Furthermore, only the PR Card will be acceptable evidence of permanent  residence status at marine or U.S. border car points of entry.

The December 2003 deadline should provide a reasonable period for all Permanent Residents to prepare their PR Card applications assuming their extensive support documents are in order. If their supporting documents are not in order, then those Permanent Residents had better get busy now!

In order for Permanent Residents who landed prior to June 28, 2002 to obtain their PR Card, they will be asked to provide certain information that will satisfy the Immigration Officials that they have established a satisfactory physical presence in Canada.  This initial information request will include the following:

• A certified copy of their most recent tax return;
• A detailed listing of all addresses lived at for the past 5 years;
• A detailed work and / or education history for the past 5 years;
• A detailed list of all absences from Canada during the past 5 years ; and
• The processing fee which must be paid according to a specific procedure at a financial institution in Canada, not by a personal or traveller’s cheque.

As a final step, the PR Card applicant must obtain a declaration from a Canadian-based guarantor (usually a licensed professional or government official) who will confirm that the information provided by the permanent resident is, to the best of their knowledge, true and accurate. Accordingly, the guarantor may be subject to severe penalties should the permanent resident make any false declarations in his application.

Meanwhile, on the tax front, Canada Customs and Revenue Agency (or “CCRA” and previously called Revenue Canada) has been active. The penalties have been tightened up with very severe sanctions against those who have under-reported or failed to file.  For example, failure to file tax returns by a Permanent Resident for 3 years is now considered tax evasion, a criminal offence with severe penalties including up to 2 years in prison and seizure of assets to satisfy the taxes, interest and penalties.

Accordingly, a permanent resident who landed in Canada with his family in 1999 or before and who thereafter returned to his previous country of residence to live and work (whether with or without a Returning Resident Permit) and who has not filed any tax returns for the past three years now faces possible criminal sanctions in Canada and financial penalties in addition to jeopardizing his immigration status.

Based on the gloomy weather forecast that has been predicted, some of you non-filing or under-filing permanent residents may simply conclude:

“Instead of jumping through the financial hoops created by the new rules, maybe I should simply relinquish my permanent resident status. My family is securely landed and living in Canada and it makes financial sense for me to continue to earn my tax-free income in the UAE or Kuwait. If I give up my status in Canada, I won’t have to pay any taxes on my worldwide income, but my family can continue to reap all the benefits of being permanent residents. By the time I am ready to retire, they will still be  permanent residents or even citizens and one of them could then sponsor me under the family reunification rules.”

This strategy will now be foiled in two ways. Firstly, any person outside of Canada will be deemed to be a Canadian resident for tax purposes on the basis of having one or more significant ties or two or more less significant ties to Canada. Having a wife and/or dependant children in Canada is considered a significant tie. Therefore, for tax purposes, a person may be regarded as a tax resident even if he has never applied for immigration status or relinquished it.

If the person is deemed to have been a tax resident but has failed to fulfil his tax obligations, he may also be subject to a range of sanctions including payment of all back taxes with interest, fines (up to 50% of the taxes owing) and prison. The tax bill can be satisfied by seizure of assets situated in Canada (house, motor vehicles, bank accounts, investments). It is also worth noting that Canada has numerous tax treaties which allow the Government of Canada to seize assets located in their tax treaty partners’ territories.

If also charged and convicted of tax evasion, he would be barred from applying for Permanent Resident Status in Canada under the family reunification provisions for five years from the date on which he fulfilled every one of the sanctions against him.

Therefore, as a result of these two legal storm fronts both clearly visible on the satellite screen, a person can no longer rely on the clever “beat the system” strategy described above. This strategy is clearly no longer viable and might result in severe problems not only for him, but also any other family members who may, by way of their own tax returns, be deemed to be complicit in the “tax” evasion strategy.

The New Tax Treaties Between Canada and the UAE / Kuwait

Let’s imagine the situation of a permanent resident and his family who landed in Canada a few years ago. Shortly thereafter the father left his family comfortably ensconced in Canada while he returned to the UAE to resume his relatively high-paying tax-free employment or business activity.   Both he and his wife filed tax returns every year but, based on advice from other similarly situated permanent residents and friends, they claimed some, but not all, of their non-Canadian income. Shouldn’t obtaining a PR Card and avoiding tax problems be a piece of cake? Not necessarily – because Canada and the UAE have recently signed a Tax Treaty that, once ratified and in force (anticipated to happen in the fall of 2002) will go a long way to lifting the fog that has existed between these countries on tax and other sharing-of-information issues (such as the dates when the person was physically present in the UAE).  (Note: Canada and Kuwait have also signed a similar tax treaty, so this section applies to landed permanent residents of Canada who continue to live and work in Kuwait as well.)
Admittedly, the underlying purpose of this and most other tax treaties is to set up a proper regime to encourage investment between the two countries so that honest corporate (or individual) taxpayers earning income in both countries are not taxed twice on the same income. However, the title to many tax treaties states the purpose as also being “For the avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital.”  This means that the two signatory countries are agreeing to share certain types of information and be more transparent.

As all Canadian permanent residents should know, Canada imposes taxes on worldwide income including salary, income from partnerships or dividends and taxable benefits such as automobiles and accommodations. It makes no difference if this income is earned in Canada or abroad. Canadian tax authorities with newfound access to UAE-supplied information may now call into question those tax returns previously filed by Canadian permanent residents that were “economical” with the stated income. With the Canadian tax authorities better able to determine the permanent resident’s non-Canadian taxable income, the implications for corner-cutters will be severe!

With these tax treaties in place, Canadian tax authorities will be able to confirm much of the information provided by permanent resident tax-payers who continue to earn income in the UAE and Kuwait (and any of the 76 other jurisdictions with a tax treaty with Canada such as Cyprus, Egypt, Jordan, India and Pakistan).  This means that tax officials could obtain copies of or information contained in all of the documents and forms that are on file with the UAE / Kuwait governments (or other tax treaty governments). This information might relate to employment contracts, personal sponsorship applications, loans, credit card applications, apartment or villa lease agreements, liquor licenses, corporate or partnership filings and yes, even entry and departure dates from the Emirates or Kuwait. In other words, both tax and immigration officials will soon be able to cross-check the permanent resident and his family’s actual time spent in the UAE or Kuwait with the time he declared on their PR Card or citizenship applications!

It is common knowledge that the information contained in these government documents and computers alone cannot determine with any degree of precision the exact amount of gross taxable income and benefits the Canadian permanent resident may have earned in the UAE or Kuwait. However, information about the person’s standard of living in the Gulf, when combined with readily available Canadian information can be used by the CCRA for a lifestyle / income audit. If this audit indicates that the person is living a lifestyle substantially richer than that which could be reasonably supported by the income claimed on his tax returns, then he will be re-assessed. In the event the CCRA’s assessment is higher than the income previously declared, the taxpayer will be asked to pay the additional taxes and interest. Depending on the severity of the under-reporting, he may also be fined and assessed penalties of up to 50% of the taxes owing. Interest will continue to accrue until the total amount is paid. This under-reporting could also result in criminal charges for tax evasion that could cause the person to be stripped of their permanent resident status and even citizenship (for those who have already reached this desirable stage)! As stated above, being found guilty of tax evasion will make the former permanent resident or citizen inadmissible for subsequent sponsorship for a very long time.

The taxpayer is entitled to dispute and appeal the CCRA’s income assessment. However, he would first be required to pay the assessment, either voluntarily or by seizure of his assets. The appeal process itself will require substantial amounts of time, energy and credible documentary proof  (which can now be more easily challenged with information obtained under the Tax Treaties.)

Summary

The introduction of the Permanent Resident Card and the new Tax Treaties with the UAE and Kuwait should be considered very seriously by those permanent residents who have not taken all of the important steps to establish their physical presence in Canada and / or who have not been entirely forthright in their disclosure to tax and immigration authorities.  As these two tropical storms continue on their set courses to merge into a hurricane, they must be considered very seriously by all permanent residents in order to protect those who fall under their care and responsibility.

Recommended Steps that Permanent Residents of Canada Should Immediately Consider

1. If you are a permanent resident and eligible to apply for Canadian citizenship, do so without delay. However, ensure beforehand with your tax accountant that all your previously filed tax returns for you and your spouse fully disclose all your non-Canadian source income.

2. Evaluate whether you and all family members will be able to succeed in their applications for a Permanent Resident Card.

3. If you and / or your legal counsel (and accountant) determine that you would be unable to successfully obtain a Permanent Resident Card (as a result of the new immigration rules, residency and/or employment history or as a result of your income tax filings), identify those areas that require attention and take the necessary steps to rectify them on a proactive basis without delay (i.e. before the immigration or tax authorities come to the same conclusion about you).

David Lesperance, Barrister & Solicitor is Chief Legal Counsel to Global Relocation Consultants S.A., a consultancy that specializes in the integration of immigration and citizenship, offshore trusts and tax planning. GRC specializes in assisting individuals acquiring residency and citizenship to fulfil tax or estate planning objectives and works closely with banking, accounting and related professionals on behalf of its clients.