Be careful before investing in Canada

There is a lot of attention towards Canadian Immigration especially post the recent successful containment of COVID in Canada. A lot of credit goes to the federal government of Canada and the local provincial governments for their process and proactive approach during the pandemic. However, most credit should go to the people who through their civilized behavior and due care helped to stop the spread of the virus.

The government support programs sounded very generous, especially to those who reside outside Canada, and YES, no doubt, it did help in the overall picture. This may have triggered a lot of interest, from investment community to explore business and investment programs in Canada towards immigration. I have received multiple requests and calls to discuss this matter: based on that, I share my insight to guide those who are interested in exploring this further.

Well, despite the long depressing Canadian winter nights; Canada is a beautiful country, civilized by its people, retired by its systems. The tolerance of Canadians made it accommodating to different cultures and colored the society with beautiful liberal mindset. Unlike the “superior race behavior” that you may notice in some other countries; people here recognize the fact that the most here are immigrants in Canada. Nevertheless, like anywhere else, business is challenged on different aspects; some you may address with good planning and control measures, and some are inevitable, which you just need to budget!  

There are number of interesting investment programs in Canada; most famous ones are operating under what-so-called the Provincial Nominee Program (“PNP”). There are few critical matters that should be considered while preparing the business plan to help reducing losses and manage expectations. In this article, we are not trying to discuss business specific issues or usual foreseeable business challenges that a business may face around the world. Our aim is to highlight some of the unexpected challenges which were surprising to most of investors in Canada, as they were “taken for granted” in many modern business environments.  

Preparing your Plan & Performance Agreement

Your Company will have clear activity and scope as per the agreement signed between you and the local immigration office in the Province, usually this agreement is referred to as “Performance Agreement”. This agreement will be based on your pre-approved submitted business plan. The key objective of the agreement is to invest a defined/minimum amount of money in business and to create jobs to a minimum specific number of Canadians. You need to be very careful with your business plan assumptions on the investment figure amount to stay reasonably near minimum and keep the hiring count toward the low end as you will face more surprises than you would anticipate.

Canadian Economy

The target customer and their age group require detailed analysis to proper reach. Doing business with other business will need long stretch of relationship and credit history. The feedback received from other investors indicated that end-user and consumable business is much faster to turnaround than doing business with business. Also, working for government contracts will require specific experience and history which most of new business would not qualify for.

Depends on the province and the selected market, you need to be aware that most of liquidity and buying power is coming from immigrants in Canada. Surveys indicate that business targeting immigrants end-users had faster returns and lower default risk from customers.   

Your Status and Privileges as Investor

As an investor, most likely you will enter Canada on a “Closed Work Permit” to work under your newly establish business entity. Regardless is of your clear intentions towards immigration, your agreement with the local immigration office, and all of the forms that you have filled, you are not considered as an immigrant. You will be given a temporary social security number (“SIN”) that start with (9) which is usually given to temporary residence like non-immigrating individuals and students. All newcomers in Canada will starts with Nil Credit History regardless of their history in business (or personal). Your entire history is disregarded, even if you had history with Canadian companies outside Canada. Nevertheless, as an investor, you will be more of negative history (starting from below zero) because you will be bundled with students who are not permanent in country. Statistics show that the no “investor with 9” has ever defaulted on a payment. That is justifiable because investors are working toward their Permanent Residency (“PR”) and they would not risk it for a phone bill! Nevertheless, students may default, or actually do. Therefore, you should plan to be treated unfairly on your interest rates and premiums for a period that may extend to three years. This may also apply to expensive interest rates that may vary from 12% to 26% regardless of the hefty down payment requirements. As a result, you will be obliged to pay in advance and find yourself putting security deposits on most of the things, including utilities, phone, mobile, internet connectivity lines and even for those services that get on pre-paid model. Just to put things in prospective, the average interest rate vary from 2.4% to 3.9% in Canada for those who hold permanent SIN while their default rate may exceed 42% , unlike “investors”.

This issue may extend to automotive insurance: because of students’ accident rate, you will find your insurance premiums exceed the average market. You need to plan on paying anything between 50% to 100% more to others pay for their insurance. You must be aware that insurance in general will be very sensitive to work related mileage, including driving to work. Therefore, you need to consider the distance from home to work. The good news is that you will have to live with this kind of insurance rate for a while that may vary from five to six years until your build history.

Your office/shop Space Readiness

workspace is usually representing the chunk of business start up cost. The cost of getting your space (office or shop) ready as per current municipality regulations is something that require proper analysis and careful estimations. You need to be aware that regulations are frequently evolving and the ability to use a “ready space” can be deceiving, especially if you had to change the scope/zone of the facility from one type of activity to another. The internal/external fittings, upgrade of standards and decor cost may significant to your plan. Cost of material used is reasonable, however, skilled labor cost may surprise you. Another critical challenge is the availability of contractors to complete the required job. You may need to budget for delays to find electricians, plumbers, and the delivery of equipment. It is just not easy to find qualified staff in Canada!

Other challenges you may need to plan is governmental permits, licenses, and related governmental inspections which are subject to your activity, location, and scope of work. regardless if the cost, which is generally at acceptable level, the time to book inspection sessions from municipality and related provincial offices will or may case unexpected delays.

Banking Systems

If you want to blame anyone for poor economic buying power in Canada, that would be Banks. A standard challenge usually unexpected and mismanaged in most business plans. Banks in Canada are trying to follow US banking standards; however, they are always three to five years behind. Although all of Canadian banks offer online solutions and email transfer, the Canadian banking system very similar to what you might have experienced back in the early 1990s. To put things in prospective, all local Canadian banks are successfully maintaining “cheap behaviour” trying to set a fee of half dollar here and five dollars there to make up their profits from your account whiling keeping cash. As an example, you will be paying a fee to visit a bank or just for dropping some cash in your account: they will deduct a fee for anything and everything. Eventually, your “bank fees” may reach to 1,000 dollars a year, depending on your activity, transaction counts and how sensitive your plan for the extra cost. As a result, point of sale fees, credit cards fees, unfair exchange rates are all coming at higher than expected fees. On the same notes, you should expect no support from Canadian banks at the level of facilities or credit, even to the level of having a $500 credit card after two years of positive history.

Finding your local Employees  

Now, as you get ready with workplace and systems; its time to hire your employee(s). a common mistake in most of investing initiatives is targeting minimum wage employees. However, despite of applicable local minimum wage local regulations (per hour rate) in your Province, you should lower your expectations on the quality and the level of skills of those employees. The level of skills you get for paying minimum wage is/are very “interesting” in attitude and level of self motivation. Therefore, we recommend business to budget paying some sort of premium to improve the quality of full-time employees. To put things in prospective, the only qualification your may expect from a minimum wage person is “breathing” and maintaining a body temperature around the 37 degrees. Anything above those two qualities will require premium pay of additional 2 to 4 dollars an hour above the minimum wage. Additionally, your business plan should budget for local and federal payroll taxes including Employment Insurance and Pension Plan portions paid by employer which re subject to hours and pay variables.  

Incentives and support

Canadian immigration programs do not offer any incentives to foreign investors and funds except the ability to register the entity as Canadian-Controlled Private Corporations (CCPC) which means that the business active revenue will be subject to tax as per local Canadian companies. However, if the investor business is not qualified as a CCPC, then the investor will be subject to much more higher taxes, which is almost four times than tax applicable to CCPC. Outside that common privilege for a Canada resident investor, the investor should not expect any other incentives on tax, importation, export, or usual government fees.

Also, unlike many other countries, the development of rural areas usually come at special support from the government, starting a business in the big cities offer bigger buying powers and lower delivery costs unlike operating from small cities. In Canada, the government fees are equally imposed on all business despite of its location, as a result, opening business in remote areas will result in lower office rent fees, however, it will target only market smaller while imposed fees and taxes are maintained the same.   

Be aware of importations limitations

In most of cases, business will depend on imported goods. If you were planning to import goods into Canada then you need to be well prepared for documentations, process and time needed to receive your goods. Canada utilize a 10-digit HS Codes system unlike European model. This creates detailed preparation to create your packing list as per CBSA (Canada Boarders Authority) standards. In addition, you shall plan for delayed shipments and slower clearance process. The important will most probably need to hire an agent to clear the good, especially if you are importing more than five (5) different items on your export invoice. Importers will not be able to utilise any online platforms to track their custom clearing process and submit fees or documents without a broker. You also need to obtain importation code from CRA (Canada Revenue Agency) and CBSA to be able to clear your goods: this should happen before you start your importation process to avoid delays.  

Taxes and Fiscal Regime

Canada Revenue Agency (known as CRA) maintain a high standard of process and ethics. In our receive, the most civilized Canadian agency is CRA. The quality of CRA staff and officers is well noticeable. The process to obtain your Business Number (BN#) and your HST/GST file is simple and can be completed swiftly. However, the online access, for business and personal, is not possible until you file your first-year taxes. This may cause some inconvenience and some privacy concerns for first time communication if required to mail any documents, however, CRA unlike IRCC do not lose papers and packages, so the loss of private information is very unlikely while dealing with CRA.

Delivering your Obligations under the Agreement

Depending on your agreement terms, but usually at the end of your first year of operation, calculated from the month of the business revenue’s first earned dollar; you will qualify for completing your contractual obligations given that you have invested X dollars and completed the hiring of X employees as per your signed Performance Agreement. At the point, the business is required to obtain an audited financials reports and statements from a credited (pre-approved) audit firm. The local province immigration office will maintain a short list of second-tier audit firms that you are required to use to document the completion of your contractual obligations and provide assessment reports to the immigration office to certify the delivery of your investment, and the health of your business. You will be required to hire this company at your own cost at fees that may vary from a minimum of $9,000 to $19,000 CAD depend on the size of the business. A local CPA certified auditor or certified tax accounting or auditing firms reports which you may have used for your tax filing are not acceptable. There is at least five to ten folds increased price from local CPA accountant and the pre-approved firms. Your business plan shall budget for this incremental cost and ensure to account for it in your investment budget.

Obtaining your Certificate of Nomination

Once you have completed a year or two in Canada, investing and creating value to local community and post completion of third-party audit at your own cost, you are entitled to obtain your certificate which you may use to convert your temporary status to permanent residency. You may need to plan for another three months post the audit completion until you obtain your certificate. Once you obtain your certificate from the local immigration office you will submit your PR application to the IRCC (Immigration, Refugees and Citizenship) on printed papers and submit using postal mail to their applicable office. You need to plan for another (20) months of delay caused by the mediocre IRCC systems and incompetent staff. During this period, the investor shall remain on Close Work Permit and not permitted to practice any other activity but his established entity. This means you should do your utmost to ensure that the business is generating enough cash to cover business and personal expenses until you complete your application with IRCC. Also, the investor shall continue to enjoy the premium cost benefited from the Temp SIN.

At some point, most of investors realise that the federal government does not honor the locally signed Performance Agreement entered with Canadian elected officials at the Province level. Also, the agreement does not offer any guarantees on time or the rights that the investor has earned by delivering his part of the obligations. The investor’s application will be processed by IRCC PNP working group that process students’ applications, refugees, and some other applications.

Plan for the likely

In addition of spending upto four years in closed work permit at limited human rights while waiting for the IRCC to grant your contractual rights while paying premium cost and interest rates, the investor should plan that the work permit document may actually expire before obtaining the PR status. It was reported on multiple occasions by investors that their permit has expired and took upto six months to renew, if renewed. During this time, the investor will be in Canada on what-so-called “implied status” which means not being allowed to leave Canada. Investors also may risk losing their basic medical insurance coverage. However, the investor shall continue paying taxes even on overseas revenues made during or before arriving to Canada.  

Also, it was reported on multiple occasions that IRCC has lost packages of private and confidential information regardless those packages were delivered and signed for by IRCC staff. Therefore, you need to plan to have a weekly communication with IRCC to make sure that your package is not lost or has fallen in the wrong hands.

Conclusion

Although Canada maintain higher standards of freedom, liberal mindset, tolerance, and solidarity in between people that makes it a special place to call “home”, yet, the system inability to provide safe and stable environment ranked Canadian business immigration to be one of the worst in the world. In a recent review completed by Henri Poincare Consultants on a point-scale system, the Canadian investor immigration programs came ranked last (20 in a list of 20) considered programs from around the world.

The reason for this instability is caused by mainly mediocre immigration delays, lack of commitment and inability to honor agreements while providing weak evaluation model that is unable to differentiate between investors who already add value to Canadian economy and other applications. Also, the unfair competitive edge offered to new investors caused by Temp SIN that may limit abilities comparing to other local market players. In addition, the lack of support, tax withholding and other usually offered incentives for foreign investors.

In a recent review session between investors, an investor referred to the program as “government ran fraud” due to the lack of commitment seen from the Canadian IRCC. However, we are unable to confirm if the IRCC delays were intentionally made to drain investors money in country while waiting or it was just a result of inadequate government systems. Nevertheless, result remain the same regardless of the cause and the impact on investors was remarkable.

As investment programs in the world are intended to attract investors for the possible business investors may bring, it seems that the Canadian investment programs are attracting investors to make them the business by raining their liquidity while sitting waiting on government responses!