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Leaving Canada? What about RRSPs?





I read a great article on Tim Cestnick's site today regarding what Canadians should do with their RRSPs when permanently leaving Canada for retirement.  That is, how to efficiently minimize the tax of withdrawing from RRSP's when one becomes a non resident of Canada.

The actually learned a lot from this article, and I thought I would share with you the highlights.

1. Leave the RRSP Intact.

  • A lump sum collapse of an RRSP account can result in the highest taxation possible in Canada.  Of course, this depends on your income for the year and the balance of your RRSP.
  • Instead, if you need to withdraw from your RRSP, it's best to wait until permanent residency is established in the new country.  Once residency is setup, CRA will only charge you a 25% withholding tax (as low as 15% in some countries).

2. Step up the Cost Base.

  • If you move to the states and withdraw from your RRSP, the US government will tax you, but will allow your cost base to be withdrawn tax free.  For example, if you purchased $50k worth of stock and it's now worth $150k, $50k can be withdrawn tax free.
  • To avoid this tax, step up your cost base BEFORE moving to the states.  In other words, sell your shares inside your RRSP and repurchase them.

3. Give up Residency Properly.

  • If CRA determines that you are still tied to Canada and residency not properly setup elsewhere, they will charge your RRSP withdrawals at full Canadian tax rates.  Check out Tim Cestnick's article on some tips on how to properly give up Canadian residency.

Photo credit: lyng883





16 Comments, Comment or Ping

  1. 1. Deborah

    CRA?

    Timely, I am concerned about all of the money our government has invested in the markets and exceptionally concerned that a regulation that kept them out of high risk stuff was removed in the past couple years. That’s $121 billion of our CPP funds.

    I think investing in Canada by paying down our debt was our best investment option. Maybe while interest rates are held artificially low it doesn’t look like it, and of course if you have lower debt there are always the total f—up politicians that compare you to close to insolvent countries that the insolvency is hidden by the artificially low rates. These idiots argue the debt can be increased so they can buy votes from dumb tax payers who figure it is ok to mortgage not only their children’s future, but their grand children’s future, for their selfish wants today.

    As much as I did not like the high taxes we paid getting our debt under control in the 80s and 90s, and even into the 2000s, it was our only hope for future generations. I know that relative to wealth, I have paid an enormously disgracefully high level of taxes compared to people older than me, and for each year older, the difference in relative tax burden increases. If you weren’t an adult in the 70s and up to when Mulroney was elected you simply did not get the mortgage the next generation’s future tax breaks.

    The debt is still sufficiently high that Canada is still at huge risk to seeing our entire federal budget fall apart should the inability to continue to set artificially low rates be lost. Currently the US is finding it that despite dropping rates 2.25% federally, rates to consumers and business have not declined and they did not meet their borrowing needs last month. For the US the endgame on this stupidity is up. They are allowing the banks to borrow at 3.5%, yet they are issuing 30-year treasuries at 4.375%, with taxpayers on the hook for the difference, yet they are not selling as many of those 30-year bonds as they intended so they will have to pay more.

    And Canada has the vote buying tax cutting idiots in office again and these types of choices are what leads to the eventual lack of choices the US is currently facing. The minute we see a recession we are in a deficit position with the tax cuts that have been put through. Applying only $3 billion to the deficit is equivalent to paying half the minimum payment on your visa bill, and unfortunately, this stupidity will win votes. In 84 tax revenue was $39 billion less than program spending and that was without including debt servicing costs. Adjust that to inflation, and the current plan is to pay back a single year of deficit over about 20 years. We had a lot of years of deficit. Our choices are still grossly limited because of debt.

    The depth of the burden of paying for the excesses of the 70s came during my trying to get established years and I have no doubt that it is the number one reason for Canada’s reduced birth rate. I know more people who never got around to having kids for simply trying to get financially established, like we were taught it was wise to do, and then simply never had children either because they had problems conceiving in their late 30s, or when they looked at it again at that age they changed their mind.

    One thing that I have decided, if our government messes us up so all that sacrifice and excessive burden was to just be lost on the markets, and/or to follow the same moron path that required such huge sacrifice to pay for in the first place, I am not sticking around to pay an excessive tax burden a second time.

  2. Deborah, I guess that was something that you had to get off your chest? :)

  3. Deborah, I think that what you said about Canada above, could be said for almost any other developed industrial country in the World..
    As for leaving Canada, I have recently been thinking about “coming to” Canada. Seems to me that US does not encourage immigration, which has led to its huge success over the decades, fueled by the diversity of its population. Canada ,on the other hand though makes it easy to become a canadian and encourages immigration of young, bright and skillful people. I don’t know though how my US B.S.(that’s bachelors of science) accounting degree would be marketable in canada..
    I think that Canada is a good investment for the next 50 years. I might have to start looking at canadian dividend aristocrats now :-)

  4. 4. Warren

    These comments certainly take this post to another discussion entirely. Deborah, I agree that fiscal responsibility is important, but I don’t think super-aggressive debt paying is the way to go. As a younger person under 10 years into my career, I’m feeling the pinch of higher tax rates as my income increases. I’m happy to see the government not wasting as much money as in the past, but I am opposed to them shoring up 50 years of debt during MY working generation, at a detriment to government spending provided to me. Lets just keep on our gradual debt-paying pace and not lose track of the bigger picture.

  5. My wife and I are just starting to investigate the possibility of retiring in Costa Rica. We’ve spent a significant amount of time there and love the lifestyle (and the price!) However, we would like to become more educated on exactly how to manage our Canadian based investments in the event we were to make this move someday. This article is an excellent primer. Thanks so much for the link.

  6. 6. Sarlock

    Keep in mind that the value of the debt decreases year over year by the impact of inflation. If we continue to just make the interest payments on our national debt and not allow the principle to grow at all, in another 20 years, $500 billion will seem like a drop in the bucket compared to our GDP.

    At the height of the debt “crisis”, our national debt was over 60% of our GDP. Now, having paid some $50 billion of it off, our debt is less than 40% of our GDP, which is where it was in the early 80′s.

    Having debt is not a bad thing. You borrow today the money you need for infrastructure and let the prosperity it brings you tomorrow pay for it. Two hypothetical countries that start off at the same point and one borrows and one operates off of cash flow… the one that borrows (correctly) will be much farther ahead. The same works for companies… the one that invests the millions of dollars in a new plant and equipment will likely destroy the company that waits until they have the cash flow to purchase them. This works on a personal level too: Borrowing to buy a house is one of the best debts you’ll ever have. Wait until you have the cash in hand to buy one outright and you may be waiting until you’re 60 years old.

    The problem we ran in to was that governments in the mid 80′s and early 90′s were borrowing heavily to fund operational losses, not for funding infrastructure. This ballooned our debt and didn’t give future generations any real benefit other than few extra borrowed dollars in our pockets during this time.

    Fortunately, we righted things before they got really bad and now we are sitting in a good situation once again. While times are good, we should continue to make modest debt repayments and when times go sour, we can just make the interest payments and keep our cash flow for more important things.

    RE: The subject of the original post: If you are considering leaving Canada (as a resident) after retirement, plan your investments carefully to take this in to account. Getting stung by unanticipated taxes can significantly alter your retirement plans.

  7. 7. Gates VP

    Actually happy to hear Deborah get that off her chest. I just wish 10% of the Canadian population actually understood even half of what she was talking about… sigh… I should write a book :(

    Either way, Dividendgrowth, what Deborah doesn’t mention is that Canada has a good (non-military) method of digging itself out of debt. Canada actually has resources it can export to help make up a trade deficit. The US doesn’t even really have that.

    Plus, with “imminent climate change”, Canada actually stands to benefit. Much of Canada (from the Alberta foothills to central Ontario) is effectively desolate, we have a lot of space. Though who knows if we’ll have enough space and resources.

  8. 8. Causalien

    Hi,

    I read a separate article on that site: http://www.timcestnick.com/articles/admin/PDFArticles/20080131_Deferring_RRSP_deductions_could_pay_off.pdf?PHPSESSID=2edb156f51cd62880717bc4a8e55fea5

    About why you should defer the RRSP contribution if it lowers your tax bracket. I am a bit confused here as I thought that if you contribute enough that it lowers your marginal tax rate, doesn’t that mean that you actually get more tax credit back because the calculation for how much you should be taxed is redone with the lower tax rate in mind? So less of your in come is taxed giving to more return. What do you think?

  9. I wrote an article a few years back for Escape Artist about how to lose your tax residency. You can find it at

    http://www.escapeartist.com/efam/65/Living_In_Bermuda.html

  10. When you indicate your tax bracket, it’s on the last dollars earned. So if you are in the 40% tax bracket, you will get 40% of your RRSP contribution back providing that you stay in that bracket. If you make a large enough contribution that you drop a tax bracket, then a portion of the contribution will get a lower tax return b/c of the lower tax rate.

    For example, if you made $55k in the year, and your province charges 40% for >$50k and 30% for <$50k
    If you made a $5k rrsp contribution, you would receive a 40% tax refund on your contribution. If you made a $10k contribution, you would get a $5k x 40% + $5k x 30%.

    Hope this helps.

  11. 11. Causalien

    Thanks FT. That explains a lot.
    I always thought that RRSP contribution serves to re adjust my recorded income. SO if I contribute 10k, that means that the government will have to tax me only 30% on my (income – RRSP contribution). So what you are saying is that I will still get my full income taxed at 40%, however, the return from the contribution will be reduced based on your formula?

  12. Caus, you are right, it does reduce your recorded income. The best way to get a clear picture is to use a RRSP calculator, like the one on taxtips.ca, to see what would happen if you were to contribute x amount.

  13. 13. Manny

    Hi ,
    This discussion is very timely. I have moved to US last month. I have my RRSP account with Questrade( since last August). What are the options open to me if I want to continue holding the stocks in the RRSP account in Canada and still need to trade ? Is it at all allowed?
    I have not done any trading after I left Canada. But with the markets gyrating, may need to rebalancing once in a while. Any suggestions/advice would be very welcome.

    Manny

  14. 14. Giorgio

    Is any one know how much cost for living in Calgary Canada?
    Please I need some information regarding that.
    Cost for apartment, Income Tax, Insurant, Transportation, etc.
    Thank you.

  15. 15. Saama

    Hello,
    I am a dual citezen (British and Canadian passports) and am planning on moving to the UK late next year.

    I’m wonding if can I keep my RRSP and tax free savings account? Can I complete my contribution/top up for 2009 even after i’ve left Canada and am working in England? And if i needed to with draw from my RRSP while still living in the UK, could I do so without paying UK taxes as well as witholding tax to the Canadian Government?

    Any insight you may have would be greatly appreciated! Thank you!

  16. 16. Gates VP

    Hey @Saama, unless you get lucky on these boards, you will likely need to talk to an accountant. In fact, talk to an accountant even if you do get a reply.

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