Canada tax advice needed

[ARex]

My situation is as follows:

• I am a dual Canadian and UK citizen, residing in Canada where I plan on staying
• I provide management consulting services to clients that are based in the US. Clients are (mostly) US companies and the work I do is for the US company/subsidiary. However, I perform the work in Canada and interact with the clients virtually.
• I have a sibling who is a US resident and US citizen who I completely trust (if needed for directorships)
• I currently have a Canadian corporation and invoice clients and get paid through this corporation. Nothing fancy. I pay Canadian small business corp tax and dividend tax / personal income tax on any withdrawals.
• Revenue is C$500k and I don't need more than C$200k for living expenses.

Is there an obvious (or less obvious) strategy I can deploy using an offshore corp to optimize tax? Just looking for ideas for now - anything I move forward with will be via a tax attorney.

 

[Forester]

I guess, the problem is dividend tax / personal income tax, correct?
(If you earn CAD 500,000 then small business corp tax – you have CCPC, I presume – is IMO reasonable, especially if you reside in a “better“ province as Alberta, Manitoba, Saskatchewan...)

 

[JustAnotherNomad]

You should talk to a Canadian accountant who has experience with such setups. I doubt there's a legal way for you to save taxes, especially considering that the Canadian corporate tax rate seems to be lower than in the US.

 

[Forester]

I doubt there's a legal way for you to save taxes,

Well, it depends on what tax burden is annoying ARex, company's or personal. In the first case there definitely are solutions (for someone even ~11 % is too much), in the second it is, really, more complicated (Canadian residents are liable for taxes on their income worldwide). All, AFAIK.

 

[JustAnotherNomad]

Generally speaking, no, there are no legal solutions for reducing company taxes, unless you pay a ton of money, which would sort of defeat the whole purpose.

 

[ARex]

My thinking was:
- set up an offshore company with myself and a US person as directors
- outsource work from my Canadian company to the offshore company
- I would be an employee of the offshore company, drawing a salary, which would be taxed at Canadian personal tax rates
- The remaining funds to be brought back into Canada as dividends

Can someone please point out the flaws in this?

 

[Sols]

The offshore company becomes tax resident in Canada and/or the US, probably Canadian if you are both a director and an employee of the company.

 

[JustAnotherNomad]

Yes, that could work, if the company had proper substance. I.e. if you were only a passive investor who isn't involved actively in the business, and if the company had economic substance, meaning local directors who gets paid a market-rate salary, an adequate office etc.
Without that? Forget about it as the Canadian/US tax authorities would say that since the company is being run from Canada/the US, that's where the company should pay its taxes.
Did you really think no one had ever come up with such a plan before and that there were no laws to prevent that?

 

[Forester]

Yes, that could work, if the company had proper substance. I.e. if you were only a passive investor who isn't involved actively in the business, and if the company had economic substance, meaning local directors who gets paid a market-rate salary, an adequate office etc.
Without that? Forget about it as the Canadian/US tax authorities would say that since the company is being run from Canada/the US, that's where the company should pay its taxes.
Did you really think no one had ever come up with such a plan before and that there were no laws to prevent that?

Generally, I agree.
But having agreed, I consider worth adding that IMHO all of it heavily depends on the jurisdiction under what would be a hypothetical offshore company. I think almost everywhere it is necessary (especially for opening a bank account, what is a must) to have an economic substance, i.e. office and local directors (ARex as a director would also be unbearable in front of the Canadian tax office and he also should not be an employee), but in some cases really the Canadian/US tax authorities are not able/entitled to say that a company is being run from Canada/the US. An offshore company need not be a LLC or equivalent, it can be a trust or whatever (I am not an expert here). Of course, the questions are 1) the reputability of the particular jurisdiction; 2) the costs. As for the costs... I am unsure whether ~CAD500k is enough to induce building of such a structure...but in some jurisdictions... maybe yes. But definitely, it is necessary to consult a professional (perhaps not an accountant, more likely an advisor/lawyer) with details of a particular case.

 

[treasureinyou]

You can concentrate on lowering your corporation tax rate using HSA (need 2 employees) max out your RRSP'S and TFSA's look into investing within corp, look into what can and can't be used as business expenses etc

 

[hernanday]

Yeah you could use and setup an offshore structure to legally reduce your tax burden. It would involve obviously setting up a corporation offshore that would have the effect of reducing the tax debts and net income of your business. It is something I have done before and can assist you in setting up if you are interested.

 

[Fred]

The offshore company becomes tax resident in Canada and/or the US, probably Canadian if you are both a director and an employee of the company.

This.

Consider UAE under your UK passport - it's in your case a very strong setup without any ties to your actual residence in Canada.