What Happens to Your RRSP After Leaving Canada?
Let’s take the example of an individual, that had a few unregistered investments in the past, but he has not yet set up an RRSP or TFSA account. This is due to the uncertainty surrounding his stay in Canada for the remaining years of his career.
His main concern now, is to know what will happen to his RRSP and TFSA in case relocates from Canada in a few years, which will mean that he becomes a non-resident.
Leaving Canada: what happens to your RRSP?
Let’s discuss in detail what changes occur to your RRSP when you leave Canada and become a non-resident. Similar to what you find in all other aspects of finance, the answer is: directly, “it depends.”
Firstly, it depends on your new location.
Several countries have a bilateral tax relationship with Canada, such as the US. Since lots of Canadians move to the US, we will use the US as a case study in our subsequent discussion.
The RRSP (or RRIF) tax-deferred nature is well understood by the United States. Therefore, if you relocate to the US, there are no issues with leaving your RRSP in Canada.
However, since you are no longer earning income from Canada as a tax resident, you would not be able to make further RRSP contributions. But you would be allowed to keep your funds in your RRSP.
If you reside within the US and manage your Canadian RRSP, all accrued income from the RRSP remains exempt from tax both in Canada and the US.
How about RRSP withdrawals?
The fascinating part occurs when you choose to withdraw funds from your RRSP. The rule of the thumb is that when non-residents make an RRSP withdrawal, the Canadian government withholds 25% in tax at source.
In Quebec, please add another 10% extra. Nevertheless, the 25% tax is withheld for a one-time or lump sum withdrawal. If you actively make regular monthly withdrawals, then the tax withheld is reduced to 15%.
You should also be aware that withdrawals from RRSP also contribute to your income globally. So, if you reside in the US, this income should be reported to the IRS when filing your US tax return.
Also, you can claim a foreign tax credit on the withheld amount in Canada – no double tax will be charged on the withdrawal.
There is a known fact that several States in the US have a significantly lower personal tax rate compared to that of Canada, so for some individuals, the net effect is beneficial.
Though this varies from state to state in the US, if you begin to make regular withdrawals from your Canadian RRSP, it may reach a point where you could access the capital for far lower than you would if you had not left Canada!
Rules in regards to the TFSA
There are more straightforward rules associated with TFSA accounts. Firstly, note that you are permitted to withdraw all your funds from your TFSA before leaving Canada, without any form of tax consequence.
But if you want to keep your TFSA intact? Based on CRA, you will be permitted to maintain your TFSA if you become a non-resident. Also, you will be exempted from tax in Canada on earnings accrued in the account; neither will you get taxed on TFSA withdrawals made.
The point to note is that, although you will not be taxed in Canada if you are a non-resident, you may be taxed based on the new country you relocated to. Hence, it is specific to each country. For instance, income from TFSA needs to be reported on a US tax return because the tax treaty between the US and Canada does not presently recognize TFSAs as tax-exempted accounts.
In regards to contributions, note that no additional TFSA contribution will be allowed for any year after you become a non-resident in Canada. Also, any withdrawals carried out during the period when you were non-resident will be included back to your TFSA contributions in the following year. Still, you need to re-establish your status as a Canadian resident before you can make further contributions.
So, what if one tries to contribute during the period of non-residence in Canada?
Same with the case of RRSP over-contribution, this mistake has a severe consequence. If such happens to you, you will be charged a tax of 1% tax for every month the contribution remains in the account.
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters.
All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions.
This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services.
Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.