Retiring Abroad and Your Personal Finances

You have had it. You cannot stand even one more winter of shovelling snow or fearing the loss of your fingers and toes from frostbite. You are going to retire to Panama, or Malaysia, or Portugal, or… There are lots of lists on the internet that recommend places where you could retire and where shovelling snow and frostbite are no longer a months-long ordeal.

 

I can certainly understand the appeal of retiring elsewhere, but for this post, I am going to focus less on where to go, than the financial impact, if any, of leaving Canada. As residents of Canada, we have many benefits just by living here. We have a stable government and legal system, a generally reliable health care system, and retirement benefits such as Old Age Security. Many people from around the world want to immigrate here. Why would we want to emigrate?

 

Regardless of your reasons, here are a few things you need to take into consideration.

 

Tax Laws

Are you an emigrant?

Two things happen for you to become an emigrant.

 

• You leave Canada to live in another country
• You “sever” your residential ties to Canada

 

You cannot stay in Canada and simultaneously cut your ties. Despite the best efforts of the “Freeman on the land” movement, you cannot just declare yourselves independent of the government and laws of Canada. You need to leave.

 

You not only need to leave; you also need to sever your ties to Canada. I lived in Japan for several years and at one point my wife and I filled out a Determination of Residency Status form to understand where we stood in relation to Canada. Among other things, we owned significant assets in Canada, and we did not intend to leave Canada permanently. We were, therefore, found to be “factual residents” despite living abroad.

 

There are two categories of residential ties that the Canada Revenue Agency considers in determining your residency status. They are:

 

Significant Residential Ties

 

• A home in Canada
• A spouse in Canada
• Dependants in Canada

 

If your residency status is inconclusive, other factors are:

 

Secondary Residential Ties

 

• Personal property in Canada, e.g., a car or furniture
• Social ties in Canada, e.g., memberships in recreational or religious organizations
• Economic ties in Canada, e.g., bank accounts or credit cards
• A Canadian driver’s licence
• A Canadian passport
• Health insurance with a Canadian province or territory

 

Because people lead complex lives and may have ties around the world, residency is not necessarily straightforward. You may want to read Income Tax Folio S5-F1-C1 for more information. Or, simply go ahead and complete form NR73 Determination of Residency Status (leaving Canada) to get an official answer.

 

Do you have to file a tax return?

Beyond the weather, perhaps the most exciting thing about becoming a non-resident of Canada is the thought of not having to file a tax return. But is that the case?

 

If you owe tax, you still have to file a tax return and pay. If you think you are owed a refund, then you will want to file a return.

 

Departure tax

One of the surprising aspects of the tax code is that when you become a non-resident, depending on the assets you own, you may have to pay capital gains tax on them. You will be deemed to have disposed of these properties at their Fair Market Value (FMV). Examples of property to which this tax applies are shares, jewelry, paintings, and collections.

 

Property that is exempt from this tax includes Canadian real estate, Canadian business property, pension plans, annuities, RRSPs, RRIFs, RESPs, RDSPs, TFSAs, DPSPs, and more. For more details, go to Subsection 128.1(10) of the Income Tax Act.

 

How to complete your tax return?

In the year that you leave Canada, for the part of the year that you were a resident you need to report your income as you usually do, that is, your income from all sources, both within and outside Canada, also known as your world income. For the part of the year that you were no longer a resident, you need to report income only from Canadian sources. And even in that case, many of your sources of income may be subject to what is referred to as Part XIII tax, that is, tax that is deducted at source. Some examples are dividends, pension payments, Old Age Security, Canada Pension Plan, and RRIF payments, among others. The standard withholding rate is 25% unless there is a tax treaty in place between Canada and your new home country.

 

After you leave Canada

As indicated above, the income you receive from Canada that falls under Part XIII tax will continue to have tax withheld before it is remitted to you. Typically, you do not have to file a tax return, but if the tax you need to pay is less than the 25% that is automatically withheld, you may find it beneficial to file a return under a section 217 election.

 

Medical Care

If you leave Canada permanently, indeed if you leave your province of official residence for an extended period, you will lose access to your provincial health plan. If you plan to permanently retire outside of Canada, then you will want to go to a country, or at least to an area within a country, that has medical care of suitable quality.

 

Speaking again from personal experience, living with chronic kidney disease, I had to visit health care facilities regularly. In Canada, I would see a kidney specialist on a semi-annual basis and receive renewable three-month prescriptions for the medications I needed. Japan is, by every measure, an advanced country with a sophisticated medical system. However, while living there, I needed to see my specialist monthly and had to get my prescription refilled every time I went. Furthermore, prescriptions were not able to be refilled at independent pharmacies. Instead, they were filled at the clinic where the doctor practised.

 

While kidney specialists generally practised in major hospitals, if you had other needs, such as an ear or sinus infection, you would see an ENT (Ear, Nose, and Throat) specialist in his or her little clinic to be looked after and buy a prescription at the clinic. That introduced a conflict of interest as the physician made money based on the number of drugs prescribed. Many people told me that they would throw out most of the drugs they were required to buy because they thought that they were unnecessary and simply the cost of gaining access to health care.

 

That does not mean that I was not well cared for; it just means that medical care is not a neutral scientific endeavour. Culture, public health policy, and economics all have an impact on your care.

 

With that in mind, recognize that choosing to retire overseas means much more than pleasant temperatures, a low cost of living, and tasty food.

 

Security

Beyond health care, there are also concerns for your personal safety. Unfortunately, there are some countries where crime is common, and where corruption in the legal system, law enforcement, or politics is a matter of course. A good place to start your investigation of countries to which you might like to move is the Government of Canada travel advisories. Countries that are considered popular places to retire include Belize, Brazil, Costa Rica, Dominican Republic, Ecuador, France,  Italy, Malaysia, Mexico, Panama, Portugal, Thailand, and Turks and Caicos. Among them, all but Italy, Panama, Portugal, and Turks and Caicos are considered places where a high degree of caution is recommended. Significant issues are the potential for crime, terrorism, or civil unrest, although in some of these countries it may be more of a regional than a national issue.

 

GIS, CPP/QPP, OAS, RRIF, TFSA, Pensions

Aside from the weather, a big reason Canadians may want to move overseas is to enjoy a lower cost of living. It would be counter-productive, then, if you lost access to the sources of income that you would enjoy in Canada. Fortunately, this is not generally a huge issue.

 

Guaranteed Income Supplement (GIS)

Let’s get this one out of the way first. If you otherwise qualify for the GIS based on age, income, and receipt of Old Age Security, once you leave Canada for more than six months, you no longer qualify. The same applies to the Allowance and the Allowance for the Survivor.

 

Canada Pension Plan/Quebec Pension Plan (CPP/QPP)

CPP/QPP continues to be payable while you live abroad. Cheques are issued in the currency of the country where your cheques are mailed. This change from Canadian currency to your local currency of residence is based on your address for correspondence, provided it is in a country supported by the Bank of America conversion service and the country appears on a list where CPP payments are made in a foreign currency. If the country is not on the list, then payments can only be issued in Canadian dollars.

 

Old Age Security (OAS)

As with CPP above, Old Age Security (OAS) is also payable abroad. Unlike the CPP, however, which is a program to which you have contributed, OAS is based on your length of residency in Canada, not on contributions. If you have a history of residence in a country that has a social security agreement with Canada, your residence in that country may help you qualify for OAS.

 

If you have lived in Canada for less than 40 years

As noted above concerning social security agreements, if you have lived in Canada less than 40 years, the amount you receive depends on the number of years you have lived in Canada divided by 40. For example, if you lived in Canada for 20 years after age 18, you would qualify for 50% (20/40) of the full OAS. Delaying your first payment of OAS past 65 will increase the payment you qualify for.

 

If you have less than 20 years of residence in Canada and do not qualify under a social security agreement, then you will not be able to receive OAS while living overseas.

 

It should be noted that moving overseas and consequently paying the non-resident tax does not exempt you from the OAS “clawback.” The pension recovery tax continues to apply based on your net world income.

 

Your payments will likely be subject to a 25% non-resident tax unless reduced or exempted based on a tax treaty between Canada and your new country of residence. If the treaty is in place, the reduction will be automatically applied.

 

Direct Deposit

Canada can arrange for the direct deposit of payments from many programs or benefits to banks in a large number of countries around the world. You can go here to apply.

 

Registered Retirement Investment Fund (RRIF)

Assuming you have accumulated retirement savings in an RRSP and plan to use it to fund your lifestyle in retirement, you will likely convert it to a RRIF. As mentioned above, RRSPs and RRIFs are exempt from departure tax and can continue to accumulate tax-free while in the account. However, when withdrawn, this is a Canadian source of income and subject to 25% withholding, unless a tax treaty applies. How you would receive payments depends on the services provided by your financial institution.

 

Locked-In Retirement Accounts

Locked-In accounts are assets that were transferred from an employer pension plan. Depending on the jurisdiction under which your pension plan is governed, you may be able to fully unlock the plan after two years of CRA-recognized non-residency.

 

Tax-Free Savings Account

When you leave Canada, you may be able to maintain your account and allow it to continue to grow tax-free. However, you will not accumulate new contribution room while you remain a non-resident of Canada. Furthermore, your new country of residence will not likely recognize it as a tax-free account or a designated retirement account, meaning any interest, dividends, or capital gains occurring within the account could be subject to tax.

 

Employer-Sponsored Pension Plans

Like most other sources of income, pension income paid to non-residents is subject to 25% withholding, unless there is a tax treaty. Again, a section 217 election may be appropriate depending on your income and the tax charged in your new country of residence.

 

 

While personal finances are an important consideration, they are unlikely to be the only factor in deciding to retire abroad. Beyond taxation, cost of living, health care, and even personal safety are two other factors, in my opinion. The first is culture. How familiar and comfortable will you be in your new place of residence? While many seniors get quite adventurous about travelling during their early retirement years and are “raring to go” now that travel is opening up again (whether that is a wise public health move is another matter I will not get into), it is quite a leap from visiting a country on a guided tour versus living there permanently.

 

The second factor is family. While I have heard some retired-abroad seniors say that living abroad has brought their children and grandchildren to visit more frequently than ever before, for others that lack of immediate access to the grandkids is a deal breaker. Do not underestimate the value of proximity to kids.

 

 

This is the 156th blog post for Russ Writes, first published on 2022-07-18.

 

If you would like to discuss this or other posts, connect on Facebook,  Twitter, LinkedIn, or Instagram.

 

Click here to contact me for an appointment.

 

You may be interested in a half-hour no-cost, no-obligation financial planning conversation with me. Click here to sign up for a free session of FinPlan30.

 

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