The Truth behind the Federal Immigrant Investor Program

I was recently retained by an exceptionally successful entrepreneur from Europe. He asked me to help him understand his immigration options and was most interested in the Federal Immigrant Investor Program. I decided to break from convention and really examine the mechanics of the program beyond what is commonly promoted both in Canada and around the world. I ran the numbers and what I found first surprised and then disappointed me.

For those of you unfamiliar with the program, rich would-be immigrants who have qualifying business experience outside of Canada can immigrate to Canada on the heels of a passive investment in Canada. The program requires a $400,000 investment in a government controlled fund for a five year term. Upon investment, the immigrant applicant receives a permanent resident visa and at the end of the term, the investor receives the $400,000 investment back, interest free. What the government does with that money over the five year period is a matter for another article.

Many savvy investors, like my client, look at a $400,000 investment without interest as a lost opportunity and instead of investing the full amount, seek out financing from one of a number of government authorized financial intermediaries (“Banks”). For years now, and taking direction from the banks, the banks themselves, consultants and lawyers have promoted a financing option at $120,000. For $120,000 a Bank will lend an investor funds required for investment under the program and facilitate the investment itself. The investor is also required to sign an assignment of the $400,000 refund from the government to the Bank at the end of the 5 year term. The $120,000 covers all interest charges and bank fees associated with the investment and at the end of the 5 year term the investor received no money in return. So where does all that money go?

Based on today’s interest rates (which we know are going up sometime soon), the cost to finance a $400,000 loan for five years is about $1000 a month in interest alone. So, over 60 months, the cost should run about $60,000. If any of the 120,000 payment is used to bring down the total amount borrowed (think of it like a down payment on your house), the monthly interest payment would also drop. So, if $60,000 of the $120,000 goes to the bank for interest that does seem quite reasonable. Banks are in the business of lending money, after all. So now we are left is $60,000, where does that money go?

Well for starters, it isn’t only $60,000 left in the pool. It’s more like $88,000. Theoretically it is the Provinces who benefit from the $400,000 investments made under this program and in return for raising money, the Provinces pay out a commission of $28,000 to the Banks and that commission trickles down to the consultant and lawyers (a large number of whom aren’t even Canadian tax payers) who refer clients to the banks. Most banks top up that commission and my research shows a range in commissions payable to consultants and lawyers of $23,000 to $58,000. Assuming $58,000 goes to the referring party, $30,000 of the $88,000 remains for the Bank in addition to the $60,000 earned in interest, for a total of a $90,000 profit.

Although most were forthcoming, when I called one of our Banks to ask about their terms under the program, they refused to tell me what commission they were willing to pay. When I explained to them that I wanted to know because I wanted to tell my client where his money was going, she was shocked and appalled that I would be so honest with him. Most people, she explained, don’t tell their clients about the commission.

I’ve come to learn that the $120,000 financing option is so popular and is marketed so well that most immigration practitioners rely on it without any consideration to other options or where the money goes. I’ve also come to learn that the practice of not disclosing commissions to clients is also wide-spread in the consulting community and quite possibly in the legal community albeit to a lesser extent based on the people I’ve talked to.

It should be known that a variety of financing options are available. Some Banks will offer financing at $200,000 where at the end of the 5 year term the investor receives $100,000 back and others have varying options within the $400,000 lending range. It should also be known that financing is completely optional and does not have to be established through an investment facilitating bank. There is nothing stopping an investor from borrowing $400,000 from a bank in the investor’s home country, paying monthly interest to that bank and then using that money to fund an investment under the Federal Investor Program, receiving the full $400,000 back after five years. Based on my estimates and today’s interest rates, an investor can easily bring down his cost under the program to about $60,000 plus application fees and if required, legal or consulting fees, a fraction the $120,000 option that saturates the market.

For a list of authorized financial intermediaries/facilitators see: http://www.cic.gc.ca/english/immigrate/business/investors/facilitators.asp