Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Hi CB,
My wife and I would love if you would take the time to offer us advice on our plan. We are a Canadian couple, ages 32, and 28, with no children, currently living in British Columbia.
We have 600,000 in investments, no debt, and no other assets. Approximately 150,000 in our RRSPs, 100,000 in TFSAs and 350,000 in our joint taxable account. We are 100% in equity ETFs, specifically 80% in XAW (MSCI All-Country World Index Ex- Canada) and 20% in VCN (Canada Total stock market), which we have in the taxable account since Canadian dividends are taxed favourably. We have no other income.
We intend to live a very low cost lifestyle by continuously traveling abroad, staying in low cost countries and doing work exchanges for free food and shelter, such as Workaway.info or WWOOF. By not staying too long in any one country and not working for money, we will remain tax residents of Canada, which we think is favourable with low income.
Our withdrawal strategy is as follows:
We will have a mix between a variable withdrawal strategy at 4%, and a constant withdrawal strategy at 2%. How it will work is we will become comfortable living at 2% of our initial portfolio value; all of our essential expenses will be covered by this. At 600,000 this would be 12,000. Once we are comfortable with this, we can apply the variable withdrawal strategy at 4%, which applies a 4% spending rate to the portfolio value each year, but anything beyond 12,000 will be entirely discretionary expenses and we likely won't use it all. These might seem like very conservative spending rates but we want our money to grow so we have more when we are older or have children.
As for taxes, we intend to stay under the Basic Personal Amount each year, so as of 2019 we would have roughly 24,000 combined, tax-free. Since we estimate we will only require 12,000, our strategy is to calculate our capital gains and dividends every December, subtract the taxable income from the Basic Personal Amount, and then withdraw the rest of the Basic Personal Amount from the RRSP, keeping our average tax rate close to 0%. The money that we don't intend to spend will be reinvested into the taxable account. We will eventually settle in another country. We are thinking in approximately 10 years, so it would be nice to withdraw from the RRSP at 0%, then to pay a flat rate of 25% as a non-existent. On top of this, we imagine that our expenses will increase in the future. Another argument for withdrawing from the RRSP now. Am I missing something?
Another tax strategy we have concerning the Basic Personal Amount is to do capital gains harvesting. Lets say we have successfully depleted our RRSPs for simplicity. In December we will calculate our taxable capital gains and dividends. If the Basic Personal Amount will encompass more taxable income, we will calculate what capital gains we should have and simply sell and buy them again. This will help to minimize the deemed disposition when we eventually expatriate.
Also.. (sorry its getting long) what about provincial residency? I have found certain virtual mailbox services that will collect your mail while your away and look like a home address, for example anytimemailbox.com. Will this be sufficient? I understand that provincial residency is based on ties. So I will tell you our ties. My wife is originally from Poland so she doesn't have any family here. I have a mother in Ontario and don't have much other family. We currently live in BC, and I have a driver's license here. We use an online bank (manicure) and an online brokerage. Other than that we will be selling everything and living out of our backpacks so we don't have many ties. Could we simply choose any province we want??? Would we need to at least get a driver's license in that province as well as the virtual mailbox? I was thinking that Alberta or Nunavut would be the best options for taxes for our low-income strategy. Any thoughts? We really don't want to be in trouble for tax fraud when we really won't be living in Canada and its not really our fault that Canada need a us to establish residency in another country before it will stop taxing us and we need to have a Canadian address in a certain province to do that!
One more question. Earlier I explained our strategy to do work exchanges instead of paid work but I know that many digital nomads do paid work while traveling. What are the tax risks of this? I don't want us to accidentally trigger residency in one of these countries and complicate our tax situation. Am I right to think this way?
Thanks a lot! I hope you will have the time an patience to read all that.
Matt and Sylwia