The Great White tax haven
Macleans.ca – business – How Canada has quietly emerged as a go-to destination for the world’s ultra-rich
Tuesday, July 19, 2011. by Jason Kirby
Until last year, Peter was a successful American fund manager, with roughly 200 employees in New York City and a personal fortune of $100 million. That’s still the case today, save for one detail—Peter is no longer an American. In 2010, the U.S.-born executive took the extreme step of renouncing his American citizenship. “I wanted to remove myself from a society and country that was heading for a financial catastrophe,” Peter said in an email interview through his Toronto-based lawyer, David Lesperance, who specializes in “tax-efficient citizenship, residence and domicile solutions.” In other words, Lesperance moves rich people to places where they’ll pay less tax. So which global tax haven lured Peter (not his real name) away from Uncle Sam? Was it the Cayman Islands? Switzerland? Monaco?
Try Canada. A year and a half ago, Peter moved to Toronto and is well on his way to obtaining his Canadian citizenship. He bought a luxury home in the city, as well as a vacation property. And now he’s in the midst of determining how much of his fund management company to uproot from New York and move across the border. “Five years ago, I would not have considered expatriation as an option, especially to Canada,” he said. “I always thought of Canada as a younger sibling of the U.S.—the same, but less advanced in terms of culture, quality of life, business opportunities and above all, taxation. I now see it as the same, but maybe better in the long term.”
As for those taxes, Peter says he’s fed up with his money going to pay for what he considers needless trillion-dollar wars in the Middle East, and to cover the staggering interest charges America owes on the money it’s borrowed to live beyond its means; by the end of this decade, at least 18 cents out of every $1 of tax revenue America raises will go to interest payments. “I know I get more for my taxes in Canada,” he says. “And the debt levels here are reality-based.”
For decades, Canadians have been told this country is a high-tax, unwelcoming place for business people and the wealthy. It’s a reputation we came by honestly. But a shift has taken place both here and abroad, say experts. While Canada is reforming and lowering its taxes, politicians in other developed countries—those faced with crushing debt loads and economic stagnation—are turning a hungry eye to the bank accounts of their richest citizens. At the same time, instability in the Middle East and Asia means wealthy individuals are looking for a safe place to move their families. Where they might have flocked to the U.S. in the past, many now see Canada as the better option. Tax specialists even use terms like “the Great White tax haven” and “Switzerland of the North” when talking about Canada.
The world’s rich are restless, says Lesperance, whose clients are worth between $30 million and $1 billion. Most work in financial services, but in every sector and every country wealthy individuals are on the move. Lesperance calls these ultra-rich the Golden Geese, arguing that wherever they go, they generate economic benefits—they start companies, buy real estate, keep restaurants busy and spend money on big-ticket items. Along with Ian Angell, a professor at the London School of Economics, he’s writing a book entitledFlight of the Golden Geese, which argues that as countries squeeze wealthy taxpayers, they will pull up stakes and flee. “Canada has an unprecedented, once-in-several-generations opportunity to put up its hand and offer itself as an alternative,” he says.
The migration is well under way. Last year, nearly 12,000 people moved here under the federal government’s Immigrant Investor Program, up from 4,950 a decade ago, according to Citizenship and Immigration Canada. (The figure includes spouses and dependents.) To qualify, immigrants must have a minimum net worth of at least $1.6 million, and are required to “invest” $800,000 with the government, which is returned after five years. (Ottawa says the money is used to fund economic development programs, though critics call it a cash grab.)
Last year, China accounted for half of investor immigrants, while other major source countries included South Korea, Taiwan, the United Arab Emirates, Iran and Egypt. Meanwhile, last year 75 wealthy immigrants moved here from the United Kingdom, while 40 came from the U.S. Over the past five years, 225 rich Americans have made Canada home. Experts suggest these figures dramatically understate the true size of the migration, since many other rich immigrants are coming here through provincial programs. A new report by consulting firm Grant Thornton shows that between 2005 and 2010, B.C.’s provincial nominee program lured 203 permanent residents under the program’s various business categories, which require a minimum net worth of between $600,000 and $2 million. They invested $423 million in the province, creating more than 1,100 jobs.
Such rosy claims will do little to quell the ire of many Canadians wondering why the country is throwing its arms open to wealthy individuals fleeing tax obligations elsewhere. There’s already a pervasive belief, reflected in survey after survey, that the rich in Canada don’t pay their fair share at tax time. There are also signs of resentment as the flood of wealthy immigrants reshape neighbourhoods. In Vancouver, local politicians have complained that rich homebuyers from mainland China drive up property values and shut local residents out of the market.
While the debate is sure to intensify, it’s unlikely to stop the flow of rich immigrants. “People still view Canada as a high-tax, chilly weather destination,” says Tom McCullough, CEO of Northwood Family Office, a boutique Toronto firm that advises wealthy families with assets of between $10 million and $500 million. “The reality is things have changed dramatically.”
It wasn’t so long ago that many feared Canada’s higher taxes would drive the wealthy away. In the mid-1980s, the U.S. slashed its top federal tax rate from 50 per cent to just 28 per cent in the span of two years; one Toronto newspaper fretted in 1986 that with top Canadian hockey players decamping to U.S. teams to avoid higher taxes, “the danger of the Stanley Cup leaving Canada forever has increased substantially.” By the 1990s the threat was far more pervasive. Tens of thousands of professionals moved to the States, adding to Canada’s “brain drain.” Yet today, those trends have almost completely reversed.
For one thing, the high tax rates Canadians love to gripe about aren’t really all that high compared to the U.S. The combined federal-provincial top marginal tax rate is 39 per cent in Alberta while in Ontario it’s 46.41 per cent (after factoring in the province’s surtax)* compared to an average federal and state rate of 39 per cent in the U.S. (Quebec is the outlier, with a combined top rate of 53 per cent.) Canada is less appealing when it comes to the income level at which those top rates kick in‹in the U.S., the top rate applies to income above US$373,650, while the top federal rate in Canada kicks in at just $128,800. But that’s an improvement from a decade ago, when income over $60,000 was taxed at the top rate.
And the tax environment for upper income earners and their businesses is getting more attractive. Finance Minister Jim Flaherty recently said that after Canada’s budget is back in the black, he will flatten the income tax system by reducing the number of tax brackets from the current four. This would allow Canadians to earn more of their income at lower tax rates. Canada is also on track to cut the federal corporate tax rate to 15 per cent next year from 18 per cent. A recent study by PricewaterhouseCoopers and the World Bank found Canada’s corporate tax rates are already among the best in the world.
But Canada’s tax laws also contain gems that appeal particularly to the super-rich. For one thing, high-net-worth immigrants can benefit from a five-year tax holiday under the Immigrant Investor Program if they store their investment assets in a trust held outside Canada. The program dates back to the 1980s, when U.S. companies were setting up branch plants in Canada, and it permitted American executives to move here without facing a double whammy of taxation. Today it allows immigrants to become Canadian citizens without immediately incurring taxes on assets they accumulated before moving here. Any income they earn in Canada is taxable at our rates. Other countries are paying attention. Earlier this year, when theFinancial Times in London reported on efforts by the British government to attract more high-net-worth immigrants, it noted that Britain attracts just a tiny fraction of the number of rich migrants Canada does.
More importantly, Canada does not impose any of the punitive taxes other countries target their rich with. Since the 1970s there has been no inheritance tax, which in the U.S. and U.K. enables the taxman to grab between 35 per cent and 40 per cent of a person’s estate after he or she dies. Unlike those countries, Canada doesn’t tax gifts either. That means wealthy relatives from the old country can send money to the grandkids in Canada without a tax penalty, or parents in Canada could give money or property to their adult children without facing a gift tax. (They might still incur a capital gains tax.) And unlike some countries, such as France, there is no explicit wealth tax on those with high incomes.
Taxes aren’t everything, of course. Canada’s biggest cities now boast the types of amenities and services once the domain of larger centres like New York and London. Millionaires who move to Vancouver or Toronto have their pick of high-end condos. Top-notch restaurants and luxury shopping abound. Meanwhile, Canada’s stable banking sector and straightforward financial regulations set it apart at a time when other global financial centres are piling on red tape.
Put it all together and Canada’s appeal to the world’s wealthy is compelling. “There are jurisdictions with zero income-tax rates, so it’s not like Canada has the very best taxes in the world,” says McCullough. “But the question is, do you want to live on a little tiny island somewhere to pay no tax, or do you want to live within an hour of Manhattan in a place where your kids can go to school and you don’t have to live in a gated community?”
But while rich foreigners have much to gain by moving to Canada, critics have long questioned whether Canada gets enough out of the deal. Last year, the Analysis Group set out to gauge the economic impact of the federal government’s Immigrant Investor Program, conducting the first formal survey of investor immigrants. The results suggest rich immigrants are having a profound impact. More than 60 per cent aquired assets in Canada ranging in value from $100,000 to $999,999, while another 28 per cent bought assets worth more than $1 million. Just over half were self-employed, while 33 per cent invested up to $1 million or more in businesses. The study concluded the average immigrant investor injects roughly $800,000 into the economy. With roughly 2,500 families entering Canada under the program each year, the economy gets a boost of roughly $2 billion.
Even so, a common complaint is that wealthy immigrants spend just enough time here to get a coveted Canadian passport, then leave. After obtaining the five-year tax break, thanks to the immigrant trust rules, there’s nothing stopping a newly minted Canadian from moving elsewhere and never paying a dime in income taxes here. How common that may be is up for debate. Lawyers who work with wealthy migrants say many may intend to leave, but their families quickly become accustomed to the lifestyle here—particularly those from the Middle East or Asia. “Canada is extremely sticky,” says Jonathan Garbutt, a Toronto tax lawyer. “Even though the tax plan may have been ‘get in, get passport, get out,’ it often doesn’t work like that. My big fear is that Canada will have a knee-jerk reaction and say we’ve got to make these people pay. The answer is: they’ll just leave because they can go wherever they want.”
As attractive as Canada is now, it may get even more so, particularly when compared to the U.S. In short, America is broke. Decades of overspending, declining tax revenues and the future bill for social programs threaten to leave a US$60-trillion hole in America’s finances. It’s not one that can be plugged by cost cuts alone, as President Barack Obama argued last month. “It would be nice if we could keep every tax break there is, but we’ve got to make some tough choices here if we want to reduce our deficit,” he said. “If we choose to keep those tax breaks for millionaires and billionaires . . . then that means we’ve got to cut some kids off from getting a college scholarship…that means that Medicare has to bear a greater part of the burden.”
In other words, wealthy Americans can expect to see their tax bill shoot up. How high? According to a recent Wall Street Journal editorial, Americans earning US$1 million could see the combined federal and state top tax rate climb to 62 per cent. At one point, Senate Democrats proposed a three per cent surtax on rich Americans, while Obama has vowed not to extend Bush-era tax cuts for the wealthy if he’s re-elected. Many dispute the actual increase in taxes, but the trend is clear. “The question is, where are you going to go to get those extra taxes?” says McCullough. “You have to go to the wealthy, who already pay 43 per cent of the taxes. It’s going to become very onerous.”
And very hard to escape. Most countries, Canada included, impose taxes based on residence. If one were to move to another country, taxes would no longer be payable here. Not so in America, which applies taxes based on citizenship no matter where a person lives. “There’s a growing number of very wealthy people realizing they’ll have to give up a huge chunk of their fortune to Uncle Sam if they remain American,” says Garbutt.
It’s why high-net-worth types like Peter, the millionaire fund manager, are giving up their citizenship instead. He’s far from alone. American law requires the names of people who give up their citizenship to be published in the U.S. Federal Registry. According to Renunciationguide.com, which tallied the names, 1,485 individuals became ex-Americans last year, up from 731 in 2009 and 226 the year before. And because of flaws with the way renunciation records are kept, the number of people quitting America is likely far higher.
Canada isn’t alone in trying to attract wealthy immigrants. Britain has said it will dramatically cut the time it takes rich foreigners to get permanent residency. Canada also throws up roadblocks to super-rich immigrants, says Lesperance. Since it can take five years for applications to be processed, he’d like to see Immigration Canada charge ultra-high-net-worth immigrants an even bigger fee, then use the money to set up a special unit dedicated to handling their cases. He also says rules that require permanent residents to be physically present in Canada for a minimum amount of time don’t make sense when targeting rich immigrants with international business interests. “The government of Canada needs to acknowledge that it’s not always a bad thing to act in our own country’s best interest,” he says. “These people are wealth creators. They are good for Canada.”
Of course, as rich immigrants like Peter have found, the tax haven of Canada can be good for them—and their bank accounts—too.
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