Expatriating from Canada: Financial Implications
Canada welcomes significant numbers of immigrants each year. However, many people choose to leave Canada for other countries, too. I have relatives and friends who live in the United States, Japan, and Australia, to name just three countries. I lived in Japan myself for a decade.
Tax Planning
Among other things, perhaps the most important is to know your residency status so that you can properly file your tax return to the CRA. Like most countries in the world, except for the United States and Eritrea(!), Canada determines your tax-filing obligations by residency, not citizenship.
The Canada Revenue Agency (CRA) reviews the ties that you will maintain while outside of Canada to assist in determining your residency. Here are the ties in broad strokes:
Significant residential ties with Canada include:
- a home in Canada
- a spouse or common-law partner in Canada
- dependants in Canada
Secondary residential ties that may be relevant include:
- personal property in Canada, such as a car or furniture
- social ties in Canada, such as memberships in Canadian recreational or religious organizations
- economic ties in Canada, such as Canadian bank accounts or credit cards
- a Canadian driver’s licence
- a Canadian passport
- health insurance with a Canadian province or territory
To determine residency status, “all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intent, and continuity while living inside and outside Canada.”
If you are planning to leave Canada or have already left, a first step in assessing those ties is to complete form NR73 Determination of Residency Status (leaving Canada). The English version is available here.
Departure Tax
Once you leave Canada, you are deemed by the CRA to have disposed of certain kinds of property at fair market value and immediately reacquired it at the same price. This deemed disposition may result in a taxable capital gain and therefore subject you to “departure tax.”
Financial Management: Banking
Cash flow, by which I mean income and expenses, is naturally going to be different in a new country. You may also wish to minimize any cash flow that originates in Canada, at least if you are still of working age. As noted above, the CRA is interested in your financial ties to Canada, so bank accounts and credit cards are a matter of concern. If, however, you wish to use a credit card in your new country, you may have some difficulty as your credit score likely does not carry over to your new home, not even to the United States.
There are exceptions, however. The two largest banks, RBC and TD, allow you to open a U.S.-domiciled Bank account and your credit score in Canada can be used to qualify you for one of their U.S. credit cards. Of course, if you are moving elsewhere, this service may not be available.
Investment Planning
RRSPs
If you cease to be a resident of Canada, that means you are no longer earning “Canadian source” income that is taxable by the CRA. It makes sense, then, that you would not contribute to an RRSP. The tax deduction is of no use to you. Having said that, if you have contribution room remaining from earned income while you were working in Canada, you may still contribute if you want.
The more likely scenario, though, is to simply retain your RRSP without making any more contributions. When I worked for an online (discount) broker, many residents of the U.S. who were formerly residents of Canada maintained their RRSPs, although they were not permitted to make new contributions. Essentially, they were limited to buying, selling, and withdrawing. Similar comments can be made about RRIFs.
You may be aware that withdrawals from an RRSP, or withdrawals from a RRIF over the annual minimum, are subject to withholding by your financial institution to be remitted to the CRA at the following rates (excluding Quebec):
- 10% – amounts up to $5,000
- 20% – amounts greater than $5,000 up to $15,000
- 30% – amounts greater than $15,000
The flat rate for withdrawals to a non-resident of Canada is 25% unless reduced by treaty. By way of comparison, an Ontario resident is paying a combined federal and provincial tax of 29.65% on every dollar of taxable income above $50,197. And the rates get progressively higher from there.
I should note that, despite U.S. Federal recognition of RRSPs and RRIFs as legitimate retirement accounts, not all U.S. states offer the same recognition. You may find your registered holdings no longer tax-deferred under state law. Moreover, you may not be able to hold an account that is domiciled outside of that particular state. Finally, as Jason Heath notes, you may find it more advantageous to invest in a retirement account in your new country of residence.
TFSAs
Generally speaking, it is inadvisable to continue contributing to a TFSA even if you have the contribution room. You are still technically eligible to contribute the full amount of your contribution room in your final year of residency in Canada, but thereafter no new contributions may be made. Although you may wish to keep the account, the firm that holds your TFSA may not feel the same way. Furthermore, the TFSA is a distinctive, if not unique, account type, and other countries are not likely to be persuaded that “tax-free” applies to any overseas accounts owned by their residents. Withdraw the money and bring it with you to your new country.
Non-Registered Accounts
If emigrating from Canada to the U.S., this is a non-starter. Your investment firm will close your non-registered account and send you a cheque for the balance unless you arrange to transfer and close out the account yourself. By the way, Canadian and U.S. regulations are reciprocal in this regard.
Other countries may not have a blanket prohibition against holding investment accounts in Canada, although they may have certain prohibitions, such as not permitting margin accounts.
Estate Planning
This is very much dependent on your new country of residence. As an example, though, let’s suppose you remain a Canadian resident, but you name an adult child, now living in the U.S. as the executor of your estate. Upon your death, the residency of the executor child may lead to your estate being subject to U.S. regulations, or more specifically, the regulations of the state in which that child resides. As this applies to Canadians leaving the country, get expert advice for your situation and your new country of residence and update your will accordingly.
Note as well that while countries like Canada, the U.S., the U.K., Australia, etc., operate according to common law, and have high regard for “testamentary freedom,” most civil law jurisdictions, e.g., continental European countries, proceed under the concept of “forced heirship,” that is, certain percentages of one’s estate must pass in fixed proportions to certain family members.
This only scratches the surface of expatriating from Canada. For more information, click on the various links scattered throughout this post.
This is the 130th blog post for Russ Writes, first published on 2022-01-10.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.