Guest Blogge: Peter Scarrow BA, JD
General Manager, TMF Group – Hong Kong
Since 1997, Mainland China, notionally a Communist country, has been
the primary source of high net worth immigrants (“HNWIs”) to Canada. Thousands come every year. 90% of them select
the Greater Vancouver as their Canadian base and pump billions of dollars
annually into our local economy. Most HNWI’s
retain China-based immigration consulting firms, not Canadian professionals, to
handle the immigration process. Confusion
abounds about many important legal issues.
Canada-based immigration, tax and other lawyers are a negligible factor
in this, by far the biggest and most lucrative immigration services market in
Canadian history.
Focusing on three “status” issues, this paper attempts to provide a
bit of background information on this phenomenon and shed light on a few of the
legal implications of Chinese HNWI immigration to Canada.
THE RESURRECTION OF CHINA
In the West, China is often referred to as an “emerging economy”. That is not the way many Chinese see
it. From their perspective China is a re-emergent
civilization-state, now well on its way to regaining its rightful place as the
pre-eminent civilization on the planet, a position it occupied for all of human
history until the industrial revolution in the West. From this perspective China is experiencing
not an emergence but rather a resurrection.
China’s road to resurrection, however, is slippery in sections,
causing many (perhaps most) well-heeled Chinese families to hedge their bets by
getting immigration status in other countries.
Canada is one of those countries and, although our immigration policies
and related legislation are in a state of flux and less welcoming to HNWI’s, we
should continue to experience substantial inflows of Chinese HNWI’s for the
next several years.
THE TYPICAL HNWI IMMIGRANT FAMILY FROM CHINA
The typical HNWI family from China comprises three individuals: mom, dad
and one child. The child is usually
school age. The parents range in age
from early 30’s to early 60’s with most being in their mid- 30’s to late 40’s.
Usually they have sufficient net worth to buy a detached home
somewhere in Greater Vancouver and deposit a million or more with a bank as
living expenses. Few
business/professional Chinese families with a net worth of less than CAD $ 2
million would contemplate immigrating.
Many HNWI families have a net worth in the $10’s of millions, some in
the $100’s of millions, and a handful in the billions. In several Greater Vancouver municipalities
(but nowhere else in B.C.) they are, by a very large margin, the principal
consumers of all kinds of luxury goods and services. In residential real estate, for example, it
is estimated that over 80% of the $2 million homes sold on Vancouver’s West
Side in the last 2 years were bought by Mainland Chinese immigrants. One prominent West Side jewellery store owner
told the writer that, during the same period, over 90% of his sales (in terms
of value) were to buyers from China.
Why do they immigrate? They
are concerned about:
- The potential for social instability in China
- The integrity of judicial and administrative processes in China, about possible risks associated with sudden shifts in government policies, and about the risks of capricious expropriation of private wealth
- The quality and intensely competitive nature of children’s education
- Extreme levels of pollution in the big cities
- The long term sustainability of China’s economy in the context of a country with diminishing energy, water and other resources and 1.4 billion people with generally rising, not diminishing, expectations
Commonly the family plan is for one spouse, usually dad, to continue
running the family business or working in his pre-immigration job in China,
traveling intermittently and briefly to Canada to visit the family. Colloquially he is an “astronaut”. As a rule the astronaut dad has no intention
of actually residing in Canada or becoming a Canadian citizen. For him the arrangement is kind of an
insurance policy. Mom and child, on the
other hand, intend to remain in Canada, become citizens and then consider their
options. Often the longer term goal is
for the child to get the best public or private school education possible in
Canada and then move on to college in the USA, the notion being that good US
colleges have a better brand recognition than Canadian universities, both in
China and internationally. So mom’s job
(typically she is not employed and has a substantial budget) is to focus on the
child’s education.
In any event, while mom and child may have significant commitments to
Canada, the astronaut dad generally does not.
He is based in China, traveling regularly to, but staying only briefly
in, Canada. From the outset he never
intended to reside in Canada. In such
circumstances he may or may not become a Canadian tax resident depending on the
unique factual conditions surrounding his lifestyle and connections to the two
countries.
THE THREE “STATUS” ISSUES
In coming to Canada the typical HNWI family from China will
necessarily make choices, conscious or not, concerning three key legal “status”
issues:
- Immigration status – having landed in Canada as immigrants, HNWI’s become “permanent residents” (“PRs”) pursuant to the provisions of the Immigration and Refugee Protection Act (“IRPA”). To maintain PR status they should endeavour to spend 730 days every 5 years in Canada. As evidence of their status, they are issued an identity card (“PR Card”) which is valid for 5 years. Renewal of the PR Card and loss of status are complex issues beyond the scope of this paper. Suffice to say that many astronaut dads refer to the 730 day IRPA residence requirement as “immigration prison”. And many of them, unwilling to stay in Canada for the 730 days, will be unable successfully to apply for new PR cards when the initial PR cards expire after five years;
- Citizenship status – PR’s qualify for citizenship under the provisions of the Citizenship Act (“CA”) if they can prove they have resided in Canada as immigrant PR’s for 3 out of the 4 years preceding the date of their citizenship application. Usually this means physical presence in Canada for 1095 days during this 4 year period (for some, another form of “immigration prison”); and
- Tax status – if they “ordinarily reside” in Canada they become Canadian tax residents obliged to report and pay tax on global income/capital gains and disclose offshore assets according to the provisions of the Income Tax Act (“ITA”). Mere acquisition of immigration PR status does not automatically make someone a tax resident, especially if he is from a country such as China which has a tax Treaty with Canada (more on this below).
HNWI’s who become citizens necessarily also become “ordinarily
resident” for tax purposes, at least during the 3 year period when they are
satisfying the residence requirement to qualify for citizenship under the CA. It is hard to imagine a set of circumstances
where someone who is physically present in Canada for 1095 days in a 4 year
period would not be a Canadian tax resident.
Most HNWI astronauts, however, unlike their spouses and children who
have been parked somewhere in Greater Vancouver, have no intention of actually
residing in or becoming citizens of Canada.
Nonetheless, many of them believe they are Canadian tax residents when
in fact they are not. In any event, only
rarely does the HNWI family, prior to landing, consider seriously the
implications of becoming Canadian tax residents.
In fact, the entire immigration process, controlled as it is by
China-based immigration consultants, rarely involves any serious discussion of
Canadian tax residence status. The reason
is simple. The consultants are highly
incentivized by fees and by the payment (usually undisclosed) of commissions of
up to $100,000 per client family. The
commissions are loan brokerage fees paid by Canadian banks to the consultants. The banks pay the commissions as
consideration for the consultants’ brokering loans used to finance $800,000 investments
in qualifying Canadian immigration funds.
Tax is a touchy subject. Canadian
tax exposure is complex and, if properly understood, potentially unsettling. Being practical people, the consultants do
not want to alarm their clients. They
take the position that they are advising solely on immigration PR status issues,
giving only perfunctory, comforting and often unreliable advice on Canadian
citizenship and tax status matters. Hence,
very few HNWI’s from China arrive in Canada with reliable information about
Canadian tax.
THE CANADA-CHINA INCOME TAX AGREEMENT (the “Treaty”)
Canada’s tax Treaty with China contains the usual “tiebreaker” rules
(see Article 4 section 2 of the Treaty) which many HWNI astronauts could likely
rely on to “tie-break” them back into China so they do not become Canadian tax
residents. Essentially the tiebreaker
rules ensure that a person will not simultaneously be treated as a tax resident
of both countries. Many of the HNWI
astronauts, unlike their Canada-based spouses and children, never intended to
reside full-time in or become citizens of Canada in the first place. Post immigration, having parked mom and child
in Canada, they retain all their old ties in China where they spend most of
their time. Based on the principals set
out in the tiebreaker rules, many are clearly not Canadian tax residents even
if they are immigration PR’s. Of course
many of them will never qualify for Canadian citizenship. They may also lose their immigration PR
status.
TAX REPORTING OPTIONS FACED BY THE ASTRONAUT HNWI
The various tax reporting options for the typical HNWI astronaut are
as follows:
- He is a tax resident of Canada. He knows it and is fully compliant disclosing details of his offshore income and assets;
- He is a tax resident of Canada. He knows it but nonetheless conceals offshore income and assets in his filings with CRA;
- He is not a tax resident of Canada but thinks he is. Nonetheless he conceals offshore income and assets, all the while reporting as if he were a tax resident. He has the intention of a tax evader without actually being one. His circumstances presumably get worse as the damaging paper trail mounts with each passing fiscal year;
- He is not a tax resident of Canada but thinks he is. He discloses offshore income and assets which he reports as a tax resident; or
- He is not a tax resident and does not file as such.
It is impossible to tell with certainty but anecdotal evidence suggests
many HNWI astronauts, having been advised by assorted friends, life insurance
brokers, tax filers who have never considered the impact of the tie-breaker
rules in the Treaty (or, for that matter the relevant jurisprudence) select
option 3. They are not tax residents but
think they are. They file tax returns as
if they were, concealing offshore income and assets. They have the mens rea of tax evaders without
actually being tax residents.
Why would they do this? The
reasons include:
·
They
almost never retain competent tax counsel.
It is expensive. Free advice from
friends is better.
- Local self-interested advisors tell them they are tax residents. The life insurance broker, for example, is supposed to sell policies only to Canadian tax residents. So the inclination is to persuade the HNWI that he is a tax resident and even generate questionable evidence of tax residency status to satisfy the insurance company that the buyer of the policy is a tax resident.
- The immigration consultants persuade them that they are tax residents because the insurance brokers pay them referral fees for the introduction of business. And the brokers can only sell policies to tax residents.
- Many accountants, especially the Mandarin speaking ones experienced in dealing with wealthy immigrants from HK and Taiwan (both non-Treaty jurisdictions so no tiebreaker rules) assume that all PR’s with spouse and/or house are naturally tax residents. Many tax filers (not professional accountants) seem to have adopted a head-in-the sand approach, knowing full well the HNWI is only reporting Canadian source income and concealing offshore income and gains.
- They like to have Canadian medical insurance. Non-tax residents are not eligible for medical insurance. Note that even if they are tax residents, astronauts’ prolonged absences from B.C. may still void the coverage.
- The real estate agent, to facilitate the mortgage loan, may prefer to have the HNWI astronaut on title since he is the one with the income and assets (all in China) required to qualify for a mortgage.
- They want the tax free capital gain on the sale of the principal residence. This is only available to tax residents.
- They believe, wrongly, that reporting as a tax resident will greatly enhance their ability to retain immigration PR status and/or renew the PR card.
FIRST GENERATION WEALTH
Almost all HNWI’s are nouveau riche with an affinity for opacity, an
aversion to legal fees and zero awareness of the fact that there are
authoritative tax advisors called tax lawyers.
Moreover, the families have had no experience transferring assets from
generation to generation since most of the private wealth has been accumulated
in the last 20 years. And in Chinese culture the common superstition is that
planning for death is inauspicious and may hasten the event. Hence the reluctance to draw post-immigration
wills, settle pre-immigration trusts or otherwise devise long-term plans for
the management and disposition of family wealth.
REAL ESTATE LAW ISSUES
Most HNWI families will buy a home in Canada. Having a “permanent home” is a key component
in the “tiebreaker rules”. In fact it is
the first “tiebreaker”. Query,
therefore, whether conveyancing lawyers should:
- When representing HNWI purchasers, suggest at the very least that the astronaut dad not go on title or otherwise reside in the family residence in Canada. Are conveyancing lawyers potentially negligent for failing to discuss the tax residency issue with astronaut buyers
- When representing other purchasers where the vendors are HNWI families from China, ask for holdbacks and clearance certificates when handling sales if there is any chance an astronaut is on title. After all, the non-tax resident astronaut is not entitled to the tax free capital gain on the disposition of a principal residence.
- Advise the HNWI family to get an opinion from tax counsel before completion.
- Include disclaimers (likely written in Chinese) in the retainer or other documents stating that they are not advising on tax matters.
Should realtors, when preparing the purchase agreement, suggest that:
- The astronaut not go on title.
- The family get an opinion from tax counsel before completion.
ESTATE LAW ISSUES
Unless attitudes change, most Chinese HNWI immigrants will die
intestate with substantial assets scattered among 3 or more jurisdictions,
usually China, Hong Kong and Canada. A
dog’s breakfast of succession law issues will arise. Where was the HNWI astronaut domiciled when he
died? Where is the real estate? Does the astronaut dad have other family
relationships in China? If so, what are their claims on the global assets? Was he a non-compliant Canadian tax resident?
Does anybody actually know where all the assets are? Are the Canadian tax resident kids prepared
to receive distributions from an estate tainted, or apparently tainted, by a
history of tax evasion? Will the
Canadian insurance company, having sold a policy to a presumed tax resident of
Canada, pay a death benefit when it turns out that the life insured was not a
tax resident after all? Was the
insurance broker negligent or fraudulent in holding out to the insurance
company that the HNWI non-tax resident was actually a tax resident? Was the deceased astronaut dad a non-tax
resident owner of a Vancouver home so that the death triggers a taxable deemed
disposition?
OTHER LEGAL ISSUES
Is the non-tax resident HNWI astronaut the controlling shareholder of
a Canadian small business that has been taking advantage of the small business
deduction? Has he been filing as a tax
resident of Canada but concealing China-based assets and income but now wants
to take his Chinese company public in Hong Kong and faces serious public
disclosure issues with regulators in Hong Kong concerning his tax residency
status? Or does he want to bring the
China/HK based but undisclosed assets to Canada but finds he cannot because he
is apparently in violation of foreign asset disclosure rules?
THE SMART MOVE
All wealthy immigrants to Canada, preferably before landing, would be
well-advised to get legal opinions/advice integrating the expertise of Canadian
tax and immigration counsel so that all family members can balance their goals
in the areas of immigration, citizenship and tax law. There is no one size fits all solution. Chinese
HNWI’s rarely do this, relying instead on non-professional free advice.
USE OF TRUSTS
For many of these families a trust would go a long way to addressing
their long-term wealth management issues.
There are two very good options:
- The Immigrant Trust – where the income and capital gains of assets settled upon trust offshore are, vis-a-vis Canadian tax resident beneficiaries, tax free for as long as the first 60 months a HNWI settlor is a Canadian tax resident; and
- The “Granny Trust” – where the income and capital gains of assets settled upon trust offshore are, vis-a-vis Canadian tax resident beneficiaries, effectively tax free in perpetuity provided the offshore settlor/contributor never accumulates 60 months of tax residence status in Canada.
Option 2 in theory is a perfect solution where the HNWI astronaut dad
who never becomes a tax resident is the settlor. The income and capital gains of the assets
settled upon trust are tax free, perhaps on a multi-generational basis, for all
Canadian tax resident beneficiaries.
CONCLUSION
HNWI immigrants from China have transformed the economic landscape of
Greater Vancouver. These wealthy
families, many flying blind in terms of the various “status” issues, will
continue to arrive in substantial numbers in the Lower Mainland for several
more years. Unclear about their legal rights
and obligations as Canadian immigrants, tax residents, and homeowners, and with
no experience passing wealth from generation to generation, their failure to
plan or even identify the issues will increasingly generate interesting legal
work for tax, trust, estate, family, immigration and real estate law practitioners.
*Published in the July 2012 edition of The Advocate, the
professional magazine of the British Columbia Bar Association.
