If you have been living in Canada your whole life, chances are you might be tired of those long winters. Believe it or not, this is the case of many retirees who are now moving abroad to enjoy the tropical weather in a new country. Apart from getting endless sunny days, Canadian retirees are also emigrating to find a new home for a more affordable price. If you are thinking about leaving Canada, you should understand how departure tax affects your RRSP.
Moving to a new country is not a decision you should take lightly, because there are many factors to consider. Think about what will happen with all your assets? How can you give up the resident status? Would you have to pay any taxes upon departure? And what will happen with your registered retirement savings account (RRSP)?
The key concept you need to understand in this regard is the relation between your RRSP and departure tax. That’s why we will first explain what an RRSP is and how it works. Later we will tell you everything about departure tax and why it is related to your RRSP.
What is an RRSP in Canada?
An RRSP is a tax-advantaged account in which the government allows a tax break. This is a way in which Canada encourages all its residents to save money for their retirement. Because this account offers incredible benefits, all Canadians take advantage of it. If you have a stable job in the country, you can open an RRSP at any time. The best part is that you decide how much you want to contribute.
The way it works is that all the money you contribute to your RRSP from the moment you create the account will be exempt from taxes. You will only have to pay taxes when you withdraw the money, which could take from 40 to 50 years.
Some people decide to cash out their RRSP early to use the money for major purchases. However, that would be a mistake because you will lose all the benefits. Instead, you can take out a home equity loan. To learn more about your RRSP and the top home equity loans, visit Alpine Credits.
Then, you might be wondering, what happens with my RRSP if I decide to leave Canada? You will find the answer to this question later. First, we are going to explain what a departure tax is.
Departure Tax: When would you have to pay it
The reason why you need to think twice before moving to another country is that when you leave Canada you are deemed to dispose of your non-registered assets. According to the disposition rules, you will have to report any gain or loss of the asset. The tax liability that results from this process is known as departure tax. You will have to pay a departure tax whenever you give up your Canadian residence for tax purposes and decide to leave the country permanently.
If you don’t know which of your assets apply for departure tax, here is a list that will help you out.
Assets applicable for departure tax
- Any real estate property that you own outside Canada.
- High-value personal property, such as pieces of art, jewelry, coins collections, or rare manuscripts.
- Company shares of enterprises inside or outside the country.
- Any type of portfolio investments.
- Mutual funds could either be located in Canada or abroad.
This means that the elements excluded from the deemed dispositions rule include Canadian real estate, assets in registered plans or tax savings accounts. Also, if you are a short-term resident, you won’t have to pay a departure tax. To clarify, a short-term resident is one that in a ten-year period has lived in Canada for five years or less.
How will departure tax affect your RRSP?
Your RRSP makes part of your registered plans, which are excluded from the deemed disposition rule applicable when you leave Canada. This means there won’t be any tax consequences for your RRSP when you move abroad. You should check if your new country of residents has any rules regarding this type of accounts.
Even though departure tax won’t apply to your RRSP, there are a couple of things you should do before leaving.
- Leave the RRSP account intact
The reason why you should do this is that if you withdraw the money early you lose the benefits. This means you will have a tax hit since the amount you take out will be taxable. Instead, what you can do is leave the RRSP account intact until you become a resident abroad.
For instance, if you move to the United States, you will only have to pay the Canadian Revenue Agency 25 percent for withholding tax on any withdrawal you make. Depending on your situation, that percentage could be reduced to 15. To make sure this will happen, before moving, check if Canada has a tax treaty with the country you move to.
- Increase the cost base of your RRSP
One thing you should keep in mind, is that depending on your new country of residence, all your withdrawals will have double taxation. But, some countries allow you to withdraw free of tax the cost base of any RRSP investments. If you want to take advantage of this, you will have to increase this amount before you leave Canada. That way, you will be able to take out larger amounts of money without paying tax in your new residence outside Canada.
- Giving up your residence (without skipping steps)
If you are going to leave Canada, the first thing you need to do is give up your residence properly. To become a non-resident of Canada, you will need to cut off all the ties of residency in the country. This means you will have to either sell or rent any real estate property and establish your home in a place abroad. Also, if you live with your spouse and children, they will have to leave the country with you. They could also follow you after some time, but there is a limit.