Are you planning to leave Canada? Well, if you don’t manage your finances carefully, you might be throwing away thousands of dollars! In this video, I’ll break down how your TFSA, RRSP, CPP, and OAS are affected when you leave Canada.
Whether you’re a retiree who is looking to escape Canada’s cold winters and high costs, or a digital nomad or remote worker who wants to leave Canada’s high taxes, you’ll find all your answers here.
I’ll cover tax implications, benefits you might lose, and smart financial moves you can make BEFORE you start packing your bags.
And don’t miss my special tip at the end on what to do with your house before leaving Canada—this advice could save you tens of thousands of dollars!
Getting the Hang of Your TFSA
Let’s start with my personal favourite account, the TFSA. What happens to it when you leave Canada?
For this video, I’m going to assume you have already made the choice to become a non-resident of Canada and are permanently moving abroad.
When you leave Canada, your Tax-Free Savings Account (TFSA) is subject to several important changes. I’ll start with the good news:
- Account status: Your TFSA maintains its tax-free status in Canada, even if you become a non-resident.
- Withdrawals: You can still withdraw funds from your TFSA while living abroad. These withdrawals will be added back to your contribution room, but here’s the key point – you cannot use this room until you become a resident of Canada again.
- Repatriation: If you return to Canada as a resident again, you can resume normal TFSA activities, including making contributions up to your available room.
Bad news:
- Contributions: You can’t make new contributions to your TFSA while you are a non-resident of Canada. However, your existing TFSA can remain open and continue to grow tax-free. If you contribute to your TFSA while a non-resident, you may face penalties of 1% per month on the contributed amount. For example, if you contribute $5,000 to your TFSA while being a non-resident, you could incur a penalty of $50 per month until the amount is withdrawn. Over a year, this penalty could add up to $600, which greatly reducing the benefits of your investment.
- Contribution room: You do not accumulate new TFSA contribution room for any years during which you are a non-resident.
- Tax implications: While the growth within the TFSA remains tax-free in Canada, your new country of residence may tax the income or gains from your TFSA according to its tax laws. For example if you move to the U.S, they don’t recognize the TFSA so the IRS will tax all the income and gains from it. It might be a good idea to collapse the account in this case. The point is – Be aware of the tax rules of the country you’re moving to!
Pro Tip for your TFSA: Max out your TFSA contributions before you leave. This way, your investments can continue to grow tax-free while you are abroad.
RRSP when leaving Canada
RRSPs: Can remain in Canada and retain tax-deferred status, recognized similarly in the US.
What happens to your RRSP when you leave Canada? First up, let’s talk about contributions and withdrawals. As a non-resident, you can still contribute to your RRSP if you have available contribution room from Canadian-earned income.
But, without Canadian income as a non-resident, you won’t generate new contribution room. And, any withdrawals you make as a non-resident are subject to a 25% Canadian withholding tax. This rate could be lower if there’s a tax treaty between Canada and your new home country.
Next, the tax implications. Your RRSP investments will keep growing tax-deferred in Canada. But, remember, your new country might tax the income and gains within your RRSP. This varies by country. Some tax treaties might offer tax relief or exemptions. For example, the U.S. will not tax the income and gains within your RRSP, but if you move to another country, it might, depending on their tax treaty.
Canada has tax treaties with 91 countries, with some of the most common ones like U.S, Mexico, Costa Rica, and Thailand, and you can find the full list here.
You can keep your RRSP open and manage your investments even as a non-resident. But be mindful of currency conversion rates and fees if you plan to withdraw funds. These can impact your returns.
As a non-resident, you can even convert your RRSP to a Registered Retirement Income Fund, or RRIF. Withdrawals from your RRIF will have similar withholding tax rules, usually 25%, unless a tax treaty reduces it. Minimum withdrawals are based on your age and the value of your RRIF.
It can get complicated though, for example, if you’re moving to the U.S, Due to the tax treaty between Canada and the United States, the withholding tax rate on RRSP withdrawals can be reduced to 15% for periodic withdrawals. So it depends on the specific tax treaty of the country that you are moving to.
And the good news is that if you decide to come back to Canada, you can start contributing to your RRSP again based on the contribution room of any new Canadian income you generate.
Another common question that I get is what are the best ways to withdraw from your RRSP after you retire, which I covered in detail in another blog post. Next up, is the CPP,
CPP When Leaving Canada
What happens to your Canada Pension Plan (CPP) benefits when you become a non-resident?
First off, it’s important to know that CPP is based on contributions made during your working life in Canada. The good news is, your CPP benefits will travel with you if you move abroad. This means the amount you receive abroad remains the same as if you lived in Canada.
Think of CPP as a trusty old suitcase—it holds everything you’ve packed over your working life in Canada and travels with you wherever you go
So, your CPP will be paid the same amount regardless of where you retire. But what about taxes? Well, CPP payments may be subject to withholding tax, depending on the tax treaty status of your new country of residence.
For example, if you’re moving to the United States, there’s a tax treaty in place that can reduce or even eliminate the withholding tax on your CPP benefits. Without a tax treaty, you could face a 25% withholding tax on your CPP payments.
Canada has social security agreements with over 50 countries to ensure your CPP coverage continues uninterrupted and to avoid dual contributions. These agreements also coordinate pension benefits for those who’ve lived or worked abroad.
It’s also worth noting that CPP survivor benefits and child benefits will continue to be paid even if the recipient lives abroad. So, your family benefits are secure no matter where you are.
Now, how do you receive your payments? OAS and CPP payments can be deposited into a local bank account in the local currency or into a Canadian bank account. If local bank transfers aren’t feasible, your payments can be mailed as checks in Canadian dollars.
While the amount you receive from CPP doesn’t change, how it’s taxed in your new country is something to look into. Some countries might tax your CPP benefits differently, and it’s crucial to understand these implications to avoid any surprises.
CPP Pro Tip: CPP Splitting – If you’re married or in a common-law relationship, explore CPP pension splitting to reduce overall tax burden.
OAS when leaving Canada
Next, let’s explore what happens to your Old Age Security (OAS) benefits when you move abroad.
First, let’s cover the basics. OAS is based on the time you spent in Canada and can be collected as early as age 65, with the possibility of delaying it up to age 70 for increased benefits. To receive OAS abroad, you must have lived in Canada for at least 20 years after turning 18.
If you haven’t met this 20-year threshold, you might still qualify if you worked abroad for a Canadian company or lived in a country with a social security agreement with Canada (see full list here). However, years spent in these countries do not count towards the OAS benefit amount.
Now, let’s talk about the benefits. If you meet the 20-year residency requirement, the OAS benefit amount remains the same, no matter where you live. However, additional OAS benefits like the Guaranteed Income Supplement (GIS), and survivor allowance require you to reside in Canada. So, if you’re receiving GIS or other allowances, moving abroad will disqualify you from these benefits.
Next, let’s discuss tax implications. High-income earners may face the OAS clawback, also known as the recovery tax, which applies to those earning over a certain threshold. This clawback still applies abroad unless you move to a country with a tax treaty with Canada, potentially allowing you to bypass it. Non-residents typically must file a T1136 form annually to determine any required repayments.
Countries without a tax treaty with Canada may impose a withholding tax on OAS payments, typically about 25%. For example, if you move to the U.S, there will be no withholding tax on your OAS due to the tax treaty between Canada and U.S. Always check the tax treaty details for your country you plan to move to.
Remember, to collect OAS abroad, you must file an annual tax return reporting your worldwide income.
OAS PRO TIP:
Income Management: If you’re at risk of the OAS clawback, manage your income through strategic withdrawals from other retirement accounts. Also, Consider deferring OAS payments up to age 70 to increase your monthly benefit by 0.6% for each month deferred.
Bonus Tip: What to do about your house
I’ve got a bonus tip for those planning to move abroad: What to do about your house that you own. If you’re leaving Canada, before you leave, consider selling your home to avoid huge taxes.
Selling your principal residence after becoming a non-resident can be harsh due to large capital gains tax. To avoid this, selling your home before you move is a smart move, as Canada doesn’t tax principal residences for residents of Canada.
Here’s an example of how it could cost you a lot of money: Let’s say you bought your home for $500,000 and the value appreciated to $800,000 when you decide to move abroad. If you sell the home after becoming a non-resident, you might have to pay capital gains tax on the $300,000 increase.
Depending on your residency status and the applicable tax treaties, this could result in a significant tax bill, potentially upwards of $75,000 or more. This huge tax bill could have been avoided if you had sold your property before leaving Canada!
If you’re considering retiring abroad, it’s crucial to consult with a cross-border tax professional to understand the specific details and implications, ideally both in Canada and in the country you plan to move to.
At Blueprint Financial, we collaborate with accountants in Canada, specializing in expat services to ensure you get the best advice and support. Check out the planning services we offer, and book a free consultation when ready!