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What is offshore investing?

The What and Wherefore of offshore investing

Most simply, offshore investing is placing your financial assets where you're not. Offshore investments can mean many things to many people. They can range anywhere from opening a bank account on a tropical island, to owning real estate, to holding investments outside Canada. They've also earned a bad reputation when used as illegal tax vehicles or secret stashes in Geneva.

Many Canadians unknowingly own offshore investments via their mutual fund holdings. Most mutual funds that have a foreign content component invest in offshore companies to add global diversity to their portfolios. To be sold in Canada, funds that invest offshore must adhere to all pertinent federal regulations. As well, many banks have offshore subsidiaries that engage in activities that are closely regulated.

According to Offshore Advantage: A Canadian Guide to Wealth Creation, Asset Protection & Estate Planning, by Gordon Laight, Toronto is one of the largest offshore mutual fund administration centres in the world. And according to the Micropal Guide to Offshore Investment Funds, there are over 5,500 funds registered offshore to choose from.

That said, great caution must be executed if you choose to open up an offshore account while enjoying an exotic vacation. Standards of regulation vary greatly from country to country. One of the safest ways to invest offshore is simply to remain 'onshore.' Owning a mutual fund that invests offshore is an excellent way to diversify your portfolio internationally while staying in your own backyard. Considering that the Canadian market represents less than 3% of the world's market, global investing offers greater opportunities for growth.

The Tax Haven Myth

To be frank, the main reason thousands of Canadians have parked their dollars offshore hasn't been for diversification, it's been for tax relief. This has especially appealed to very wealthy investors seeking tax havens. But times are changing rapidly. In the past few years, many Canadians avoided claiming income earned from offshore investments, but the federal government has established new rules and regulations to eliminate any tax avoidance. Canadian residents must pay the tax on income earned offshore through a trust or corporation. Through advanced technology and the ease of tracking global paper trails, the government has a greater ability to scrutinize offshore investments to ensure that taxpayers are properly reporting income earned outside of Canada. Further proposed rules will virtually eliminate any tax deferral opportunities that previously existed.

Risks

Investing offshore can result in the same risk as investing 'onshore' at home. You may lose some or all of your capital.

You may find it harder to evaluate and obtain adequate information on an offshore investment.

Tax risk: as a Canadian resident, you must report "worldwide" income from all sources. Failing to fail to do this can result in steep tax-evasion penalties.

The successful offshore investor

seeks global opportunities and diversification through international investments

uses a trusted financial advisor to understand offshore investments and the risks and rewards involved

discusses changes in offshore investing rules with a competent tax professional

evaluates fund companies that invest offshore by looking at their track record and management experience