According to the International Consortium of Investigative Journalists, many of the world’s richest citizens are stuffing cash in offshore havens to avoid paying tax. It sounds like everyone’s doing it: in the wake of a massive leak of private offshore banking data, experts now believe that, to avoid detection, as much as $20 trillion to $30 trillion may be hidden away in places like the Cook Islands, Monaco and Switzerland.
As you sit down to dutifully file what you owe by the April 30 tax deadline, it’s hard to shake that feeling that you’re a chump. Why should you hand over a massive chunk of your income to the government when people far richer than you are getting off scot-free?
I’ll tell you why: because they’re not getting off scot-free. The perception is that because they can afford brilliant advisers, the world’s super-rich have access to tax-dodging secrets the rest of us don’t. And maybe some of them do. But just as many have become obsessed with avoiding taxes—and they’re doing really dumb things just to save a few bucks.
I’m not against trying to minimize your taxes. As the former editor of MoneySense, I spent years advising folks on every legal and practical tax shelter available. Using such methods, you can reduce your taxes by as much as 20% or 30%—maybe more—and still sleep well at night.
But take a look at the ridiculous lengths to which Saskatchewan lawyer and class-action king Tony Merchant went just to avoid paying his tax bill. According to CBC News, he set up a trust in the Cook Islands, a well-known offshore tax haven, and deposited at least $1.7 million of his money. He then had the trust open an account in Bermuda at a brokerage called Lines Overseas Management and used it to buy mutual funds. A note placed on his Cook Islands account contained instructions that he be communicated with only via airmail (no faxes!), and that correspondence should be kept to a minimum. When his banking fees were due, he stuffed envelopes with cash and mailed them halfway around the world.
There is no proof that Merchant ever broke the law, but it sure sounds like he went through a lot of anxiety and trouble. The result? Both he and his high-profile wife, Liberal Sen. Pana Merchant, are now battling the public perception that they’re greedy tax dodgers who feel they’re above paying their fair share.
Smart investors know that every financial decision you make is a trade-off between risk and return. In some ways, hiding money from Canada Revenue Agency using offshore accounts is just another option on this continuum, but when you take the risk into account, it’s not a wise move. Even if you don’t break the law, you’re not in full control of your money. What if the offshore bank goes bust? What if you need your funds suddenly in an emergency? What if an even less scrupulous person than you cleans out your offshore account? In some cases, you’re putting 100% of your capital at risk just to save 30%.
Given the good fortune required to amass $1.7 million in savings, taking on that much risk is stupid. Why would you put your money, your reputation, even your freedom at risk, just to avoid taxes? As billionaire investor Warren Buffett says, “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”
Feeling better now? Good. Now get back to filling out that T1.
Duncan Hood is the Editor of Canadian Business.