Civil Law
The historical and cultural conditions that led to the evolution of Civil Law were entirely different from those of Common Law. An investment in a Civil Law jurisdiction has a much higher probability of repelling common law forfeiture than in a common law jurisdiction.

The problem of in-personam jurisdiction however remains. To avoid it, investors must structure their investments so that their compelled consent with a disclosure or repatriation order is ignored by the party holding the funds. If this is accomplished before any claims are made against the investor and/or his property, U.S. courts may not be able to hold the investor accountable either criminally or civilly. The court may however potentially cause to be forfeit "substitute untainted property" subject to U.S. jurisdiction. Rosen in "Uses and Abuses of Offshore Trusts in Asset Protection Planning" states:

"The U.S. Supreme Court in both United States v. Rylander (1983) and United States v. Bryan (1950) has held that a person cannot be held in contempt for failing to do that which is not within his power to do .... unless he created the impossibility. The Settlor-debtor should not be deemed to have created the impossibility where the trust containing a properly constructed duress provision has been established for in advance of the origination of the creditor’s claim. The lack of a nexus (a necessary conncection between cause and effect) in time between the establishment of the trust and the claim that compliance is impossible will substantially overcome an argument that the settlor-debtor was responsible for the resulting impossibility".

Time then is of the utmost importance - the earlier a Private Foundation, not a trust, is established the longer the time between its founder conveying assets to it and any claim by government, relatives or other specious creditors.

Most importantly; the vast majority of civil law jurisdictions do not recognize the concept of a trust. However, many investments and instruments indigenous to Civil Law exist. Each must be evaluated separately, but most elude lawyers trained only in Common Law.

Let’s examine the asset protection opportunities in civil law investments, stemming as they do from the Civil Law itself. Forced Heirship is one of the doctrines recognized by civil law. It provides that the great bulk of an individual’s property not settled in a trust or gifted to a foundation must pass on death to his descendants immediately and unconditionally, in equal shares per stirpes, regardless of his wishes. Forced heirship is a draconian result where the individual does not wish his estate to flow to his heirs. However, where this is the individual’s intent, forced heirship could avoid creditor claims, including claims by a foreign government, in an estate settlement.

Civil law jurisdictions recognize a much smaller range of torts than in U.S. and English Common Law, and the concept of punitive damages is virtually unknown.

The most basic opportunities in civil law jurisdictions do not even require the use of any "structures". A German bank account for example while reportable under U.S. law, provides asset protection from government that is superior to any common law instrument! The assets in an account can be claimed by the individual’s heirs through a probate proceeding if he makes a Power of Attorney designation before his death. Deutsche Bank A.G. has branches in many outlandish countries of our world.


In 1949, through an Act of Parliament, no more (references) appeals could be made to the English Courts clearing the way for the Supreme Court to rule openly in favour of the Government without fear of rebuttal. As federal government employees, and owing loyalty to the government, and having been "selected" by the Prime Minister the judiciary’s intention was and is to centralise the power in the Federal Parliament - it is this that has precipitated the people of Quebec to want to become an independent country.

Since most judgments in the field of taxation emanating from the Supreme Court are manipulative and deceptive, we need reminding what the application of assessed income taxes which is for. It should be .............. to generate revenues to be used for the needs of the public ....... for the support of government, for the administration of the laws, and as the means for continuing in operation the various legitimate functions of the state

The application of the Income Tax has become coercive and oppressive, employed in the service of social engineering. The judiciary fails to adhere to the interpretation guidelines set out in its own construction of Statutes, fails to uphold its own decisions (the 1950 Lord Nelson Hotel Company case) and in a hundred different ways does not comply with and support law in Canada’s one and only Constitution. But when he’s charged with contempt of court and faces punishment in Canada, the judiciary is above the law and the Common Law has been debased and the protection it affords the citizen, destroyed.

In the book "The Spirit of the Common Law" by Roscoe Pound published in 1921 by Marshall Jones Company, manipulation by the legal profession is spelled out:

"This conflict between lawyer’s theory and the political theory weakens the force of law. The lawyer’s theory leads him to pay scant attention to legislation, or to mould it and warp it to the exigencies of what he regards as the real law ..........."

It so happened that prior to 1949 more, much more than 50% of Supreme Court decisions on constitutional matters were reversed by the (Judicial Committee of the) Privy Council on appeal to the highest Court of Great Britain. The Parliament of Canada, the Provincial Legislatures (with the exception of Quebec) and the judiciary are all, and have been for the last 50 years, saying:

"We will do what we want, and in doing so, we will ignore the law."

In a common law jurisdiction, there are no longer any common law constitutional rights to be fought for - all are subject to administrators’ whim, the political activism of its courts, in particular its supreme court, the treatment by judges of a constitution as their exclusive domain - it means what they say it means. The result ..... flight of capital.

At the American Bar Association Convention held in Toronto! at the end of July last year (1998) a member of the Ontario Court of Appeal (federally appointed justices) stated:

"We’ve moved from a Society governed by the rule of law, to a society being governed by the law of rules".

There you have it! Who is making the rules, the new rules? The Canada the Canadian Constitution, the Common Law inherited from Great Britain, and in the case of Quebec, the Civil Code laws inherited from France, they are all meaningless. Canadian Courts now make the rules (which passes for law). Both our nations, Canada and the United States of America, had at one time provided ways to ensure that we citizens, not the growing army of politicians, judges, lawyers and bureaucrats, rule our nations - but now they make the rules. We’ve lost the safeguards in allowing statutes passed by legislators, and bearing the appearance of law, to "constitute the law of the land". The general rule, as opposed to the unceasing stream of manufactured rules, is that an unconstitutional statute, though having the form, appearance and name of law is in reality no law, but is wholly void, and ineffective for any purpose. No one is bound to obey an unconstitutional law and no courts are bound to enforce it.

So do not expect justice from a subverted Common Law system. The judiciary has been hopelessly corrupted by the money power. It holds in contempt our Constitutions, established legal definitions of laws, and legislated powers. It is not out of control, it simply is controlled and corrupted. Seek no solace therefore in a common law jurisdiction.


For individuals seeking asset protection and privacy within a civil law structure with the potential to solve the problem of in personam jurisdiction, the Republic of Panama offers perhaps almost the most adaptable law in the world. Panama’s indigenous civil law structures, in particular the Family Foundation or Private Interest Foundation, provide opportunities for estate planning, genuine asset protection and privacy. Proper counsel is essential in setting up these - that has been provided. The Constitution states that "The inviolability of private property is guaranteed; confiscation shall only take place in such cases as are laid down by the law." Articles in the Constitution appear to provide judicial recourse against the Panama government. Such rights are in marked contrast to U.S. law and the laws of most Crown offshore centres, which exclude statutory entities and non-resident aliens from any constitutional rights or protections!

Asset protection opportunities are specifically written into law for Family Foundations.

Tax Evasion? or Tax Avoidance through Tax Planning.
(This is dry stuff but important in application).

There has been much publicity in the popular press in Canada, not so much in the U.S., concerning citizens who "Stash their Money in Foreign Tax Havens". The most famous, a series of articles in Maclean’s Magazine (equivalent to Time Magazine) was on October 5, 1995, with a magnificent cover showing a paper boat sailing into a setting sun, its sails made of a patchwork of world currencies! Inside the main feature was a 10-page survey and interviews with leading practitioners concerning the flight of capital, estimated 5 years ago at $60 billion a year from Canada. Canadians have been responding big time for a long time!

Now the professional advisors, that is to say lawyers and accountants, apparently faced at that time a moral dilemma - should they engage in activities that "can be used by tax payers to evade tax in Canada?" - Canadians, like Americans, are taxed on their world-wide incomes - or should they allow the competition to conduct all of this business! For accountants the dilemma has since been simply solved for them; their governing bodies and recently introduced legislation proposing heavy fines and penalties for counseling or assisting a "taxpayer" to do anything which could be remotely categorized as tax evasion. Complete lack of any accountant-client privilege has seen that profession withdrawn from offshore tax planning. The offshore tax-planning business in spite of the mock attack of government, and the introduction of strict reporting rules affecting transfers to and distributions from trusts and controlled companies (but not Foundations) has been growing exponentially as people want to structure their personal and business holdings offshore.

This activity in Canada started in the Seventies with banks and trust companies pushing all sorts of packaged advice and services designed to attract fees from their well-heeled customers. Their packages included integrated financial advice, estate planning and tax planning services. These components were often, in the early stages, focused on the advantages of using the international personal services organizations that these banks had themselves set-up in various offshore tax havens like the Cayman Islands, Barbados and the Channel Islands. While use of tax havens had a long and successful heritage in Europe and Asia for several decades, it was only just beginning to catch on in Canada. Why? because:

(1) Canadians and Americans were becoming aware of man’s oldest pastime - tax avoidance

(2) High taxes in their country of residence compounded by a fiercely progressive system of taxation

(3) Earnings and investment opportunities available in an offshore financial centre which made domestic Canada and U.S. offerings look shabby, especially when risk taken account of. The Hong Kong Index out-performed the Dow by a factor of 8 in the period up to 1997

(4) Unfavorable inheritance provisions (death and estate taxes)

(5) Employment under contract overseas, enabling part of income to remain free of tax if unremitted and, in the case of Canada, undetected.

(6) Political considerations which militate against the holding of wealth in the country of residence. (7) Depositing surplus after-tax funds or inheritances in a family trust offshore and having the possibility of investment earnings accumulate tax free although required to be reported.

(8) Accumulating income for retirement and need for an ever bigger corpus as a result of inflation - induced debasement of the currency

(9) Protection of an estate by anonymity, privacy and sometimes secrecy through the use of confidential bank accounts, nominees and investment corporations.

(10) Re-structuring (for example a U.S. annulled double-taxation agreement between South Africa and the United States caused the disinvestment of many U.S. foreign subsidiaries operating there; that is until they cottoned on to re-structuring their subsidiaries’ headquarters to Windhoek, the only town of any size in the neighboring country of Namibia!)

However, it was neither cheap nor convenient for those who could invest offshore to do so. Relatively few "professional" specialized in establishing offshore arrangements and the solution was usually expensive and complicated. The combination of steeply rising tax rates, the depth of the early 1990’s recession following that savage one in 1981 to 1984 and the impression that governments were insatiable in their revenue appetites caused great masses of taxpayers to rebel, even in the face of draconian enforcement powers granted by legislatures.

The lawyers were then apparently faced with an additional dilemma! The legions of tax professionals in mainstream law firms focused for a time on this advice issue

Is it appropriate to help "taxpayers" with these structures if there was to them no obvious reason, other than tax evasion, to implement them?

In the early 1990’s therefore a conscience-easing and legitimate solution was found. The ethical issue was solved by "creditor proofing" embraced by top line professionals all across Canada. The fact that the Income Tax Collection authority was sometimes one of the creditors of an estate escaped them.

Tax professionals, and that now includes Financial Planners, could use the tools of tax mitigation "legally or illegally"; most take the view that they won’t sell to or counsel someone they know will misuse it - but what was the purpose anyway?! The tax authorities check sporadically for those professionals to make sure they’re not propounding tax evasion. Anyone who knowingly assists in tax evasion can be criminally charged under the Income Tax Act in Canada - but hey! document the file with the fact that the client has been advised against tax evasion, and it becomes tax avoidance, avoidance using tax planning. Any subsequent accusation of "evasion" is the client’s challenge, and lawyers can help you again tackle that one.


There is a difference between tax evasion (which we do not recommend) and TAX AVOIDANCE (which we as professionals recommend highly) TAX AVOIDANCE is legal and done daily by every business that takes advantage of its lawful deductions.

Tax evasion: Understating or Hiding Income is illegal BUT

Tax Avoidance: Transferring your assets to minimize your taxes, and taking every possible tax deduction IS 100% LEGAL

Every person has the well documented legal right to structure a transaction so that it satisfies the requirements of the Internal Revenue Code in order to minimize their tax liability:

1) Judge Learned Hand stated in the landmark trial of Gregory v. Helvering: "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one’s taxes."

2) Taxpayers are not required to continue that form of organization which results in minimum tax. [Raymond Pearson Motor Company v. Commissioner, 246 F 2d 509 (1957)1

3) "U.S. taxpayers may also use tax havens for tax planning reasons. Some transactions conducted through tax havens have a beneficial tax result for U.S. taxpayers that is completely within the letter of the U.S. tax laws." [Federal Tax Guide Reports in official I.R.S. Agents’ Manual]

Exercising this right within the "letter of the law" is "Tax avoidance" and is 100% legal. PAY YOUR TAXES, BUT DO NOT PAY MORE THAN YOU ARE LEGALLY REQUIRED TO PAY!


Stringent Anti-Avoidance Rules (in Canadian Tax Code) Invoked By Feds, Fails in May 1999 Case Involving Family Foundation

Revenue Canada has attacked a major donation of land to a family charitable foundation and lost on all counts. Of particular interest was the federal tax department’s attempt for the first time to use the Income Tax Act’s general anti-avoidance rules (or "GAAR" contained in section 245) to shore up its case concerning a charitable gift, or donation of property.

The central issue of this case (Jabs Construction Ltd. v. The Queen), which came before Tax Court of Canada and on which Judge Donald Bowman ruled in May, was whether a transfer of 13 properties to a registered charity, Felsen Foundation on Oct. 31, 1992, by Jabs Construction Ltd. was legally effective.

The taxpayer company transferred by way of gift 13 properties to the Felsen Foundation in its 1993 taxation year and designated the proceeds of disposition to be the adjusted cost base of the properties. (i.e. the tax basis)

The subsequent sale of the properties to Callahan Construction Company Ltd. by the Felsen Foundation resulted in the realization by Felsen of a large capital gain that was not taxable in the Foundation’s hands because it was a charitable foundation.

The family’s Felsen Foundation loaned a portion of the proceeds from the dispositions to Jabs Construction and the interest that the latter paid on the loan is deductible in computing its income.

Revenue Canada took the position that the transfer of the 13 properties to the Felsen Foundation was legally ineffective, that accordingly Callahan had beneficial ownership before the purported transfer to Felsen, that the proceeds of disposition of the properties belonged to the appellant, and therefore the large capital gain was realized by Jabs [the appellant]. Thus the Felsen Foundation had nothing to loan to Jabs and the latter cannot deduct the interest paid to Felsen because it was seeking to deduct interest on its own money.

Revenue Canada alternatively alleged that if the transfer to the Felsen Foundation was legally effective, it would be caught by the GAAR, thereby permitting the Department of National Revenue to reallocate the capital gain from the Felsen Foundation to Jabs and to include it in the company’s taxable income.

The donor company was controlled by the Jabs family of Vancouver, which earlier had created its Felsen Foundation for the purpose of funding religious charitable work. It was quite apparent that the creation of the foundation had nothing to do with the tax planning related to the transfer of the properties.

Judge Bowman went through the transactions step by step, and found, in a decision late last month (June, 1999), that a valid gift had been made. Moreover, he said he couldn’t see that the mere fact that the foundation loaned the money back to Jabs Construction in itself would trigger the GAAR.

In case Revenue Canada didn’t get the message, the judge went on to say: "I can discern nothing else in the entire series of transactions that could possibly justify their being avoidance transactions, either separately or collectively. This transaction is the last one that would have occurred to me as subject to attack under section 245. Section 245 is an extreme sanction. It should not be used routinely every time the [Minister of National Revenue] gets upset just because a taxpayer structures a transaction in a tax effective way, or does not structure it in a manner that maximizes the tax."

This is a wonderful judgment for the charity community. It confirms the position that I have taken for many years: A properly structured plan involving charitable donations will not run afoul of the GAAR. The rules with regard to donations have changed substantially since Jabs Construction made its gift, but it seems Judge Bowman’s decision is good law - in spite of these changes.

Arthur Drache, QC
Financial Post
July 13, 1999

Continued in part eight of ten

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