Tax implications of foreign residency

Himani Ediriweera

It’s not uncommon for retirees to live out their golden years in warmer climates. However, leaving Canada does not necessarily mean you are exempt from taxes. Before you consider a permanent or temporary move from the country, you must consider the tax implications of both.

How does foreign residency impact your government pensions?

If you are a resident of another country, you might be subject to a non-resident tax. This means that unless you reside in a country that shares a tax treaty with Canada, your CPP/QPP and OAS benefit pension will be hit with a 25% tax rate. This tax rate is deducted from your monthly pension.

If you live in a country that does not have a tax treaty with Canada and you want your taxes reduced or exempt, you must complete the Application by a Non-Resident of Canada for the Reduction in the Amount of Non-Resident Tax Required to be Withheld (NR5). This application must be renewed every five years and a new one needs to be submitted with each following pension.

If you live in a country that has a tax treaty with Canada, you do not need to request an exemption. It will be done automatically.

OAS Recovery Tax

If you live in a country that does not have a tax treaty with Canada and your net world income exceeds the annual threshold for the preceding tax year ($71,592 for 2014), you may have to repay part, or all, or your OAS pension. In addition, the Canada Revenue Agency (CRA) will also calculate the recovery tax to withhold from your monthly OAS payments for 2015 to 2016.

According to the CRA, net world income is defined as income you “are paid or credited in a year from Canadian or foreign sources (when we refer to foreign sources, we are referring to sources outside of Canada), minus allowable deductions. It includes income from employment, business, pensions, social security, capital gains, rental property, interest, and dividends.”

However, if you live in a country that has a tax treaty with Canada, you might be exempt from OAS Recovery.

Avoiding Dual Residency

If you’re looking to avoid double taxation and dual residency, you can relocate to a country that has a tax treaty with Canada. The CRA is far more lenient with retirees who establish permanent residency in one of the 93 countries that have tax treaties with Canada. For a list of countries that has a tax treaty with Canada, visit the Department of Finance website.

Things to Remember

If you leave Canada permanently, you must surrender your Canadian citizenship, particularly when you become a resident of another country that has no tax treaty with Canada. If you neglect to do this, the CRA will deem you a dual resident and you will be liable for Canadian taxes on worldwide income. Holding onto your provincial health coverage, a home or a bank account, can affect your status. According to the Tax Specialist Group, “the Tax Court has held that storing furniture in Canada indicates that the move was not intended to be permanent, so the retiree was held to still be a resident here.”

To avoid surprising tax consequences, it is recommended you consult with the CRA to determine your residency before you leave the country for an extended period of time. Everyone knows the CRA can be very unforgiving when it comes to individuals defending their tax situation.