There are many reasons Canadians decide to spend their retirement years in a different country. Climate, family, or desire for change… to name a few. However, leaving Canada in retirement can be tricky and needs to be done thoughtfully and with the help of a professional as there are a variety of tax implications that a Canadian emigrants face.
In Canada, there are varying degrees of residency. Each type of residency has its own tax implications This article will assume that people who choose to leave Canada will become non-residents. A non-resident in Canada is defined as follows:
- Someone who is disposing of or renting out a Canadian home and has secured a permanent residence in another country.
- Spouses and dependents of the individual will be leaving Canada as well.
- The individual is breaking social ties in Canada. This means cancelling memberships, leaving churches etc.
The information in this article only applies to those who will become non-residents.
What You Need to Know
There are a variety of tax and financial planning considerations when leaving the country. While every family will have a unique situation that requires tailored planning, there are a few areas of planning that apply to most people that wish to retire abroad.
- Selling a Primary Residence
A big concern Canadians face when moving abroad is how selling their home with an intent to leave the country will affect them taxwise. If you sell your home before you leave the country and become a non-resident, any gains you receive from selling your home will be wiped out by the principal residence exemption. If you do not, you may lose your principal residence exemption and end up paying capital gains on the sale if the CRA can prove that you had a new principal residence in a different country. This can cause a huge unplanned for tax liability.
As mentioned above, you may still be eligible to be considered a non-resident even if you keep your home by using it as rental property. If you choose to go this route, be aware that change of use rules will apply and cause capital gains and taxes to accrue going forward.
- Canadian Departure Tax
Canadians who wish to retire to another country must file a departure tax return if they have property in Canada. This return needs to be filed even if there was no income earned in the year of departure. When Canadian taxpayers leave Canada while still maintaining ownership of certain types of property, they must pay what is called the Canadian Departure Tax. The taxpayer is deemed to have sold the property at fair market value and will be required to pay capital gains from the deemed sale. Departure tax applies to the following types of property:
- Real Estate outside of Canada
- Unincorporated Businesses in Canada
- Private or Public Company Shares in or out of Canada
- Mutual Fund Units owned in or out of Canada
- Partnership Interests
- Interests in non-resident inter-vivos trusts
- Personal Property (i.e. Jewelry, Artwork)
Property that is exempt from the departure tax includes the following:
- Real Estate
- Canadian Business Property
- Pensions
- Annuities
- RRSP, TFSA, RESP, RDSP
Departure tax can be problematic for retirees leaving Canada as they will owe the tax connected with the deemed disposition of a piece of property without having any actual proceeds of a disposition. The CRA will allow you to defer paying the tax until the property is sold, but only if you are able to provide the CRA with acceptable security on the amount owing. This is an expense that needs to be planned for prior to leaving Canada.
Particular attention should be paid by those who are moving to a country without a tax treaty with Canada. How you will be taxed will be contingent on the tax rules in the country you are moving to. It is possible that you could be double taxed when you eventually dispose of an asset that was subject to Canadian departure tax. If there is no relief under the tax laws of the other country and there is no tax treaty between the two countries to provide relief, you should consider whether it makes sense to dispose of the asset before you leave Canada to avoid the double taxation. For example, if the country you are moving to requires that you use the original cost base of an asset to determine the capital gain on the sale and does not permit you to claim a foreign tax credit for the departure tax that was incurred for Canadian tax purposes when you became a non-resident, you will be faced with double taxation.
- Canadian Sourced Income
Any Canadian income must be taxed within Canada. This applies to both residents and non-residents. Non-residents will be subject to tax on employment income earned in Canada, income from carrying on a business in Canada, and the disposition of taxable Canadian Property. It is also worth noting that if a non-resident continues to earn income from Canadian sources, they will also continue to earn RRSP contribution room until they are 71.
RRIF, RRSP, and Pension income that is paid from a Canadian source will be subject to a 25% withholding tax at source. Some countries have tax treaties with Canada that allow for coordination with the CRA and reduce the risk of double taxation. For example, some countries may allow for the tax withheld at source in Canada to be credited towards your taxes in your new country of residence. Alternatively, some countries do NOT have tax treaties with Canada. This could mean that you would be responsible for paying tax on the income in both Canada and the country you are residing in. This calls for careful planning to avoid double taxation.
TFSAs are often a source of confusion for retirees abroad but residents can withdraw from their TFSA without incurring a tax penalty in Canada. They may however be responsible for paying tax on that income in their new country of residence. It is also important to keep in mind that individuals who have emigrated from Canada cannot contribute to or earn TFSA room after the year they leave Canada. If they do, they will be charged interest every month until the money is removed.
- CPP and OAS
One of the biggest concerns of those who are looking to retire abroad is how this will affect their Canada Pension Plan payments and their Old Age Security. Here is what you need to know:
- Canada Pension Plan (CPP)
CPP is a member contributed plan which means that if you paid into the plan at some point, you will be entitled to a certain amount of benefit. This means that no matter where you live in the world you will be able to keep receiving your CPP benefits without reduction or penalty.
- Old Age Security (OAS)
Canadians who retire abroad can receive OAS payments subject to their eligibility. Old Age Security is a government benefit program that is not contributed to directly by its members. Therefore, there are a few conditions that individuals must meet to be able to receive it. Individuals must have resided in Canada for 40 years between the ages of 18-65 to be eligible for the full pension whether they live in Canada or not. Partial benefits are available those who live in Canada for just 10 year or more. However, if you choose to leave Canada and are not entitled to full benefits, then you must have been here for 20 years or no benefit is payable.
OAS payments are subject to 25% holding tax in Canada. Like RRSP/RRIF income, tax treaties or lack thereof will determine how the tax is handled.
The Bottom Line
Leaving Canada for any reason can come with an abundance of complicated tax planning. It is essential that anyone looking to retire abroad seek the advice of a tax professional who has knowledge of tax treaties and experience helping their clients emigrate from Canada.