Question: Hi, I have my non-registered investments at ModernAdvisor and really enjoy the platform and the service. However, I haven’t opened an RRSP or TFSA yet. The reason is that I’m not sure if I will stay in Canada for the remainder of my career. My question is, what would happen to my RRSP and TFSA if I were to end up leaving Canada in a few years and become a non-resident*?
Answer: Great question. With an estimated 500,000 Canadians in California’s Silicon Valley, and millions of Canadians living elsewhere in the world, this is a very common scenario.
Before we get started, let’s clarify what this article is and what it isn’t. The info presented here is meant to be educational in nature, and is not meant to be interpreted as specific advice. If you’re planning to leave Canada and move elsewhere, please be sure to consult with an expert in cross-border tax planning who can provide you with advice and recommendations specific to your unique situation and circumstances.
Leaving Canada: what happens to your RRSP?
Let’s take a look at what happens to your RRSP upon leaving Canada and becoming a non-resident. Like most everything else in finance, the answer is: “it depends.”
First and foremost, it depends on where you move. Many countries have tax treaties with Canada, and the US is certainly one of those countries. Since this is where a vast number of Canadians move, we’ll explore this topic primarily in the context of moving to the US.
The US recognizes the tax deferred nature of the RRSP (or RRIF). So if you move to the US, you can just leave your RRSP in Canada. In this case, you won’t have Canadian income anymore, so making further RRSP contributions is not possible. But keeping your RRSP is allowed.
Note that many banks will not let non-resident clients maintain their RRSPs. This is an internal decision made by the institution. ModernAdvisor does allow existing clients who become non-residents to maintain their RRSPs. So if you have an RRSP account with us and you become a non-resident, you don’t really have to do anything to your RRSP. If you live in the US and maintain your Canadian RRSP, all income earned within the RRSP remains tax sheltered both in Canada and the US – no tax consequences.
What about RRSP withdrawals? I thought you’d never ask. Indeed, the interesting part comes when you decide to make withdrawals from your RRSP. The general rule is that when a non-resident makes a withdrawal from the RRSP, the Canadian government has a withholding tax of 25% at source. However, the 25% figure is based on one time or lump sum withdrawals. If you begin taking out regular periodic withdrawals (for example, monthly), then the withholding tax is reduced to 15%.
Please note that RRSP withdrawals also form part of your worldwide income. So again, if you’re in the US, you have to declare this income to the IRS on your US tax return. However, you will also be able to claim a foreign tax credit on the amount withheld in Canada – there is no double taxation on the withdrawal.
In fact, in many US states, personal tax rates are significantly lower than here in Canada, so the net effect for some people is actually beneficial. Depending on the state, if you move to the US, and then start taking periodic withdrawals from your Canadian RRSP, you may end up accessing the capital for even less than you would if you had remained in Canada!
What about the TFSA?
The rules regarding TFSA accounts are simpler. First of all, let’s recognize that you could simply withdraw all your money from your TFSA just before leaving Canada, and with no tax consequence whatsoever.
But what if you want to keep your TFSA intact? According to the CRA, if you become a non-resident, you will be allowed to keep your TFSA. Furthermore, you will not be taxed in Canada on any earnings in the account, nor will you be taxed on any TFSA withdrawals.
The catch is, although as a non-resident you will not be taxed in Canada, you may very well be taxed by your new country of residence. Again, this is country-specific. For example, TFSA income would have to be reported on a US tax return as the tax treaty between Canada and the US doesn’t currently recognize TFSAs as tax sheltered accounts.
As for contributions, note that you will not accrue any additional TFSA contribution room for any year in which you are a non-resident of Canada. Further, any withdrawals made while you were a non-resident will be added back to your TFSA contribution room in the following year, but you can’t actually re-contribute until you re-establish your Canadian residency status.
So, what if you try to make a contribution while you are non-resident? Just like an over-contribution to your RRSP, this can be an expensive mistake. If you do make a contribution to your TFSA while you are a non-resident, you will be subject to a 1% tax for each month the contribution stays in the account. Tip: Don’t do that!
This is one area where you definitely want to consult with an expert (before leaving Canada) – a professional who is experienced in cross-border tax planning, and in particular for the country to which you are planning to relocate.
In the meantime, open your RRSP and TFSA accounts. Potentially leaving Canada at some point in the future is not a valid reason to dismiss the TFSA and RRSP. These investment vehicles provide great tax shelters, and an eventual move elsewhere should not deter you from taking advantage of the immediate tax advantages available today.
Interested in opening your RRSP or TFSA account with ModernAdvisor? Sign up online at modernadvisor.ca and get started today.
Have a question you’d like answered in a future Ask ModernAdvisor post? Just send us an email or start a live chat with one of our team members.
*You must be an existing client of ModernAdvisor before you become a non-resident. We are hoping to offer non-resident accounts to new clients in 2020.