Use an offshore company to avoid tax? Not that simple!

Many small business owners could easily get the impression that using offshore companies is always useful in minimizing taxation.

The reality, however, is not that simple. Avoiding Canadian tax requires much more than forming a legal entity in a foreign jurisdiction.

In general, an overseas corporation can still be taxable in Canada as long as its directors reside, meet and make decisions in the country.

They may also be considered for GST/HST if they have substantial business activities in Canada.

Furthermore, all Canadian directors are subject to income tax on their worldwide income, regardless of where it's earned. Simply working or doing business outside Canada (like running a dropshipping business on the beach in Thailand) won't help avoid paying tax to CRA.

The individual directors must not have any place to live in Canada, have an actual residence elsewhere, have opened bank accounts there, etc. According to CRA, you have to cut off all "residential ties" with Canada in order to be deemed as a non-resident.

Take Barbados, for example.

You'll need to register as an International Business Company (IBC) first. Then the Board of Directors should be non-resident of Canada. And you can't sell any goods in Canada. The company also needs to to hold all board meetings in Barbados...(probably at least 20 additional steps to follow)

Sounds complicated, right?

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