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The likely answer seems to be that they are real as other people such as Gerrard and Buck Frobisher also see them and hear what they're saying. The supernatural seems to exist in Due South as we also have an episode featuring a man with psychic powers.
Frasier has his RCMP issue Smith&Wesson .38 revolver but he's not allowed to carry it in the US. We see that he keeps it and ammunition in a locked box in his apartment and he occasionally uses it in stories set in Canada along with a Winchester rifle. He also carries a lock knife in his boot and is proficient at throwing it a fair distance. Ray carries a Baretta 9mm pistol as his primary weapon and a five-shot Smith&Wesson .38 revolver as a back-up gun in an ankle holster.
The three stars are good conduct badges (noticeably Frasier's dad and Buck Frobisher have several more than he does). The crossed pistols and rifles signify that he is a qualified marksman with both.
David Marciano wanted a more equal salary and on-screen status with Paul Gross. This could not be accomodated so Marciano was largely absent from the 1997 series but returns for 3 stories, including the finale in order to give Ray Vechio a fitting send off. In the 1997 series this is explained by Ray going undercover as a mobster whom he resembles and his place being taken by another police officer, Stanley Kowalski, who assumes his identity in order to preserve his cover.
The iconic scarlet uniform of the Mounties is actually their formal dress worn only on ceremonial duties such as when Frasier and Turnbull are guarding the consulate. For daily duties they wear a much more drab and practical tan coloured uniform. After the first season however we only ever see them in formal dress.
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