Top Ways To Avoid Income Tax – Part 3

This is the final part of my series on top ways to avoid income tax. If you miss the old posts, you can read part 1 here and part 2 here.

The Offshore Corporation

This is the favorite playground of the rich. It is estimated that one-third of the world’s wealth (over $5 trillion) is held offshore. This is a very BIG business. The world’s largest banks are all involved. Barclays Bank’s (11th largest bank in the world) most profitable branch is in the offshore jurisdiction of Jersey, Channel Islands. The Canadian Imperial Bank of Commerce (CIBC) earned most of its $1.69 billion profit from its Caribbean operations. The Cayman Islands handles more deposits than any other country, except the US and Japan. There are 418 banks licensed to do business in the Bahamas. By comparison, Canada has 84. Once the exclusive domains of the super rich – the legal fees cost a fortune – offshore investing in the global economy is now available to people with as little as $10,000 to invest.

In the case of a web publisher, he would set up an offshore International Business Company (IBC) and this new company would own the websites. It’s pretty simple and straight forward to tell Google and the other ad networks to send payments to this new company. You are now earning all your Internet income tax free because the IBC is set up in a country with no income tax. There are about 45 countries that do not have income tax, capital grains tax or estate tax. Other offshore markets, like Panama or Costa Rica, do have income tax but have legislation exempting IBCs or they allow the IBC to earn income tax free if it’s earned outside of their country.

The problem comes when you try to bring the money back into the home country. The easiest way to do it to set up a company in the home country to do “consulting” for the offshore company. You can have the offshore company pay you enough to cover living expenses. You will get taxed on this money but if you don’t need much to live on, you should stay in the lower tax brackets. The other way to bring money back is to fly to the offshore district, take out $9,999 in cash and fly back home. As long as you not bringing home more than $10K, you don’t have to declare it.

The Offshore Subsidiary

The offshore subsidiary is a move multinational corporations do to avoid high corporate taxes in their home country. Let’s say Canada Mega Corp posted $10 million in net profits. They would need to pay 47% tax on that earning, leaving only $5.3 million for the shareholders.

What Canada Mega Corp would do is have their subsidiary in Barbados (Barbados Mega Corp) invoice them for $10 million worth of services. Suddenly, Canada Mega Corp has a net income of zero. The Barbados subsidiary now has a net income of $10 million, which will be subjected to the Barbados corporate income tax rate of …… 3%.

The Barbados subsidiary would then send the money back to Canada Mega Corp as a tax-free dividend because Barbados and Canada have a tax treaty. The money has already been taxed and therefore shouldn’t be taxed again.

The final score: Canada Mega Corp shareholders – $9.7 million, Barbados government – $300K, Canada Revenue Agency (CRA) – $0. Now you know why most of the Canadian Imperial Bank of Commerce’s $1.69 billion profit came from its Caribbean operation (the corp tax there is 3% as well).

The Letter of The Law vs. The spirit of The Law

While the above strategies may satisfy the letter of law, some would say they go against the spirit of the law. Let’s see. Which do you think is more corrupt: government buying votes with your money, or the efforts of every citizen to deny the government as much money as legally possible so as to force it back on the road to financial responsibility?

There a framed letter (in both English and French) in every CRA office that lists the rights of the taxpayer. One of the things the letter states is that you have the right to arrange your financial affairs to pay as little tax as possible. I’m just following the letter.


56 thoughts on “Top Ways To Avoid Income Tax – Part 3”

  1. I read the other two parts as well. I like the part 2 as the best. And honestly, I am thinking to become a non-resident.

  2. I LOVE IT!! I’ll have to get more info on this. Do you have any resources where I can do a little more research and get some details?

  3. Lance says:

    In Malaysia, Labuan Island is one of the place of the rich. Duty free island.

    1. ForumeR says:

      Langkawi Island also duty free Island and the best and cheapest place to go shopping in Malaysia i think 🙂

  4. Jack says:

    The offshore subsidiary is very, very common. I used to work in a Mergers and Aquisitions Tax group, and I spent my days looking at org. charts and documents about arm’s length agreements. There are a lot of Canadian parent companies with FIE’s and ownership in Barbados holding companies or income trusts.

  5. Zune Tricks says:

    I also heard that most of the middle east is not only “Tax free” but it’s considered quite rude for even the government to ask you how much money you make, earn, or have.

    So next time you rob a bank remember.

    I remember a friend telling me that when he worked in the bahamas his company HAD to hire 20% of their employees locally.

    That means a lot of people being hired to do nothing. And you can look at it as, that’s they way these countries make money for their citizens.

    I’m starting to sound like a right wing rich bastard 😉

    Go torries!

    1. This is definitely true. I once was working with a gaming start-up, and in order to get a gaming license in Malta, X% of the workforce had to be there, and you had to spend $Xk per year on housing/office space/etc.

      DevDad

  6. yeoq.com says:

    Do you know if you are not from the US every year when you file your taxes you get reimbursed everything i deducted. Only citizens and permanent residents pay taxes. Only problem with this solution is you lack so many priviledges being on visa.

  7. I’m really enjoying these series. How many do you plan to do?

    DevDad

    1. John Chow says:

      That is it for now. I may do a post on how I run my operation.

      1. Tyler Cruz says:

        Cant wait to read that when its coming out?

      2. That is definitely something I’d like to read. I talk quite a bit on my new blog about managing time while I’m working from home. I’d really like to hear more about your day to day work flow to manage your sites.

        DevDad

  8. Paul B says:

    You forgot the Isle of Man? We kick the ass of Jersey.

    0% corporate tax and no dispersable profits tax if you’re not Manx. We’ve also got more CSP’s than you can throw a stick at. There are few better places in the world to put your money if you don’t like tax, the US government really hates us!

  9. Awesome post. It doesn’t matter what the letter or spirit of the law is, it matters what judges say it is.

    As long as the judges are fine with it, and you feel it’s ethical, you should go for it. Especially when it comes to laws that punish you for making money.

    One Man. One Year. $100,000 online. Punished.
    http://www.oneyeargoal.com

  10. John seems to be experimenting with Kiyosaki-style posts, adding some views on politics, which means controversy, which means more traffic.

    Judging by the success of Kiyosaki himself, I woudn’t be surprised if other series follow this one.

    1. Let’s just hope they’re about blogging or making money online. There’s plenty of controversy to stir up in those areas. Only a fool would take tax advice from someone who’s neither a tax attorney nor an accountant.

      1. John Chow says:

        Actually, I am an accountant.

        1. Tyler Cruz says:

          LOL In your dreams you didnt even pass high school

  11. bob cobb says:

    I hope I don’t have to pay captial grains tax 😆

    1. I think only John Cow has to pay those lol :mrgreen:

  12. Eric L. says:

    There are many ways to avoid paying taxes. I haven’t read all your posts on taxation, but one way is to earn income considered as “nothing” under Canadian Tax Law: gambling income… for professional gamblers (poker players). That is one of the safest ways.. although it is not easy to make money out of gambling… the proof: casinos are cash cows.

    That being said, you did suggest a few strategies to avoid taxes. Problems:
    – you need tax experts to implement those strategies and they charge a lot, so unless you make a lot of money, it’s not worth it;
    – you expose yourself to tax assessments – even if you end up being right, it they take you to court over your tax affairs, you will lose years of your life + lawyer’s fees;
    – we can minimize your tax exposure as much as possible, but we live in Canada, and few of the things that make our country great is our free health care, low education costs, etc. – minimizing tax is right, but avoiding paying tax altogether is extreme and not responsible;
    – the idea is to make money and then minimize taxes, not minimize taxes and then find a way to make money.

    Cheers.

    1. pj says:

      “avoiding paying tax altogether is extreme and not responsible”

      You are right that people from Monaco – as an example- are profiting from the universities and other services such as hospitals of for example France.

      However, instead of concluding that Monaco should increase tax rates to provide these services too (and so lower the spill-ver), one can also state that France should decrease government intervenience (which also lowers the spill-over).

      Economic theory suggests the second conclusion. Unfortunately, political democracy will often go for the first.

  13. pj says:

    John, this is by far the best post of your series. The real estate play was also correct but that didn’t provide so much freedom in terms of what cash flow you want and when you want it. Also, you were still paying estate taxes and mortgage interest.

    For those asking where to find more info, there are books and websites dedicated to this kind of stuff.

    I hope this post will help at least one person to escape the middle class mentality.

  14. iComunik says:

    Tax is something nobody likes to pay. To be honest, the amount of income tax I pay every month could easily pay off a nice car. Like they say: Welcome to Canada!

  15. dcr says:

    I agree that this is the best post of the series.

    The more you tax the rich, the fewer rich you will have to tax because they can afford to uproot and leave!

  16. Nabloid.com says:

    As a capitalist at heart, I can’t stand to pay the Canadian government 50% in taxes… they don’t own half of my time or my work. Reasons such a this are why I have a corporation I do all my work through… a combination of a very low salary and dividends can keep my tax rate at a much more appropriate level. While I haven’t avoided taxes completely, I have made them more manageble and reasonable. Maybe later when I’m making millions 🙂 ill go for some more extreme tax strategies to save myself some serious coin.

  17. Marco says:

    John you are evil 😈

    1. ForumeR says:

      No doubt about dat 😀

  18. This is great stuff. I have already followed some of these as my income from my businesses has steadily increased. The great thing about being a business owner is that you get your tax money before the government does, so you can get creative with how to keep as much of it IN your pocket as possible!

  19. This is by far my favorite part of this series. It is something that I may be able to put to good use in the near future…

  20. Thomas says:

    Geo-political situations asides. This is spot on.
    Once you see your self as your own CEO – your mind set changes.

    I’m walking this path and I intend to in that general direction.

    You can go into is the Federal Reserve Act illegal?
    Is Income Tax Illegal?
    Why as why? Drink bud dry?

  21. Johnny says:

    Once again, great advice from the guru, thanks

  22. Ok, so now that this series is over it’s back to the topic of making money online right? 😕

    1. Nick says:

      Ever dollar the Government doesn’t seize is a dollar you earn.

    2. Simon says:

      You crack me up dude. Great post John, I think this one is my favorite of the three, I especially like the last bit.

      Simon

      1. This is my favorite of the three because it’s the end of the series. 😉

        1. Simon says:

          Lol, I like you too dude. 😀

          Simon

  23. Derrek says:

    Beautiful series. I’d like to know more about the non-resident and offshore options for US citizens. Thanks for the info.

  24. Nathan Roe says:

    hahahaha lovin the series, its full of some great info!

  25. Softsled says:

    John,

    I got involved in Real Estate a few years ago and at one seminar I heard some very good tax strategies, but I have never heard the details about setting up an offshore corporation. This is very good information. You might think of having a tax specialist do a guest blog.

  26. Tony says:

    Any news on the post regarding 17% tax on income lower than $400,00 :mrgreen:

  27. John,

    The offshore scheme isn’t nearly as easy for American citizens. The IRS still wants your money. There are still ways around the IRS by going overseas, but its a lot more complicated in the US than it is for Canadian citizens.

    1. Tony says:

      The IRS will do anything to squeeze the last penny you owe them. Don’t try to hide from them. They even got Swiss to their side now.

  28. great topics 🙂
    you should know why i am saying so ha

  29. Amit says:

    Hi John,

    Excellent post! I’m working on setting up a offshore account myself, you just need to be careful in the US, you don’t want the IRS finding out.

  30. Max says:

    Some of the stuff is a bit scary 😐 . I hope you know what you are doing dude !!!

  31. moom says:

    I don’t think you can just bring $10,000 in cash back home tax free. Once you pay yourself a dividend from your offshore corporation most countries that tax on a residency basis will tax you on that dividend. Doing what you suggest would be tax evasion. But as long as the profit remains in the offshore corporation you may be able to avoid tax depending on the laws in your home country. US multinational corps do this all the time.

  32. Is this just for big corporations or also normal bloggers or even John needs to avoid paying TAX. I was wondering if I have to pay TAX if I dont have any business and earning money just on Internet byu donations and affiliate marketing.

  33. This is an interesting post.. Of course, one has to start making the “big bucks” before one is concerned with these things, but it is good to keep this in mind..

  34. mic says:

    There’s a strategy done by a business tycoon here in the Philippines (i wont say the name), create two companies, one is for production the other one is for distribution. The production company then sells the produsts to the distributor company for the cost of just producing the products, meaning they dont earn anything. If it’s a break even they dont have to pay taxes cause they don’t earn anything.

  35. moom says:

    Mic – yes that’s called transfer pricing. Another strategy is having more than one foreign subsidiary and lending money from the low tax jurisdiction subsidiary to the high tax one. The subsidiary in the high tax one gets to deduct the interest payments at the high tax rate and the low tax subsidiary earns them at the low tax rate. There are lots of tricks like these used by mutlinational corporations. To some extent countries try to clamp down on the tricks but new ones pop up.

  36. Tax Haven says:

    All countries have very specific tax laws. What John wrote is only valid for Canadian residents. It is also true that setting up an offshore company can be quite expensive depending on the jurisdiction. Check the real cost before starting.

    Americans must file a tax return no matter where they live. But the last time I looked non-resident americans have an $80k exemption double that for a couple. Though you may have to pay taxes in yur country of residence. Not everyone wants to be a tax exile.

    I am sure that the canadian tax department knows Barbados very well and would take action if it felt like it to close the loophole.

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