simply taken their money and drove to the US rather than taking their money and running to a tax haven, they not only would have enjoyed the lifestyle they desired but also had a lower cost of living, a better tax result and with less planning involved.
The benefit of using the US as a tax haven for Canadians is detailed in, A Canadian’s Best Tax Haven, Take Your Money and Drive! Here is a summary of some of the key points:
- The United States is the only Tax Haven Canadians can drive to. In addition, there are literally hundreds of economical nonstop airline flights from any major Canadian city to any major US city on multiple airlines and often several times a day.
- Traditional tax havens are treaty deficient. Canada and the US have a treaty established 70 years ago that provides rules to enable Canadians who move to the US, the ability to return to Canada on a very regular basis to maintain their family relationships or spent summers at their favorite cottage without fear of CRA trying to tax them as Canadian residents.
- The cost of living in the US is not only less than in Canada but also substantially less than the traditional tax haven island where virtually everything has to be imported with numerous levels of hidden import taxes.
- The tax Canadians pay as US residents can be equal to or even less than what they would pay if they lived in a traditional tax haven on an island in the middle of nowhere. Take Your Money and Drive! itemizes every type of income a Canadian is likely to have and proves that out of the 13 kinds of income, the US provides more favorable tax rates to Canadians than a traditional tax haven in 12 of the 13 forms of income and is tied with traditional tax haven for the 13th. In Take Your Money and Drive! I show this works at nearly all income levels.
- Canadians using the US as their tax haven can get full access to the US medical system at reasonable costs. In effect, they can get the best of the Canadian medical system ( they can remain Canadian citizens and can return to Canada at any time to get back on Canadian Medicare with a one day wait depending on the province) and the best of the US system for the rest of their lives. Canadians and Americans alike always argue back and forth as to which medical system is the best, my lifetime of experience has shown that those that have access to both systems have more options, more flexibility and the opportunity to get the best treatment without waiting in ridiculous lineups. Better medical options can be a major lifestyle enhancer, including living longer and a better quality of life.
- Canadians in the US are not subject to any Old Age Security clawback or withholding on the OAS or QPP/CPP
- When moving to the US there are many ways to mitigate or even avoid entirely any Canadian exit tax through the US/Canada Tax Treaty.
In summary, there are far fewer lifestyle adjustments with far fewer unpleasant surprises for Canadians moving to the US Sunbelt than for Canadians choosing to go to the traditional tax haven island. For those who actually wish to live on a tropical island and at the same time use the US as their tax haven, the US has many islands such as Hawaii, Puerto Rico, US Virgin Islands and the Florida Keys. We have clients who have a great life style enjoying the Caribbean islands for part of the year when they please yet also enjoying residences in the low taxed US states mainland avoiding all the lifestyle and tax disadvantages described in the many chapters of, A Canadian’s Best Tax Haven: The US: Take your money and drive! (Cross-Border).
About the Author:
Robert F. Keats CFP® (US & Canada), MSFP, RFP® (Canada). Bob is a founder and President of Keats Connelly, the largest cross-border wealth management firm in North America that specializes in helping Canadians and Americans realize their dreams of a cross- border lifestyle. Since 1976, Bob has been helping clients manage the complexities of US/Canadian cross-border planning when they are considering permanent or seasonal moves across the border. He is the author of The Border Guide, currently in its 10th edition. Bob is a frequent speaker in Canada and the US. Accountants, as well as Estate Planning and Elder Care attorneys often call upon him for his expertise.