Zac Goldsmith, who advises Tory leader David Cameron on green issues, insisted yesterday that he had derived "very few benefits" from his non-domiciled tax status.
Goldsmith, who inherited a fortune from his industrialist father Sir James, denied claims he had avoided paying huge sums of tax as a result.
Mr Goldsmith, who is standing in Richmond Park and North Kingston in west London, is an adviser to Tory leader David Cameron on green issues.
The revelation threatens to embarrass the Tories, who have pledged to impose a £25,000 annual levy on non-doms.
And the Liberal Democrats, who currently hold the Richmond Park seat, called for Mr Cameron to sack Mr Goldsmith as a candidate.
Treasury spokesman Lord Oakeshott said: "He's not fit to sit in parliament, when he's claimed non-dom status all his life to keep his offshore hundreds of millions free of income, capital gains or inheritance tax."
But Mr Goldsmith strongly denied suggestions he had "dodged" tax and said he was to give up any benefits he did derive from the arrangement.
"For Lord Oakeshott to suggest that I have 'dodged' any tax is simply defamatory," he said.
"My annual tax returns are all signed off by the Inland Revenue and there are no outstanding matters between us.
"His suggestion that I keep money offshore 'free of income tax, inheritance tax and capital gains tax' is also entirely wrong.
"Despite having been non-domiciled because of my father's status, I have always chosen to be tax resident in the UK.
"Virtually everything I do is in the UK and therefore virtually all my income comes to the UK where I pay full tax on it.
"I do not derive any benefits as far as either capital gains tax or inheritance is concerned since I am registered for the latter in the UK.
"Because of my own choices, the non-domicile status has delivered very few benefits. I have, in any event, already decided to relinquish it."
A Conservative spokesman said: "Zac Goldsmith's private affairs are a matter for him."
The Sunday Times reported that some of Mr Goldsmith's properties, including a 300-acre ecological farm in Devon and a house in Richmond, were owned by companies based in the Cayman Islands.