Could You Live To Be 200?

Recently a physician I know and respect indicated that a child born to day could easily live to be 105, in good functioning health.  This with the known medical craft of today.  Another article indicated that by the turn of the century we could expect people to live 200 years, also in good health.  A recent death in my family produced a plethora of picture of old looking relatives (my parents among them) who rarely lived to more than 60 years.  At 40 they were old.  What can I say about me, who is in his 79^th year and feel, mentally at least, decades younger. 

The reason that I make these observations is that I cannot think of one think tank (and there may be some) who has addressed this problem in terms of what such longevity will mean in social and political terms.  If a person who is 50ish loses his/her job today it is unlikely that he/she will find employment—ever.  This in an environment where most people live (at least in the first world countries) past 80.  Adding another 20 year to longevity will put extreme pressure on the work force.  Who will make room for younger workers where the existing workers work past 80 years of age.  If one assumes that retirement age (say 65 or even 70 years of age) remains relatively constant it is possible that people will be retired for more years than they were at work.  How will society adjust to that?  The pressure that this may put on the medical resources of our community will be enormous.  I can only assume that, by the time people regularly live to 105 we will have solved the problem of cancer or dementia.  We will therefore have a great deal relatively well people in our society who are not working.  What do we do with them?  What do they do with themselves?

As a student of economics I am wary of those who play with demographic numbers. Malthus who believed that, since people multiplied in geometric progress would soon outstrip food supply did not take into account fundamental changes in the technology of growing food.  The greater population was well accommodated.  I am assuming that technology will accommodate our order populations.  However some basic questions still arise.

We put an enormous value on work.  What we have learned from the recent downturn is that when businesses increase efficiency during a downturn the last unit added is labour.  Those who argue that people will be needed to manufacture technology devices (people built cars that replaced horses and wagons) do not take into account the labour saving aspect of most technologies.  It took 20 years for the computer to demonstrate its efficiency in the work place but, having done so, the effect was profound.  I believe that we will move into some sort of economy where the value of work will be supplanted with something else.  What that “else” is, as yet, unclear. 

Our current pension algorithms are just starting to take into account longevity data in a world where many people live well into their 80s.  Therefore most pension funds are woefully underfunded.  When news of this underfunding hits management (as it must with current accounting rules) many companies “reorganize” under bankruptcy protection rules where the underfunding is eliminated—to the detriment of existing employees.  Because competition is so fierce the pressure on existing labour rates is such that the employees can save little or nothing for their retirement.  The confluence of these events will be catastrophic in the future.

There are but two issues that require some discussion.  There a re many more.  Most governments today can’t think beyond the next election.  Therefore there is little or no discussion or analysis of what life will be like beyond 2015.  However, the problem, like global warming, won’t go away.  We will reach the tipping point and when our leaders respond it may be too late. 

It's a Whopper of a Double Double

The latest "inversion" of Tim Horton's and Burger King was expected--as a tax planning concept.  What wasn't expected is that it took so long for a major company to opt for Canada rather than, say, Ireland as a place to do an "inversion".  The differential in corporate taxation between Canada and the US, about 10 points is significant enough.  However, the greater benefit--and one that is just beginning to percolate with US tax planners---is that foreign profits can largely be repatriated to Canada tax free as against a 35% tax for US corporations.  Accordingly, corporations can incorporate offshore active business affiliates in low-no tax jurisdictions and repatriate after tax (usually 2.5% or, in the case of Nevis or Cayman no tax) profits tax free to Canada as exempt surplus.  This is a huge benefit not only in tax savings but in the mobility of capital.  While there are still some hurdles (e.g. transfer pricing between the Canadian parent and its offshore trading company) these issues are no less important than relationships between a US parent and its offshore subsidiary.

It is important to note that the methodology for doing this "inversion" is that of merger between a US and Canadian (or Irish) company.  Establishing a Canadian subsidiary does not work because the subsidiary will be classified as a Controlled Foreign Corporation (or CFC) and taxed as if it were a US corporation.  US companies have tried several mechanisms to avoid having a CFC in Canada (the usual mechanism is to have a trust formed in Canada hold the controlling shares in the Canadian sub) but the better alternative is to merge with a Canadian company.

A question arises concerning the treatment of dividends to US taxpayers from a Canadian company.  Usually there is a withholding tax levied on the dividend paid to foreign taxpayers.  This dividend is usually creditable by the US taxpayer against tax normally paid in the US.  Regard should be had for the Canada-US tax treaty. Canadian shareholders in Burger King will benefit significantly.  Canadian shareholders receiving dividends from a Canadian corporation will get the benefit of the dividend tax credit.  This reduces the tax on Canadian based dividends.  This was not available to Canadian taxpayers of Burger King when Burger King was a US company.

US tax policy regarding the repatriation of foreign after tax profits is plainly wrong headed.  This policy has kept much needed capital outside the US and has driven companies to find unlikely partners in low-no tax jurisdictions.

The current hubbub illustrates how far we have strayed from the general tax principle that people can arrange their affairs so that they pay the least amount of tax.  Tax, as I have always said, is not a moral issue; its a commercial issue.  Corporations will migrate to jurisdictions with the lowest tax rate.  Tax is, almost always, the biggest expenditure that a company makes.  A company's treasury will demand that tax rates be kept as low as possible.

Inversions And Other Thoughts on Corporate Taxation

Recently there has been a lot of press on the issue of corporate taxation.  Many US corporations are engaging in "inversion" transactions where they merge with a company in a low-no tax jurisdiction.  Billions of dollars of taxable revenues are shifted out of the United States to, say, Ireland (the current flavour of low-no tax jurisdictions.  There is no doubt that the US Inland Revenue Service (IRS) is going after such transactions.  The amount of tax revenue from corporations continues to fall both in the US and Canada.  In the US it is mainly because of either significant tax subsidies (e.g. depreciation, reserves for extractive industries such as oil and gas) or because the world has flattened significantly and corporations can (like the rest of us) choose where it wants to be domiciled.

Other than wages and raw materials, taxation is the highest expenditure that a corporation will make. Wages are deductible in computing the income of the corporation but wage earners suffer immediate taxation by way of payroll deductions.  Since accounting for such corporations are done on an accrual basis corporations pay tax on income that is not yet earned (e.g. accounts receivable).  Because business is driven to optimize expenditures, expenditures on taxation are no less managed than are, say, the purchase of a machine or raw materials.  Shareholders would hold management to account if tax dollars were squandered.  So business will continue to optimize its tax status.  As do individuals.

Canada is in the forefront of optimizing its corporate tax regime.  It has significantly lowered corporate taxes on small business (about 15%) and larger business (25%) as compared to 35%+ in the United States.  Distributions to shareholders are favoured in Canada through a dividend tax credit so that the shareholder is reimbursed for some if not all of the taxes paid by the corporation.  In the US there is an element of double taxation--once at the corporate level and once when dividends are distributed.

There is a case to be made that corporations should pay no tax at all.  This would stop tax jurisdiction shopping and would center the corporation's activities in locations without regard to taxation.  In the US where repatriation of foreign profits is taxed at about 35% (on top of whatever tax is paid in the foreign jurisdiction) corporations hold trillions of dollars outside the country--to the detriment of the domestic economy.  Any tax shortfall would be made up of taxes on dividends, wages, and economic activity that produces jobs.  Less dependency is required from banks.  Less need for wasteful tax subsidies to corporations.  This would result in a significantly reducing the complexity of tax legislation.

That leaves us with the conundrum of what governments do about the general tax base.  In theory, progressive taxation places higher taxes on the rich.  In practice, this is hardly the case.  Also, the utility value of a dollar to a poor man is more than to a rich man.  Because much of the wealth of the rich gives rise to capital gains, their collective tax rate is about half of the general tax rate.  Why capital gains should attract a lower rate of tax is somewhat mystifying.

I have long been a proponent of consumption taxes--such as VAT in Europe and GST-HST in Canada.  The rich spend more than the poor and therefore the tax is somewhat progressive.  A consumption tax is hard to beat and, while it may not eliminate the underground economy it will put a significant dent in it.  In Canada we have gone the wrong way by reducing our consumption tax.  We should have increased it and reduced our income taxes.  For poor the tax system can refund some of the consumption taxes paid by way of an earned tax credit.  The need for filing a tax return would vanish and tax collections would rise dramatically.  I believe that such a regime might be instituted--not by the Conservative government of the day--but by other cooler heads.

The Belize International Trusts Marketing Ploy--Buyers Beware.

This is an article written by a colleague, Rebecca Puni of Southpac Trust International Limited.  Reproduced by permission.

Belize is touted to be the premiere asset protection jurisdiction in the world because it did away with statutory fraudulent transfer laws applying to international trusts. However, what sounds heavenly is a lot less so when you look at the actual wording of the legislation.

Section 7(6) of the Trusts Act Chapter 202 reads:

Where a trust is created under the law of Belize, the Court shall not vary it or set it aside or recognise the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect to –

(a)    the personal and proprietary consequences of marriage or the termination of marriage;

(b)    succession rights (whether testate or intestate) including the fixed shares of spouses or relatives; or

(c)    the claims of creditors in an insolvency.

Although the restrictions upon the Court are generous, the types of claims that can’t be pursued are actually limited. Only marital claims, estate claims and claims from creditors in an insolvency are barred. All other types of creditor claims for fraudulent transfer may be brought against a Belize international trust.

What non-Commonwealth attorneys are often not made aware of is that there is a broad and well established statutory law in Belize for fraudulent transfers, section 149(1) of the Belize Law of Property Act. Section 7(6) doesn’t do away with this law applying to international trusts, it just limits it. The value of section 7(6) is in how well it reduces the scope of section 149(1), which reads:

Except as provided in this section, every transfer of property made...with intent to defraud creditors shall be voidable, at the instance of any person thereby prejudiced. (emphasis added)

Section 149(1) is based on the British Statute of Elizabeth dating back to 1571. The Statute aimed to stop debtors from intentionally limiting the pool of their assets available to creditors at common law for payment of debts lawfully due. Case law explaining the operation of the law abounds. If a creditor wants a transfer avoided, he needs to establish that the debtor actually intended at the time of disposition to defraud creditors.[1] There is no requirement for the creditor to prove the debtor is actually insolvent.[2] The creditor need only show an intention to hinder, delay or defeat creditors.[3] The creditor also need not prove the debtor intended to defraud him specifically and in fact, at common law, the creditor doesn’t even need to be an existing creditor, he may be a future creditor (post transfer of the property).[4] Transfers avoided under s149(1) have the effect of sending the property back to the pool of debtor’s assets available for all creditors, not the specific creditor that sued for relief.[5] Herein lies the yawning hole that the Belize Trusts Act left open. By attempting only to bar certain types of claims from the operation of the Law of Property Act, other types of creditors have the full benefit of the broad scope of section 149(1). 

For example, X goes into business with Y, the relationship sours. Y transfer profits from the business into offshore entities and then transfers the stock certificates for those entities to his Belize international trust, to be placed out of X’s reach. X sues Y for loss of profits and obtains judgment, which is affirmed after an unsuccessful appeal by Y.  X goes after the stock certificates by suing the trust in Belize for fraudulent transfer. Now, to protect himself Y could just voluntarily declared himself bankrupt, making X a ‘creditor in an insolvency’ and barring X’s claim in the Belize Court. However, not all Ys will want to do that, or can do that because of their healthy financial situation.[6] Unless Y is willing to render himself insolvent as against all creditors (i.e. through bankruptcy), the assets he has disposed to the trust are exposed to a fraudulent transfer claim under section 149(1) of the Law of Property Act. It also puts the trust in a predicament because the trust’s protection is squarely in Y’s hands, not the trustee. Y’s decision whether or not to be ‘in an insolvency’ determines whether the trust can be attacked in Belize or not.  

The approach to fraudulent transfers taken in the Cook Islands International Trusts Act 1984 has often been criticised by proponents of the Belize Trusts Act because it’s not a ban on creditor claims (not that the Belize approach is a complete ban either!). In the Cook Islands, rather than attempt to ban claims that could otherwise succeed under statutory fraudulent transfer law, they legislated to change the law altogether in so far as it affects international trusts. Under the International Trusts Act, to succeed in a fraudulent transfer claim, a creditor has to prove beyond a reasonable doubt (in common law the higher criminal standard of proof) that the Settlor’s principal intent in establishing the trust was to defraud that particular creditor.[7] The creditor must also prove beyond a reasonable doubt that the transfer of property into the trust rendered the settlor insolvent to satisfy the creditor’s particular claim.[8] Future creditors therefore can’t succeed in a fraudulent transfer claim against the trust. The Act contains a limitation period for bringing claims. [9] It also spells out procedural requirements which the creditor needs to first satisfy before its claim will be entertained by the Court, including affidavit evidence demonstrating the creditor’s ability to prove the elements of the claim beyond a reasonable doubt.[10] If a claim is satisfied before the Court, neither the trust nor the transfer is void or voidable.[11] Instead, the trust becomes liable to satisfy the creditors claim out of the property transferred.[12] Otherwise, the avoided transfer would send the property back into the pool of debtor’s assets available to all creditors and the particular creditor that came to the Cook Islands to sue may not get full relief. These are all fundamental changes to the way the law of fraudulent transfer normally applies. The changes were necessary because existing statutory fraudulent transfer law would have probably rendered transfers to an international trust void given their very nature as asset protection trusts. Also the trust would be exposed to the settlor’s future creditors for years to come.

The ‘Belize ban’ effectively condones a debtor settlor whittling down the pool of their assets available to pay debts due to certain types of creditors. It’s a return to debtor law pre 1571. Belize law screams ‘hide your money from your ex’, ‘avoid giving to your family when you die’ and ‘store your assets here when you go bankrupt’. This type of approach taints the integrity of the offshore trust industry and makes Belize a haven for debt avoidance. In stark contrast, settlors are restrained from using their Cook Islands international trusts for debt avoidance. Trust assets can be exposed to a fraudulent transfer claim if the settlor’s principal intent in transferring assets to the trust was to defraud a known creditor and the transfer rendered the settlor insolvent as against the creditor. The fundamental difference between Belize and the Cook Islands is that Belize law aims to protect the settlor in flight from his debtors. Cook Islands international trusts law, on the other hand, aims to protect the wealth of the trust from future creditor claims. This is why the statutory limitation period is so important. Assets legitimately transferred to a Cook Islands international trust will be protected from future creditors of the settlor so that, no matter what the financial circumstances of the settlor in times to come, their creditors cannot claw back assets from the trust.

The Cook Islands approach is uniform, transparent and fair. All creditor claims are treated the same under the International Trusts Act. The Belize approach, on the other hand, has created a dichotomy between barred and non-barred claims which is significant and inequitable. If you are a wife stiffed by her ex-husband when he transfers millions to a Belize international trust to reduce his divorce settlement, you’re out of luck. However, if you’re a businessman chasing debts traceable to property in a Belize international trust and the debtor is solvent, as in the example given, you’re in.  Whatever the rationale was for distinguishing different types of claims - perhaps it was prevalence - the consequences were not well thought out. Also, it is astounding that any legislature in this day and age would have thought it ‘okay’ to rate spousal creditors below other types of creditors, particularly when the burden of the law is likely to fall upon wives given their traditional lack of control over marital assets.  

What the drafters in Belize tried to do, although novel and ambitious, was bound to be porous because of the sheer difficulty involved in composing exceptions to a very broad and well established rule dating back some hundred years in British law. To its credit, section 7(6) is a great marketing tool, though buyers beware they may be disappointed with the reality of their purchase.  On the other hand, the Cook Islands approach is sound and balanced because it introduced a new statutory fraudulent transfer law for international trusts which reflects the very essence and purpose of an international trust and does not purport to prejudice certain types of creditor claims.

---

[1] Cannane v J Cannane Pty Ltd (In Liquidation) [1998] HCA 26 at para 10; Williams v Lloyd; In re Williams [1934] HCA 1; Re Barnes; Ex part Stapleton [1962] Qd R 231 at 237; Ex part Mercer; In re Wise (1886) 17 QBD 290 at 298-299.

[2] Regal Castings Limited v Lightbody [2009] 2 NZLR 433 (SC) at para 56.

[3] Ibid.

[4] Barton v Deputy Federal Commissioner of Taxation (1974) 131 CLR 370 at 374; In re Lane-Fox; Ex parte Gimblett [1900] 2 QB 508 at 512; Ex parte Russell; In re Butterworth (1882) 19 Ch D 588 at598-599.

[5]

[6]See http://www.nytimes.com/2014/05/10/your-money/a-multimillion-dollar-battle-could-complicate-getting-what-youre-owed.html?_r=0 for the real life scenario the factual example is based on.

[7] Ibid at s13B(1)(a).

[8] Above n6 at s13B(1)(b).

[9] International Trusts Act, Cook Islands at s13K.

[10] Above n6 at s13K(3).

[11] Above n6 at s13B.

[12] Ibid.

CRA Confidentiality

It has always been axiomatic that CRA’s records are strictly confidential and not available to other arms of government.  Lately this credo has been significantly undermined both formally and informally.  At the formal level the new US law whose acronym is FATCA requires Canadian (and other) banks and financial institutions to report on US citizens (some of whom are Canadian legal residents) who have bank or investment accounts in Canada to the US Internal Revenue Service.  A recent negotiation between Canadian and US officials produced an amendment that provides that Canadian banks and financial institutions report this information to CRA and that CRA would turn over this information to the IRS.  Pardon?  How does CRA turn over financial information that is the property of Canadian taxpayers to a foreign government? These provisions beg a charter challenge. 

The other area that appears to be grey is the role that the CRA plays in non-tax related fraud investigations by the police.  It has come to my attention that a recent CRA investigation that CRA documents that absolved the taxpayer from any fraudulent dealings wound up in the hands of the RCMP.  The Income Tax Act states, clearly, that tax records can be released only in the case where the CRA is charging a taxpayer with fraud under the provisions of the Income Tax Act.  How did the RCMP get CRA information and files?  This will, I am sure, become the subject of a civil case against the CRA and its assessors. 

Also, what is unclear is the effect of international tax information exchange agreements that Canada has with countries that clearly offer bank and corporate confidentiality.  Such an agreement has been entered into with the Bahamas, Cayman, Nevis and Belize.  All three countries clearly offer strict bank and corporate confidentiality.  The terms under which the CRA and the governments of these countries can release information are unclear.  I have been given unconditional assurances that corporate and bank records such as directorship are strictly confidential and that Canadian “fishing operations” are not allowed.  

The good news is that net after tax income from countries with whom Canada has a tax information exchange agreement can be repatriated to Canada as dividends tax free to a corporate recipient.  While this may open the door to a more widespread use of  low/no tax jurisdictions (such as the Bahamas, Cayman, Nevis and Belize), these countries do not enjoy the benefits of a full blown tax treaty.  Therefore, in the Caribbean, Barbados still remains the jurisdiction of choice.