Author Topic: RRSP when not planning to retire in Canada + options when TFSA maxed out?  (Read 2139 times)

moustacheverte

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Hi,

I am going to max out my TFSA very soon but haven't opened any RRSP yet. Since I'm not going to retire in Canada, does it make sense to contribute to a RRSP at all? I will save the taxes now but won't I have to pay more taxes when I use the RRSP while not a Canadian resident anymore?

Once both my registered accounts are maxed out, where should I put my money? Should I use non-registered accounts and keep buying TD e-series funds or is there a better option?

Thanks!

RichMoose

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Tax rates on RRSP withdrawals for non-residents depend on tax treaties and such so they vary depending on the country of residency. Contributing to an RRSP can still be very beneficial if you currently have a high income.

For most countries, the rate on RRSP withdrawals is 15 - 25%. http://www.cra-arc.gc.ca/E/pub/tp/ic76-12r6/ic76-12r6-e.pdf

moustacheverte

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Thanks. I'm a bit confused though. Are these rates on top of the tax you'll have to pay in that country for income or does this 15-25% tax is the only tax you'll pay on the amounts?

Retire-Canada

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Thanks. I'm a bit confused though. Are these rates on top of the tax you'll have to pay in that country for income or does this 15-25% tax is the only tax you'll pay on the amounts?

It will depend on the country you are in.

If I'm a Canadian in Canada and I get $20K in income from the US that get's added to my income for CDN tax purposes and I pay the CDN rates on it, but if I have paid tax on that money to the US Gov't I can claim that foreign tax as a credit on my CDN tax return which will reduce my taxes payable by the same amount.

-- Vik

Cathy

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As OP points out, there are two separate parts to this question. First, what rate of tax does Canada charge on a distribution from an RRSP paid to a nonresident of Canada? Second, will your new country of residence charge any additional tax on the RRSP distribution?

As for the first question, the Canadian tax rate on an RRSP distribution to a nonresident of Canada will be the lesser of:
  • The 25% flat rate imposed by s 212(1)(l) of the Income Tax Act, RSC 1985, c 1; or
  • The graduated tax rate determined under s 217 of the Income Tax Act; or
  • The rate of tax provided under a tax convention (treaty) between Canada and your new country of residence.

Again, the tax Canada will charge you is whichever of those three is the least. So the first thing to notice is that although the rate cannot go above a 25% flat rate, it can be less than that, perhaps significantly less.

For an MMM style early retirement, option (2) will probably determine the lowest tax rate of the three. Section 217 of the Income Tax Act provides that for certain kinds of income paid to a nonresident (and RRSP distributions are one of them), the nonresident can elect to file a tax return as if the nonresident were a resident of Canada, and calculate the rate of tax as if the nonresident were a resident of Canada, subject to some conditions.

The major condition is that you cannot take the personal credit authorised by s 118(1) or most other credits unless the RRSP distributions for the year together with other Canadian-source income represent "all or substantially all" of your worldwide income for the year (considering income from all sources, both within and outside of Canada). In an MMM-style early retirement, this could quite possibly be the case, if you are living on RRSP distributions and other Canadian-source income. Successfully meeting this condition will mean that if your RRSP distribution is sufficiently small, the rate of tax charged by Canada will be very low or zero.

The other potentially relevant consideration for the s 217 computation is that s 120 imposes a 48% surtax on income that is income other than earned in a province. What I mean by "surtax" is that if your tax rate was 10% before, then your tax rate becomes 10%*148% = 14.8%. Section 210(4) says that income earned in a province has the meaning given in the regulations. The relevant definition is found in s 2602 of the Income Tax Regulations, CRC, c 945, and it does not include RRSP distributions. Therefore, this 48% surtax does apply to RRSP distributions to a nonresident who is electing to be taxed under s 217. However, if your tax rate was 0 without considering this surtax, then it remains 0; and even after considering this surtax, s 217 probably still provides the lowest rate of tax for an MMM-style retirement.

As I mentioned above, if a tax convention specifies a lower rate of tax, that is also open to you. The first thing to understand is that aside from approximately 5 countries, the vast majority of tax conventions do not explicitly offer a favourable rate for RRSP distributions per se. Instead, they only offer a favourable rate (15% flat rate in almost all cases) on "periodic pension payments". According to s 5 of the Income Tax Conventions Interpretation Act, RSC 1985, c I-4, a periodic pension payment does not include a distribution from an "unmatured RRSP", but instead only includes certain distribution from a matured RRSP (otherwise known as an RRIF or certain annuities). In order for a distribution from an RRIF to be a periodic pension payment (and thus be eligible for the 15% flat rate in most tax conventions), the yearly distribution must be less than or equal to the greater of (i) twice the required minimum distribution of the RRIF, or (ii) 10% of the assets held in connection with the RRIF. Suboption (ii) is actually more than adequate for an MMM-style retirement, so you can probably qualify for the tax convention rate if you want to (assuming that the country where you reside has a tax convention with Canada that contains these terms; not all do).

As I mentioned, for a low income MMM-style retirement, the s 217 computation is probably the lowest rate of tax of the three methods, even lower than tax conventions (treaties), assuming that "all or substantially all" of your worldwide income is Canadian-source income, which again is a reasonable assumption for an MMM-style retirement where you accumulated your assets in Canada and then moved abroad.


With that said, we move on to the second part of the question, which is how your new country of residence will tax the RRSP distribution. As Vikb says, this depends on the country. However, for any country that has a tax convention with Canada, these all contain an article that provides that your country of residence will provide a tax credit for any taxes paid to Canada on Canadian-source income, subject to certain restrictions. Although there are various exotic exceptions(*), the general effect of these articles is that the actual total tax rate you end up paying will be the greater of (i) the rate of tax charged by Canada, and (ii) the rate of tax charged by your country of residence. For example, if Canada charges you 5% and your new country charges you 10%, you would pay 5% to Canada and 5% to the new country, for a total of 10%. By contrast, if Canada charges you 15% and your new country would have charged you 10%, then you pay 15% to Canada and zero to your new country.

As always, the law can change between now and when you retire, so you always need to be prepared to hedge your bets when you are making these kind of major life plans.


(*) One such exotic exception is that California does not consider itself bound by the tax convention between the USA and Canada, so the tax you pay to California will be on top of what you paid to Canada, with no credit for what you paid to Canada.
« Last Edit: March 31, 2015, 09:30:15 PM by Cathy »

moustacheverte

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As OP points out, there are two separate parts to this question. First, what rate of tax does Canada charge on a distribution from an RRSP paid to a nonresident of Canada? Second, will your new country of residence charge any additional tax on the RRSP distribution?

As for the first question, the Canadian tax rate on an RRSP distribution to a nonresident of Canada will be the lesser of:
  • The 25% flat rate imposed by s 212(1)(l) of the Income Tax Act, RSC 1985, c 1; or
  • The graduated tax rate determined under s 217 of the Income Tax Act; or
  • The rate of tax provided under a tax convention (treaty) between Canada and your new country of residence.

Again, the tax Canada will charge you is whichever of those three is the least. So the first thing to notice is that although the rate cannot go above a 25% flat rate, it can be less than that, perhaps significantly less.

For an MMM style early retirement, option (2) will probably determine the lowest tax rate of the three. Section 217 of the Income Tax Act provides that for certain kinds of income paid to a nonresident (and RRSP distributions are one of them), the nonresident can elect to file a tax return as if the nonresident were a resident of Canada, and calculate the rate of tax as if the nonresident were a resident of Canada, subject to some conditions.

The major condition is that you cannot take the personal credit authorised by s 118(1) or most other credits unless the RRSP distributions for the year together with other Canadian-source income represent "all or substantially all" of your worldwide income for the year (considering income from all sources, both within and outside of Canada). In an MMM-style early retirement, this could quite possibly be the case, if you are living on RRSP distributions and other Canadian-source income. Successfully meeting this condition will mean that if your RRSP distribution is sufficiently small, the rate of tax charged by Canada will be very low or zero.

The other potentially relevant consideration for the s 217 computation is that s 120 imposes a 48% surtax on income that is income other than earned in a province. What I mean by "surtax" is that if your tax rate was 10% before, then your tax rate becomes 10%*148% = 14.8%. Section 210(4) says that income earned in a province has the meaning given in the regulations. The relevant definition is found in s 2602 of the Income Tax Regulations, CRC, c 945, and it does not include RRSP distributions. Therefore, this 48% surtax does apply to RRSP distributions to a nonresident who is electing to be taxed under s 217. However, if your tax rate was 0 without considering this surtax, then it remains 0; and even after considering this surtax, s 217 probably still provides the lowest rate of tax for an MMM-style retirement.

As I mentioned above, if a tax convention specifies a lower rate of tax, that is also open to you. The first thing to understand is that aside from approximately 5 countries, the vast majority of tax conventions do not explicitly offer a favourable rate for RRSP distributions per se. Instead, they only offer a favourable rate (15% flat rate in almost all cases) on "periodic pension payments". According to s 5 of the Income Tax Conventions Interpretation Act, RSC 1985, c I-4, a periodic pension payment does not include a distribution from an "unmatured RRSP", but instead only includes certain distribution from a matured RRSP (otherwise known as an RRIF or certain annuities). In order for a distribution from an RRIF to be a periodic pension payment (and thus be eligible for the 15% flat rate in most tax conventions), the yearly distribution must be less than or equal to the greater of (i) twice the required minimum distribution of the RRIF, or (ii) 10% of the assets held in connection with the RRIF. Suboption (ii) is actually more than adequate for an MMM-style retirement, so you can probably qualify for the tax convention rate if you want to (assuming that the country where you reside has a tax convention with Canada that contains these terms; not all do).

As I mentioned, for a low income MMM-style retirement, the s 217 computation is probably the lowest rate of tax of the three methods, even lower than tax conventions (treaties), assuming that "all or substantially all" of your worldwide income is Canadian-source income, which again is a reasonable assumption for an MMM-style retirement where you accumulated your assets in Canada and then moved abroad.


With that said, we move on to the second part of the question, which is how your new country of residence will tax the RRSP distribution. As Vikb says, this depends on the country. However, for any country that has a tax convention with Canada, these all contain an article that provides that your country of residence will provide a tax credit for any taxes paid to Canada on Canadian-source income, subject to certain restrictions. Although there are various exotic exceptions(*), the general effect of these articles is that the actual total tax rate you end up paying will be the greater of (i) the rate of tax charged by Canada, and (ii) the rate of tax charged by your country of residence. For example, if Canada charges you 5% and your new country charges you 10%, you would pay 5% to Canada and 5% to the new country, for a total of 10%. By contrast, if Canada charges you 15% and your new country would have charged you 10%, then you pay 15% to Canada and zero to your new country.

As always, the law can change between now and when you retire, so you always need to be prepared to hedge your bets when you are making these kind of major life plans.


(*) One such exotic exception is that California does not consider itself bound by the tax convention between the USA and Canada, so the tax you pay to California will be on top of what you paid to Canada, with no credit for what you paid to Canada.

Oh wow, thanks for the very detailed answer!