When you hear the term “OffShore Accounts” you might immediately think of things like drug lords, gangs, global terrorism and unsavoury black market enterprises; things that are far more evil than even what John Chow has come up with…and the Panda Slaying too. However, at the root of the usage of offshore accounts is the ability to funnel funds outside of the country, protecting them from the tax man. While offshore accounts do provide this sort of protection, the shady nature and the fees associated with keeping such funds offshore tends to make it a tool for only the wealthiest of individuals or for those with the most to lose in case those funds are discovered.
In a somewhat surprising move, the Canadian Government, in their recent budget, has announced an initiative that will allow Canadians to save up to $5000 a year in an account that is sheltered from taxes on the gains within this account. That means that any interest or capital gains earned in this account are exempt from taxation and are not considered part of your yearly income unlike traditional un-registered vehicles.
Compared to an RRSP, however, the initial $5000 savings limit does not have any tax advantages, just the proceeds gained from the initial principal investment. So if you have an opportunity to reduce your taxes through the purchase of RRSP’s, you’re better off doing that first. However, if you don’t owe anything, this method could give you a place to stuff those funds from under the counter jobs, or money made online from your blog into a place where the tax man can’t touch it, like an offshore account.
This new initiative, which will be available in 2009, will have banks jumping for joy as it provides yet another way for institutions to sell products to help individuals put this new savings vehicle to work. Although it seems like a great program, it really doesn’t hold much benefit for most people.
For starters, the program may only benefit those with above average incomes, who need a place to sock a part of their funds away in case of a rainy day. Also, for those of you that are into monetary policy, having Canadians each take an extra $5000 out of the economy will have an adverse affect for industries that export their goods to other countries as this will increase the value of the CDN dollar due to the scarcity of dollars in the marketplace. Speaking as someone who makes US dollars, this is actually bad for me because the US dollar will be worth even less than it already is.
So before you get all excited about your pseudo $5000 a year offshore account, it’s worth considering if this is anything that will even benefit you at all. With other non-tax bearing products such as Universal Life Insurance Policies available, it really is only good if you’ve maxed out every other possibility to shelter your money, and for most Canadians, that’s not happening anytime soon. I guess the rich do keep getting richer.