Tax havens are countries that impose very low taxes or in any case no tax on investments and income earned out of that country. This is done to encourage people from investing in the country so as to boost the economic status of the country.

Tax haven countries impose no tax or very low taxes in order to attract investment in their financial and other sectors. Most countries co-operate under international tax treaties by exchanging information about foreign investments. However, in tax havens, strict bank secrecy and a lack of information-exchange provisions can result in transactions and foreign investments being concealed from tax authorities.

This allows rich individuals, Canadian banks and resource companies to avoid paying billions of dollars in taxes each year. There are legitimate reasons why a tax haven might be used, and tax administrators have no view on where Canadians invest as long as they comply with Canada’s tax laws. What the CRA is concerned about are investments, transactions and schemes that use tax-haven countries to reduce, avoid, or evade Canadian tax. Using tax-havens for tax avoidance and tax evasion is a growing concern for Canada as it is for other countries. The CRA is working closely with tax administrations of other countries in focusing its efforts on identifying offensive arrangements and taking corrective action.

Tax havens can be used in very straightforward ways such as setting up an offshore bank account to hide assets and income with the intention of not reporting the income. This is tax evasion. Tax evasion is a deliberate attempt to conceal or distort net income. Tax evasion schemes involving tax-havens may also be quite sophisticated, and take many twists and turns. Often, tax-havens are used to set up trusts or to create corporations or other entities that are used to make tracing assets as difficult as possible, including foundations designed specifically to disguise the true ownership of assets.

These entities are often used as part of larger tax plans to hide critical parts of the transactions. Such plans and transactions fall under the category of aggressive tax planning and may constitute tax evasion. Aggressive tax planning is a challenge confronting all developed countries.

It can involve very complex structures with both domestic and international elements. The objective of this type of tax planning is to get tax benefits that were never intended under the normal application of the tax laws. Aggressive tax planning manipulates transactions to avoid crossing the line to tax evasion.

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