The Retirement Income Guide for Canadian Non-Resident Expats

Retirement income planning for Canadian non-resident expatriates can be difficult. Let's consider some of the implications of receiving CPP/QPP, OAS, RRSP and pension income in retirement.

CPP/QPP and OAS

Canadians living abroad can apply for and receive government pensions like Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS) in retirement.

Non-residents can begin their CPP/QPP pension as early as age 60, just like a Canadian resident.

OAS can start as early as age 65, but if you apply while you are a non-resident, you need to have resided in Canada for at least 20 years after the age of 18 to qualify.

Canada has international social security agreements that coordinate pension programs between countries for those who have lived abroad and contributed to multiple national pensions. Canada may consider your periods of contribution to foreign national pensions as periods of contribution to the CPP/QPP or periods of residency for calculating OAS entitlement. This is particularly important for OAS given the 20-year minimum residency threshold. A social security agreement may help you to qualify.

Some countries, like the United States, also have minimum thresholds to qualify for government retirement benefits. You need 10 years of contributions to the U.S. Social Security to qualify, but the totalization agreement between Canada and the U.S. can help someone who has worked for under 10 years in the U.S. qualify for enhanced retirement benefits when combined with the CPP/QPP.

Contact Service Canada if you have lived or worked abroad or are currently a non-resident applying for a government pension.

Of interest is that the Receiver General of Canada can also pay CPP/QPP and OAS benefits in local currency in 54 countries currently.

CPP/QPP and OAS paid to a non-resident of Canada is subject to a non-resident withholding tax that is 25% by default. Many countries have tax treaties with Canada that reduce the withholding tax rate – commonly to 15% tax.

This doesn’t mean that you must file a Canadian tax return. Withholding tax is generally your only tax obligation to Canada as a non-resident.

Many countries will tax foreign pension income, though some, like the United States, tax only a portion. There is an 85% inclusion rate for CPP/QPP and OAS on a U.S. tax return and a corresponding 85% inclusion rate for U.S. Social Security on a Canadian tax filing.

It’s important to understand the tax implications in the country where you reside. Withholding tax at source in Canada will often be credited towards tax payable in your country of residence.

You can apply to have your withholding tax on your CPP/QPP or OAS reduced further. According to the Canada Revenue Agency (CRA): “As a non-resident, it may be beneficial for you to elect under section 217 of the Canadian Income Tax Act to pay tax at the same rate as residents of Canada on your Canadian-source pensions or other benefits.”

In other words, if your income is low, 15% or 25% or whatever required withholding tax rate applies may be too high. Section 217 allows a non-resident to calculate the applicable tax payable as if they were a resident so that they are no worse off than if they lived in Canada and paid tax on that income. If someone has little to no other income beyond their CPP/QPP and OAS, there is a good chance a section 217 would benefit them, particularly if their pensions are not taxed in their country of residence or are taxed at a low rate.

The application form to elect under section 217 can be found here. You can also file a section 217 tax return after the fact to request a retroactive refund if eligible.

There is an OAS Recovery Tax if your net world income for the year exceeds a threshold, which is $74,789 for 2017 (a threshold that is generally increased each year with inflation). The recovery tax is calculated based on an Old Age Security Return of Income you must file each year to report your net world income. There are currently 42 countries that have a tax treaty with Canada so that OAS Recovery Tax does not apply regardless of income.

RRSPs

Income and growth in a Registered Retirement Savings Plan (RRSP) is considered tax-free in many foreign countries. Canada has numerous tax treaties that deal with the taxation of various income sources, including “pensions and annuities” like RRSPs.

Non-residents generally don’t contribute to RRSPs, because if they aren’t filing Canadian tax returns, RRSP contributions won’t provide a tax deduction like if they were residents.

Investing can be tricky as a non-resident, as some financial institutions cannot or will not work with foreigners (though RRSPs are often exempt). Certain Canadian investments cannot be purchased by non-residents either, though they can often continue to be held if you owned them before becoming a non-resident.

Withholding tax rates on RRSP withdrawals depend on the nature of the withdrawal. A lump-sum withdrawal is taxed, by default, at 25%. A periodic withdrawal, like a Registered Retirement Income Fund (RRIF) withdrawal in retirement, may be eligible for a reduced withholding tax rate – most often 15% depending on the tax treaty between Canada and your country of residence.

This doesn’t mean that you must file a Canadian tax return. Withholding tax is generally your only tax obligation to Canada as a non-resident.

You can apply to have your withholding tax on your RRSP/RRIF withdrawals reduced further. According to the Canada Revenue Agency (CRA): “As a non-resident, it may be beneficial for you to elect under section 217 of the Canadian Income Tax Act to pay tax at the same rate as residents of Canada on your Canadian-source pensions or other benefits.”

In other words, if your income is low, 15% or 25% or whatever required withholding tax rate applies may be too high. Section 217 allows a non-resident to calculate the applicable tax payable as if they were a resident so that they are no worse off than if they lived in Canada and paid tax on that income. If someone has little to no other income beyond their RRSP/RRIF withdrawals, there is a good chance a section 217 would benefit them, particularly if their withdrawals are not taxed in their country of residence or are taxed at a low rate.

The application form to elect under section 217 can be found here. You can also file a section 217 tax return after the fact to request a retroactive refund if eligible.

Most countries will tax foreign pension income, like RRSP/RRIF withdrawals. It’s important to understand the tax implications of the country where you reside. Withholding tax at source in Canada will often be credited towards tax payable in your country of residence.

Some countries do not tax foreign pension income, like RRSP/RRIF withdrawals. Some countries are tax-free jurisdictions that don’t tax any income at all. This may create strategic opportunities for Canadians to liquidate their registered accounts as non-residents.

If non-residents have locked-in accounts, like LIRAs, LRIFs, LIFs, etc. that came from pension plan transfers, these accounts can be unlocked if they have been non-residents for more than 2 years and transferred to a regular, non-locked-in registered account.

Pensions

Non-residency generally won’t impact your entitlement to a private workplace pension.

Pension income paid to a non-resident of Canada is subject to a non-resident withholding tax that is 25% by default. Many countries have tax treaties with Canada that reduce the withholding tax rate – commonly to 15% tax.

This doesn’t mean that you must file a Canadian tax return. Withholding tax is generally your only tax obligation to Canada as a non-resident.

It’s important to understand the tax implications of the country where you reside. Withholding tax at source in Canada will often be credited towards tax payable in your country of residence.

You can apply to have your withholding tax on your pension reduced further. According to the Canada Revenue Agency (CRA): “As a non-resident, it may be beneficial for you to elect under section 217 of the Canadian Income Tax Act to pay tax at the same rate as residents of Canada on your Canadian-source pensions or other benefits.”

In other words, if your income is low, 15% or 25% or whatever required withholding tax rate applies may be too high. Section 217 allows a non-resident to calculate the applicable tax payable as if they were a resident so that they are no worse off than if they lived in Canada and paid tax on that income. If someone has little to no other income beyond a modest pension, there is a good chance a section 217 would benefit them, particularly if their pensions are not taxed in their country of residence or are taxed at a low rate.

The application form to elect under section 217 can be found here. You can also file a section 217 tax return after the fact to request a retroactive refund if eligible.

Some defined benefit (DB) pension plans allow members to take lump-sum commuted value payouts in exchange for giving up their future pension entitlement. Some or all of the payout may be eligible for transfer to a locked-in retirement account on a tax-deferred basis. Some portion may be taxable at a default 25% rate. This taxable portion may or may not be subject in your country of residence.

Once someone has been non-resident for 2 years, they can unlock their locked-in retirement accounts. Since some countries do not tax foreign pension income, like a locked-in retirement account withdrawal, this may create strategic opportunities for Canadians to liquidate their registered accounts as non-residents.

When interest rates are low, commuted value pension payouts are high, meaning favourable conditions currently exist to consider commuted value payouts.

Written by Jason Heath

Jason is one Canada’s approximately 150 advice-only, fee-only Certified Financial Planners (CFPs). He does not sell any products or receive any referral fees. He has a particular interest in working with clients with complex financial planning issues, including Canadian expats in other countries, but works with single people, seniors and families at all planning stages seeking to take control of their financial lives. Jason is a Certified Financial Planner at Objective Financial Partners in Toronto and works via Skype with clients across Canada and internationally. He is also a personal finance columnist for the Financial Post and MoneySense.

8 Responses to The Retirement Income Guide for Canadian Non-Resident Expats

  1. In this day and age of electronic banking is it necessary to set up these formal arrangements. If these various pensions are deposited directly into your Canadian bank account, in which, as a senior, you pay no service charges, could you not then transfer the funds electronically to your Mexican or Italian bank? This seems like it would be more convenient and involve less logistical headaches, particularly if you were only spending six months of each year outside Canada. Thanks.

    • Hi Jeff. You could have the deposits go to a Canadian bank account. I guess it depends where you want to spend the money. If you’re spending it in Mexico, it may be easier to have it go into a Mexican bank account into Mexican pesos. Foreign exchange costs can be 2%+ to move from one currency to another, though there are ways around that too.

      It’s a convenience to get CPP/OAS paid in a foreign currency to a foreign bank account. I’m surprised Service Canada goes through the trouble, but maybe it’s easier and cheaper than issuing 12 cheques a year to a non-resident.

  2. Can a Canadian Citizens transfer their superannuation (University pensions) accumulated while working in Australia to a Canadian RRSP or LIRA? Are there any tax implications. Thank you.

    • You will probably be able to make the transfer, Pat. Section 60(j)(i) of the Canadian Income Tax Act allows transfers of foreign superannuations or pension benefits to an RRSP. Get advice from an accountant and make sure you understand the tax withholding in Australia and tax deduction and credit in Canada to ensure there is little to no tax leakage.

  3. Great article.
    I believe hat if one collects only the minimum RIF payout required, then no withholding tax applies at all.

    • Hi Peter. If a Canadian resident takes the minimum RRIF withdrawal, there is no required tax withheld at source (though some people choose to have tax withheld). The withdrawal is still taxable on your tax return with tax calculated accordingly, so having no tax withheld doesn’t mean you won’t pay tax. It’s different for a resident though. Periodic withdrawals, like monthly or annual RRIF withdrawals, generally have 15% tax withheld. Lump-sum withdrawals – like cashing in your entire account – would have 25% withheld.

  4. “Some countries do not tax foreign pension income, like RRSP/RRIF withdrawals. Some countries are tax-free jurisdictions that don’t tax any income at all. This may create strategic opportunities for Canadians to liquidate their registered accounts as non-residents”

    Please share a listing of the aforementioned countries…

    • Hi Dave. I don’t know it there is a central list. It’s all based on the tax treaties between Canada and the country in question. Here is a list of in-force tax treaties that Canada has, but you’d have to go through on a country by country basis: https://www.fin.gc.ca/treaties-conventions/in_force–eng.asp.

      International taxation is complicated, but in order for you to have your RRSP withdrawal free from taxation, you’d have to literally live in the country in question and break ties with Canada. That has other consequences because when you leave Canada, you dispose of your worldwide assets for capital gains tax purposes. You also lose health benefits. But keep in mind, even if the income is not taxable in the other country, you will still have withholding tax in Canada (15% or 25% as the case may be). So there is always tax to pay somewhere when it comes to an RRSP.

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