Income, Wealth and Tax Noncompliance: Richmond Income Tax Invaders

You may have caught wind of the Vancouver Sun article from Monday June 15, 2105 that reported on the ritzy Vancouver neighborhood where many people are poor. This was follow up with an article about these “Richmond income tax evaders”, but that article no longer exists on their site. Instead, this little gem appeared today.

The crux of the argument is that because the price of homes in this area is so high, but reported incomes so low, this must mean its residents are underreporting their income, and specifically their global income. There is a lot of focus on global incomes because Richmond is home to many non-Canadians. Here is a quote from the former mayor:

“Since many of the families live in over $1 million homes, it is simply under-reporting of income that causes the problem.”

I think it is a bit of a stretch to take this data and make this sort of bold statement for a number of reasons.

First, owning a home makes you a resident for some purposes, but not for others. Notably, owning a home does not necessarily mean you are a resident for tax purposes. Here are the CRA rules for determining residency. To determine residency, CRA looks at many factors and only if most of them indicate residency, only then will residency for tax purposes be established. Only once you are a resident for tax purposes do you need to report your world-wide income to CRA. If instead you are deemed to be a non-resident for tax purposes than the only income you need to report to CRA is your Canadian source income. Residents qualify for tax related benefits, such at the CCTB and UCCB, but non-residents do not. The other issue is that we have tax treaties with many countries that allow for foreign income not to be subject to tax in Canada. Again, something the Canadians working in other jurisdictions equally benefit from. One such country includes, gasp, China. There are also various immigration rules that allow for only some members of the family to be residents for tax purposes.

The article from today suggests that this is not fair and if you own a home, you should pay income taxes. Well, we should be careful here because Canadians benefit from similar rules in other countries. For example, many Canadians own property in the US, but this does not subject them to income tax in the US provided they are not a US citizen, green card holder, or do not stay more than 120 days in the US. By the logic expounded about the Richmond case, these Canadians should be paying taxes in the US. I am fairly sure the Canadian snowbirds would flip if that were the case.

Second, income is not the same as wealth, something we really need to start getting our heads around as the wealthiest generation ever retires. Check out this gem of a quote from the article:

Jiun-Hsien Henry Yao, who ran for Richmond city council in 2014, is also troubled by the income-reporting problem. Normally, he said, “you would need a family income of $150,000 to $200,000 just to feel you can afford any home in Richmond.” But in high-end Thompson, most households report income well under $100,000.

Buying a home does not require income. It only requires income if you are going to have a mortgage. You can buy a home with wealth. It is very possible to have low income yet be very wealthy. Hence, owning a $1 million dollar house and having $50k or less in income is not an indicator to call in the tax auditors. In fact, if this were the metric, many seniors in BC would be in the CRA hot seat. More importantly, wealth is not reportable to CRA, only the gains made from said wealth and only according to your tax residency status.

The article from June 15 talks about people reporting poverty level incomes. See this:

“Statistics Canada continues to show (the entire city of) Richmond as one of the poorest cities in British Columbia, with a very high child poverty rate.”

While the article is not clear, this seems to be based on data from the 2011 National Household Survey. That is the voluntary survey that replaced the mandatory long form of the census. There are certainly problems with response rates, but Richmond seems to have a good response rate of around 80% which is not bad, but not 100%, and we don’t know how that response rate varies across the city or by other factors. The Survey collects information on income and, if permission is given, the respondents’ income is obtained from their income tax file, assuming they have one. If permission is not given, it is provided by the respondent. So again, we have the problem of residency for tax purposes creeping up again, but we also have to understand the data that is obtained. While it the income data is linked to the income tax file, Statistics Canada income definitions do not correspond to CRA definitions for income tax purposes. For example, total income does not include capital gains, an important income source for many high wealth individuals. It does not include inheritances, RRSP withdrawals, and related. You can get capital gains income from the NHS but it is not in the public tables.

Don’t take this the wrong way. Is there income tax evasion going one? I don’t doubt it. Some of it is due to a misunderstanding of the rules. Navigating the tax rules of a different country is not easy. I should know as my family has had to navigate the US tax rules and that was amazingly difficult. Ensuring that our rules are transparent, easy to understand, and easy to locate is an obligation on which the CRA falls vastly short.

But a lot of it is due to willful tax noncompliance. Certain groups of people that have come to Canada have tax morale problems. That said, so do certain groups of Canadians (cough, building and renovation industry, oil and gas, mining, cough). In fact, there is some good evidence that our tax compliance rate in this country is shockingly poor, but that will be the subject of a future blog post.

In the meantime, take this to heart. We know the IRS’s audit rate is 0.86%. We don’t know CRA’s audit rate, but based on the US rate, we expect it to be much, much less than 0.5%. Auditing is expensive and requires a lot of manpower. To have a higher audit rate CRA needs resources that it does not have, and never has had. To make this investment means an opportunity cost. What are you willing to give up to get this audit rate and are you prepared to happily accept being selected to have such an audit?

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