Ask a Planner
By Jason Heath, CFP on January 22, 2024
Estimated reading time: 6 minutes
By Jason Heath, CFP on January 22, 2024
Estimated reading time: 6 minutes
For Canadians who plan to retire to other countries, here’s a primer on the tax implications of leaving accounts in Canada compared to moving them abroad.
If I retire in Europe, can I maintain my current investment accounts and is it tax efficient to keep my accounts in Canada or move them to Europe?
—Aida
Canadian residents are taxable on their worldwide income. Upon leaving Canada, a taxpayer may become a non-resident and subject to Canadian tax on only certain Canadian sources of income, Aida.
Significant residential ties are often the determinant of whether you have become a non-resident. They include:
If you are working or vacationing temporarily outside of Canada, commuting back and forth, or attending school abroad, you may still be considered a factual resident and subject to Canadian tax.
In your case, Aida, if you move to Europe to retire and set down roots there, you may become a non-resident for Canadian tax purposes.
I will touch on the tax implications for a European resident who leaves behind investments in Canada.
Registered retirement savings plans (RRSPs) remain tax-deferred in Canada for non-residents and are generally not subject to annual taxation by other countries. However, withdrawals come with tax implications.
When taken as a lump sum, RRSP withdrawals are generally subject to withholding tax of 25% for Canadian non-residents. When an RRSP is converted to a registered retirement income fund (RRIF), the periodic withdrawals may qualify for a lower tax rate—as low as 15%. This depends on the tax treaty between Canada and the foreign country.
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Foreign countries take different approaches when taxing Canadian income, Aida. Some countries are like Canada and tax their residents on worldwide income. Some countries exempt foreign income from taxation, subject to different criteria. A country may even offer a special tax regime for immigrants or returning citizens that exempts foreign income from tax for a certain period or offers a flat tax incentive.
Many Canadian emigrants leave their RRSPs and RRIFs in Canada and draw them down during retirement. The Canadian withholding tax, which is withheld by the financial institution where you hold your account, is the only Canadian tax obligation that applies for an RRSP or RRIF. So, a non-resident is not required to file a Canadian tax return for this income.
Tax-free savings accounts (TFSAs) can remain tax-free for a non-resident of Canada—at least from a Canadian perspective.
If a foreign country taxes worldwide income, that would generally include TFSA interest, dividends or capital gains. So, a non-resident may have no tax advantage to keeping a TFSA. These accounts are more likely to be withdrawn and the funds taken abroad.
That said, if the person expects to return to Canada, leaving their TFSA to grow tax-free could be advantageous. If a $50,000 account grows to $150,000 and they re-immigrate to Canada, they would have a $150,000 tax-free account to leverage. If they instead withdrew their TFSA savings, their TFSA room would increase by that amount but their contribution room would not otherwise grow while they were abroad.
Taxable non-registered accounts are generally subject to a deemed disposition when a person leaves Canada. It’s treated as though all the investments were sold on the date of the account holder’s departure, triggering any accrued capital gains and resulting income tax.
If the federal tax owing is more than $16,500 on the person’s final tax return, they can choose to defer payment of the tax. This is done by completing Form T1244, Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property.
Since there’s generally no tax advantage to leaving non-registered investments in Canada, it’s common to see non-residents liquidate and reopen accounts abroad. Some investors prefer to leave them in Canada because they have other accounts, like RRSPs, that they cannot liquidate. Others keep their investments in place because they trust the regulatory environment in Canada more than the one in their new country.
If you leave non-registered accounts in Canada, they will be subject to withholding tax at the financial institution. Interest, dividends, and mutual fund or exchange-traded fund (ETF) distributions are generally subject to 15% to 25% tax at source. The rate varies based on the tax treaty between the country of residence and Canada.
This withholding tax represents your final tax obligation to Canada, so you do not need to file a Canadian tax return for this income.
Capital gains on securities are not subject to withholding tax for non-residents. Capital gains on real estate and some other assets are subject to Canadian withholding tax and even require the non-resident to file a tax return.
When you leave Canada, you should update your financial institution with your new mailing address and residency status. It will use this information to determine the applicable withholding tax, as well as other compliance obligations.
Non-residents typically cannot buy Canadian mutual funds, though they can continue to hold the funds they already own.
Some financial institutions will restrict your accounts if you move abroad, so it can be a good idea to speak to yours before you move. There may be changes that are easier to make while you’re still a Canadian resident.
Most European countries tax foreign income, Aida, but it’s important to look into the local tax laws of the country you’ll be living in.
Spain, for example, offers a special tax regime for inbound expatriates. New residents may be eligible to exempt foreign-source income from Spanish tax for up to six years.
Malta offers the Malta Retirement Programme and a returned migrant tax status, offering a 15% tax rate on foreign income subject to minimum tax liabilities of €7,500 and €2,325, respectively.
Italy has a flat tax regime for high-net-worth individuals, who can pay a flat €100,000 per year on foreign-source income for up to 15 years.
To prevent double taxation, most foreign countries will allow a foreign tax credit for Canadian tax already withheld on the income.
Moving abroad complicates the taxation of your Canadian investments. Leaving investments in Canada doesn’t cause you to be a tax resident of Canada, nor does it mean you have to file a Canadian tax return for that income.
RRSP/RRIF withdrawals and non-registered interest, dividends and fund distributions will typically be subject to 15% to 25% tax at source in Canada. TFSAs may remain tax-free, but that may not matter if you are taxed on the income in the new country. It’s more common for Canadian emigrants to cash out their non-registered and TFSA accounts than their RRSP and RRIF accounts.
Make sure to validate any potential investment restrictions with your financial institution before you move abroad.
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