So you’re a Canadian retiring abroad. The dream of many Canadians, especially given the harsh winters many of us endure. However, there are some pitfalls to doing this, and not planning accordingly can have significant consequences.
Probably the biggest thing that anyone should do before retiring abroad is figuring out their tax residency. This isn’t to be confused with physical residency in Canada — you can be physically not present in Canada, but still be liable to pay taxes in Canada — something that catches many people who think just not living here more than six months a year removes that liability off-guard!
Primary ties to Canada automatically deem you resident for tax purposes and include, per the CRA:
- A home in Canada for your exclusive use (i.e. not rented at arm’s length to a 3rd party)
- A spouse in Canada
- Dependants in Canada
Then there are secondary ties such as:
- personal property in Canada, such as a car or furniture
- social ties in Canada, such as memberships in Canadian recreational or religious organizations
- economic ties in Canada, such as Canadian bank accounts or credit cards
- a Canadian driver’s licence
- a Canadian passport
- health insurance with a Canadian province or territory
Secondary ties are evaluated by the CRA collectively — no one secondary tie is enough to deem you a tax resident, but several might tip you over the scale. A CRA form called an NR74 can be completed for the CRA to provide an opinion on whether your primary or secondary ties to Canada deem you a resident for tax purposes and help alleviate any ambiguity. Alternatively, a good cross-border accountant can give you a professional opinion on where your particular case falls.
Withholding Taxes for Canadian Source Income
You may still owe the Receiver General money even if you’re not a tax resident. If you earn income in Canada such as pension or benefits payments (CPP, for example) or investment income it is subject to something called withholding tax which is applied when the payment is made to you. This becomes your final tax obligation to Canada (i.e. you don’t additionally have to file a tax return).
Withholding tax rates differ by type of income and the country that you’ve become a resident of (based on whether or not Canada has a tax treaty with that country, otherwise, the default is 25%).
Again, many people assume that when you live abroad there are no taxes to be paid to Canada — which is thoroughly wrong in the above scenario.
Canada has set up 84 tax treaties, at the time of writing, with other countries. One of the major goals of a tax treaty is to avoid someone being taxed first in their country of origin and then again in their destination country. This might happen if you continue to have ties with Canada or have Canadian source income.
Therefore, it pays to research the tax implications of residing in a foreign country. Let’s tax Mexico as an example. Canada and Mexico have a tax treaty that prevents double taxation. If you pay taxes on income in Canada, they’re generally at a higher rate than Mexico, and that negates any further taxation in Mexico. But in the circumstance they were higher in Mexico, you’d first pay taxes in Canada and then the balance of taxes in Mexico rather than being taxed all over again.
Some countries, such as Costa Rica, have a territorial taxation system. They only tax on income generated locally and not abroad, so your Canadian income would be exempt from taxation in Costa Rica if you have the appropriate residency.
Another pitfall for Canadians is foreign exchange rate fluctuations. If we were to take the Mexican peso as an example, the Canadian dollar has swung wildly from a low of about 13 pesos per dollar to a high of 17 pesos per dollar in the last decade. That’s a 24% variance and if you’ve built your new life without that sort of wiggle room in the budget and are on a fixed income, you could find yourself going hungry that month.
Day to Day Finances
Most Canadian credit cards incur foreign exchange fees, with the notable exceptions being cards like XXX, making them less than desirable for day-to-day use.
Moving money from your Canadian accounts to a foreign account is a lot simpler than it used to be as most of the large banks now have self-service international transfer services (for example, TD Global Transfer). Beware of how expensive these services actually are: they advertise a service fee of only a few dollars, but the exchange rates are so poor that they are actually significantly more expensive than dedicated services such as Wise or XE.
Finally, don’t forget that being out of the country may jeopardize your provincial or territorial healthcare. For example, if you’re outside of Ontario for more than seven months in a calendar year, you will lose your OHIP eligibility regardless of whether or not you’re paying taxes in Ontario.
But What If You Just Want to be a Snowbird and Not a Canadian Reitiring Abroad?
You may just decide to go away part of the year to avoid the Canadian winter. If you maintain a residence for your exclusive use in Canada (i.e. you don’t rent it out to a third party whilst gone), you’re generally fine. Or if you leave for less than 183-days, that’s also fine.
Consult with a certified accountant or tax lawyer before planning a move outside of Canada to address the specifics of your individual circumstances before commiting what could be a costly mistake.