Retiring Abroad: Tax Implications of Foreign Residency

Like many Canadians, you may have dreamed of leaving the cold Canadian climate to retire permanently in another country. There are many beautiful retirement destinations around the world, and many of those countries are very welcoming to Canadian retirees. However, there are several factors to consider before making this life altering decision.

Generally speaking, it is preferable to sever as many ties to Canada as possible, and establish ties to your new home country, to avoid being deemed a resident of Canada for tax purposes. One of the first decisions to be made is whether to sell your home in Canada, or to keep it and rent it out long term. Selling your home outright gives you the advantage of distancing yourself from Canada from a tax perspective, as well as freeing up that capital to purchase a home in your new country. However, if you feel that you might be moving back to Canada in a few years, you may wish to keep your home so that you do not miss out on any potential appreciation while you are away.

When becoming a non-resident of Canada, one of the first issues to consider is taxation, and it is important to consult with an accountant that specializes in this field. In most cases, any assets that you own outside of a tax-sheltered account (RRSP, TFSA etc.) would be deemed to be sold, and therefore any capital gains would be reportable as of the date that you become a non-resident. If you have chosen to keep your home and rent it out, normally this would be a deemed disposition; however, you may make a claim to defer the tax for the time that you are living outside of Canada (although in some cases you may be required to provide the CRA with a security deposit).

Investment accounts such as RRSPs, RRIFs, TFSAs and LIRAs (or Locked-In RRSPs) can be left behind in Canada. The value of these accounts is not subject to the deemed disposition rules upon leaving Canada, so no capital gains are triggered. Also, while you are living abroad, in most cases these accounts retain their tax-sheltered nature (although in some cases, TFSAs are not recognized by other countries as being a tax-sheltered account).

You are still able to receive retirement income while you are living outside of Canada. You can have your Canada Pension Plan and Old Age Security payments directed to a bank account abroad. You can also have your RRIF payments similarly directed. For a non-resident, the standard withholding tax on these retirement payments is 25%; however, several countries have a tax treaty with Canada which allows for a lower withholding tax. Before leaving, check with Canadian banks who have subsidiaries in your destination country, as you may be able to set up your accounts there ahead of time.

If you are one of the many Canadians who would love to live abroad in retirement, a bit of well-directed planning in advance could be the key to making your dreams a reality.