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How to fix Canada’s ’Ghost Immigrant’ fraud problem

Opinion: Canadian policy makes it easy for unscrupulous wealthy foreigners to dodge their taxes. The solution is surprisingly simple.
David S. Lesperance
The T1 General tax form for 2015 is shown in this recent photo. Tax season is upon us once again and the Canada Revenue Agency has implemented several new measures in an effort to help streamline the filing of income tax returns. (Graeme Roy/CP)
Tax forms from the Canada Revenue Agency. (Graeme Roy/CP)

On January 4, 2018, in her ruling in the Fu v. Zhu case, Madame Justice Griffin of the B.C. Supreme Court detailed a sordid tale of immigration and tax misrepresentations undertaken by both litigants. This included falsifying rental and employment agreements to support a fraudulent claim of physical presence for immigration purposes and a multimillionaire declaring less than $100 in worldwide income on his Canadian tax return.

As has been widely reported, Canada is experiencing an influx of wealthy “Ghost Immigrants” who are securing permanent residence, purchasing properties in Canada, and then returning to their home countries. Unfortunately, a large number of them are not paying anywhere near their legal worldwide tax obligation to Canada, yet are fraudulently claiming to meet the physical presence requirement of maintaining permanent residence and qualifying for citizenship as well as reaping the many other benefits of Canadian life.

There are a number of lessons that Canadians and their government can learn from the Fu v. Zhu case:

1. The problem is widespread

Dodging taxes is not an uncommon thing for people to try to do. What’s unusual in this case is that these individuals chose to expose themselves rather than having been uncovered by an investigation. This is the dumb end of the spectrum of fraudulent behaviour. This same dumb end is occupied by dozens of applicants who used the same address or hundreds of immigrants who hired the same notorious firm to engage in assembly line, cookie cutter fraud.

2. It’s not a new problem

Fraudulently claiming to be physically present in Canada is a scam dating back decades. In 1991 I presented a “Scoundrel’s Guide to Circumventing the Canadian Immigration and Citizenship Act,” to the Federal Parliamentary Immigration Subcommittee. This guide described many of these very same methods to circumvent the physical presence requirements of maintaining permanent residence and qualifying for citizenship. In our current social media world, these same techniques would work just as effectively. At the same time I presented my guide, the newspapers were focused on a high profile case regarding Toronto lawyer Martin Pilzmaker who promoted these same schemes during the 1980’s.

3. Tighter border controls aren’t the answer

Canada Border Service investigations require enormous resources. Investigations to date uncovered only the most unsophisticated and lazy offenders, with the consequences usually being only a minor fine and a suspended sentence. In reality it would take massive investigative resources to even attempt to catch the smarter physical presence frauds. If there were an increased investigative push, rest assured that all would migrate to the more sophisticated hard-to-detect techniques. Therefore, throwing ever greater sums of money at CBS investigations of the current physical presence law is a waste of time and not in Canadian taxpayers’ best interest.

4. Audits would work better

Successful audits by CRA are revenue generators. The reality is that the CRA has not been enforcing worldwide taxation and this news has spread throughout the immigrant community. In a 1996 report, the CRA claimed that it was simply too difficult to audit these cases in the first place and to collect the taxes owed.

However over the last two decades there have been some significant changes which render this viewpoint obsolete:

  1. Data-mining techniques that allow cross-referencing of employment/business and asset information that the immigrant supplied to Canadian immigration officials when applying for status with their later claimed worldwide income;
  2. Canada signing a tax treaty (with an exchange of information clause) with Hong Kong in 2012;
  3. Even though Canada has had a tax treaty with China since 1986, the recent anti-corruption movement within China means that this treaty has gained significant potential usefulness to the CRA in the last few years;
  4. CRA introducing a Whistleblower program in 2013  in response to the dramatically increased international importance of whistleblowers to tax evasion collections starting in the mid 2000’s. This means that there are now a multitude of potential informants (in banks, accounting, real estate firms etc.) who can and will supply financial information on tax evasion;
  5. Social media and on-line information make lifestyle audits easier and more accurate, especially with today’s computing power compared to 1996; and
  6. Canadian assets (namely highly inflated real estate in Canada) have increased significantly, which means that there are now significant seizable assets within the easy reach of the CRA.

Given these changes it is now in the Canadian taxpayers’ best interest to increase tax audits in this area. This would send shock waves through the hearts of those engaging in fraudulent behaviour. This effort does not require any legislative change… simply a refocus by the CRA of its resources.

The second equally important action would be to replace the current unenforceable physical presence requirement in Canadian immigration and citizenship law. In the future, “tax residence” should be the criteria for maintaining permanent residence and fulfilling naturalization requirements for citizenship.  This action can possibly be done at the Ministerial level under the power granted under the Immigration and Refugee Protection Act, as opposed to requiring a parliamentary vote.

The immediate impact of these combined efforts would mean that current (and future) immigrants will be forced to make a clear choice. If they wish to maintain their permanent residence status or qualify for citizenship, they will need to declare themselves Canadian tax residents and pay full Canadian tax on their worldwide income. If they try to under-report the amount of their worldwide income, then their case will immediately be audited by CRA. If CRA finds they have engaged in tax evasion, they will suffer the double whammy of tax evasion and also being stripped of their immigration status or denied citizenship, because of fraud. All family members who engaged or assisted in this fraud would suffer a similar fate.

As a result of these changes a large number of people who are currently gaming the system will realize that there will be a real chance that they will be exposed to the full brunt of Canadian taxation. They will then decide that permanent residence status or citizenship is not worth that price and voluntarily relinquish immigration status. Furthermore, under Canadian law they will be required to sell their Canadian residential property to an unrelated arms length party, in order to make themselves clearly non-resident in Canada for tax purposes. This will have a significant impact on an over-inflated real estate market when these properties go up for sale.

If this is so logical, why hasn’t Canada done this before? This same proposal is basically the same one I made over a quarter of a century ago in that hearing room on Parliament Hill. The reason that it was not adopted then, and hasn’t been adopted since, is that Canadian politicians and voters have a lovely but unrealistic sentiment that new immigrants and new citizens should be physically present in Canada, rubbing elbows at Canadian Tire and Tim Hortons. According to this mythology, in this way these newcomers magically become “Canadianized.”

In reality, becoming “Canadianized” is a choice people make, not an automatic natural result of being physically present in Canada. There are plenty of immigrants who are long-time Canadian residents who are not much engaged with their neighbours; there are plenty of others who do not live within Canada’s borders but who maintain deep connections to broader Canadian society. (I still vividly remember greeting a client and his family when they landed in Canada for the first time after moving from Dubai. Their 8 year old son immediately started quizzing me about the Toronto Maple Leafs, as he had spent the last two years watching every game and reading about Toronto sports teams. He was quite disappointed to discover that, having grown up in Windsor, I was a Red Wings fan.) Being physically located within Canada’s borders has, in reality, remarkably little to do with genuine citizenship.

Furthermore, it has always been, and will continue to be, extremely expensive and intrusive to enforce physical presence rules, with little actual benefit. At a minimum, increased enforcement would mean massive disruption for all Canadians, since measures such as exit controls would be required. This would further inconvenience the Canadian traveling public, while having no appreciable impact on fraud reduction.

Another benefit of replacing physical presence with a tax residency regime is that Canada will suddenly become attractive to a large number of international entrepreneurs who, as a result of their normal business travel, would never meet the current physical presence requirements and are not willing to engage in fraudulent behaviour. However, they would be willing to trade their current tax situation for the favourable one that Canada offers. Canada’s lack of estate, gift or wealth taxes makes us very attractive to American and European businesspeople who are currently exposed to these taxes in their home country.

Without a doubt, becoming “Canadianized” is a worthwhile requirement to maintain immigrant status and qualify for citizenship. However, I would argue that making sure that a) the individual pays their fair share of taxes; and b) knows the history, culture, social norms and legal obligations of Canadians (through a more rigorous Citizenship test) are more effective and efficient ways of ensuring that they fulfill this requirement than the current, easily-circumvented and ineffective physical presence regime.

The current run-away real estate markets may just be the catalyst for Canadians to start to think logically and practically about this issue. By using modern tax collection techniques and replacing the hapless physical presence test with tax residence, Canada can both get rid of the ghosts and attract the Golden Geese.

David S. Lesperance, J.D. is an international tax and immigration expert and co-author of The Flight of the Golden Geese: Why the 1% Matter to the 99%.