Guarding wealth: Risk reduction through global diversification

One way to increase your financial security is diversification — spreading your assets among sectors and markets. That way, a single event that injures one stock or bond will not crush your entire portfolio.

Farmers usually have almost all of their money tied up in their land, buildings and equipment. Therefore it is a good idea to invest off-farm income as far away from the farm as possible. That means investing in non-agricultural industry, perhaps putting money into foreign jurisdictions. Done properly, such diversification is wise and legal. Legality means complying with Canada Revenue Agency procedures. It is easy.

If you have more than US$100,000 abroad or in property with a situs — that is, a base — outside of Canada (that includes American and other foreign stocks held in Canadian accounts), then you must complete and file CRA form T1135 each year at tax time.

The Canada Revenue Agency document is a tick-off that takes a few minutes. It asks what regions of the world are involved and provides a little set of brackets for tallying up amounts. Canadian assets, such as mutual funds based in Canada, are Canadian and not foreign assets, no matter what they are invested in.

There is nothing wrong with having a foreign bank or investment account. Canadians who have winter homes in Florida or Arizona can quite reasonably have U.S. bank accounts with which to pay bills, get money without having to be dinged for foreign exchange fees and perhaps to make U.S. investments. Canadian people and companies that do business in London quite properly have banking arrangements there. It facilitates trade and can provide other benefits such as getting you into contact with bankers who know the right people.

You don’t need to be where your money is to justify having accounts outside of Canada. A child may go to a university in the United States or France. If you and the kid have accounts in the foreign country, it is easy to shuffle money without the bother of having your bank in Canada send money via the private money transfer network called Swift do it — always at a charge, of course.

Privacy is another reason for having foreign accounts. Your chartered bank or credit union may obey Canadian laws pertaining to privacy of information, but Swiss banks are the champs in the business of saying nothing to anybody, unless they are foreign tax authorities. These days they comply with requests for information from foreign revenue agencies, so hiding money in Zurich for tax evasion is not a good idea.

There are other reasons to bank in Switzerland. Swiss banks offer financial products and services not available in Canada. You can get a Euro denominated mutual fund that invests in Scandinavia, not a bad idea if you plan to retire in, say, Sweden. If for some reason you want a Japanese Yen fund that invests in Mexico, it’s available. You can’t get such investment products in Canada.

Tax minimization

There are, of course, people who want to hide money from creditors or tax authorities. For them, there are many jurisdictions, scores in fact, where banks will be happy to take your money. But beware — some are one-way operations that will not give it back.

In reality, legal tax minimization is anything but a free trip. Advisors are ready to help, but at a charge. You want to keep things legal, so you’ll need tax counsel in Canada at $300 per hour and up. You will need advice and a lawyer in the foreign entity.

Transfers may require trips to the foreign country, bags of cash that attract attention and may be confiscated by customs authorities and even payoffs to people who find out what’s going on.

It gets worse. Vanuatu, population 225,000, an archipelago in the South Pacific east of Australia, is said to be a lovely place to visit and not a bad place to bank, but on the out islands, there continue to be rumours of cannibalism. The government of Vanuatu takes pains on its official website to deny them, but tourist guide books suggest that if you do go out from the capital, Port Vila, you take plenty of food as gifts for the locals.

There is a division between reasonable diversification of money and idiocy.

Canada is not such a bad place to keep money. The banks are honest, you know the law and customs and you can pick a province for low corporate tax rates or even move with your money to low tax Alberta. Most of all, we have a reasonable and even generous regime of taxes at death.

In 2012, the U.S. taxed estates on a graduated scale in full over US$500,000 at rates of 18 to 35 per cent with about US$5 million exemption for U.S. citizens (2012 rates) and thus taxes thrift as well as the income used to build estates. Canada only taxes accrued but unrealized gains at death. Spouses get a shift of asset values, so that postpones tax of accrued gains for perhaps a generation. Canada is a death tax haven compared to the U.S.

Geographic diversification can be achieved by buying exchange traded funds that invest in foreign stock markets. The MSCI EAFE Index which holds stocks of companies in Europe, Australasia and the Far East, provides a lot of diversification. You can buy U.S. stocks or ETFs that replicate the broad index of U.S. large cap stocks, the S&P 500 Composite.

Keeping money abroad can be part of the strategy and it works well enough as long as you report it to CRA and understand the problems that can arise when you try to do business across time zones with currencies that change in value. If you choose to put money in the places that do not report to Canadian tax authorities, most of which are dodgy and many of which provide havens for money from unsavoury activities, you are adding to risk, not reducing it. May the investor beware. †

About the author

Columnist

Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.

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