Thoughts of warmer weather, tropical beaches, living in an ancestral homeland or simply seeing pension dollars stretch a little further may encourage some of your clients to broaden their horizons in retirement. And while many clients may choose to become snowbirds and spend a few months at a time in foreign destinations, others may prefer a more permanent situation for their golden years.
Clients who wish to move to another country once retired have several decisions to make before they can begin packing, from where exactly they want to live to the tax consequences of their move. You can help these clients navigate many of these decisions by offering information and advice.
“More than ever, people get to that retirement stage and they still feel like they have dreams they want to chase,” says Mariska Loeppky, director, tax and estate planning, with Investors Group Inc. in Winnipeg. “[These clients should] get some professional help in navigating all those issues and be sure to make that decision with everything in mind instead of on a whim.”
There are several reasons why clients may choose to leave Canada once they retire. They may be looking for a more comfortable climate, want to live near family members or be seeking a place with a lower cost of living.
Although a client may choose to retire anywhere in the world, some locations are attracting the attention of Canadian retirees and pre-retirees more than others. Tax and estate planning experts interviewed for this story say they frequently receive inquiries about retiring to the U.K., Spain, Italy, Mexico and the U.S. The Annual Global Retirement Index, published by Ireland-based International Living Publishing Ltd., lists several more hot spots that your clients may be considering. These include: Peru, Nicaragua, Portugal, Malaysia, Ecuador, Panama and Costa Rica. In some locales, communities of Canadian and American expatriate retirees have formed in recent years. Examples include San Miguel de Allende in Mexico, and Cuenca, Ecuador.
Even if a client knows where he or she would like to retire, there are many financial and non-financial matters to investigate. For example, prior to clients deciding to uproot their lives and move to a foreign country, those individuals should ask questions about their chosen destination, including:
– Is the banking system stable?
– What is the political climate?
– Is the region safe regarding crime?
– Does the cultural scene align with my interests?
– Is lack of fluency in the local language a problem?
To answer these questions, your clients may choose to seek out experts such as expats who live in the location a client is considering and do research online.
A key factor in your client’s decision to move to another country is residency, and how residency in another country will affect him or her financially. Your client probably will have to give up Canadian residency and formally immigrate to the new country if he or she intends to live there full-time. Therefore, the client must determine the costs of applying for residency in his or her new home, as well as any requirements for immigration, such as minimum income or asset levels.
In Mexico, for example, Canadians can apply for temporary or permanent residency status, both of which have their pros and cons. Temporary status requires less in terms of assets and income than permanent status does. But the client would have to reapply for temporary residency annually, according to Michael Nuschke, owner of Mexico-based Focus on Mexico.com.
Nuschke, formerly a financial advisor in Halifax, now provides educational conferences and online information for people who are considering retiring to the Lake Chapala area. Permanent residency status in Mexico requires a higher level of assets or income, but would not have to be renewed, he says.
– Taxes in Canada
Giving up Canadian residency could have significant financial consequences for your clients.
When a client ceases to be a Canadian resident, he or she will have a deemed disposition of assets held in non-registered accounts (excluding Canadian real estate). Those assets are deemed to have been disposed of at fair market value on the day the client becomes a non-resident, and are subject to capital gains taxes.
This tax burden, sometimes known as the “departure tax,” can be paid immediately or the client can file an election with the Canada Revenue Agency (CRA) to defer payment to a later time, such as when the assets are sold.
The CRA looks at several factors when determining residency status. These include the location of the individual’s principal residence; whether he or she holds a Canadian driver’s licence; whether he or she holds accounts in Canadian banks; whether the individual has dependents in Canada; and whether he or she is eligible for Canadian health-care coverage.
– Registered accounts
Canadians who plan to retire outside the country should keep their RRSP and RRIF accounts intact.
“The first question people ask is ‘Should I withdraw [all my money] out [of my RRSP]?'” says Jennifer Poon, director of wealth management, taxation, with Bank of Nova Scotia’s wealth-management division in Toronto. “And the answer, overwhelmingly, is ‘No’.”
In most cases, RRSPs and RRIFs maintain their tax-exempt status when your clients relocate, a situation that’s due to tax treaties Canada has with other countries. Once a withdrawal from such an account is made, however, those funds are subject to a 25% withholding tax in Canada – unless a different percentage is specified in Canada’s tax treaty with that country. For clients residing in the U.S., for example, the withholding tax is 15%.
TFSAs, on the other hand, don’t receive the same treatment abroad as they do in Canada. That’s because the TFSA still is a relatively new savings vehicle and is not recognized in tax treaties. Therefore, clients often will be advised to withdraw their TFSA funds and close those accounts before terminating Canadian residency.
“Most people choose to close their TFSA when they move, partly because there’s not a single country that we know of where that income is tax-sheltered,” says Loeppky. “So, [the treatment of a TFSA] really is no different from having a non-registered account.”
Canadians can receive their employer plan’s pension, Canada Pension Plan and old-age security (OAS) benefits while living abroad. But these payments also will be subject to withholding taxes of 25% or less.
Eligibility requirements for public pensions can be partially waived through social security treaties. For example, to continue to qualify for OAS, your clients must have lived in Canada for 20 years after the age of 18. However, a client who falls short of that requirement may qualify for partial payments if he or she moves to a country with which Canada has a relevant treaty.
Clients who are entitled to the guaranteed income supplement (GIS) in Canada, however, will lose that benefit if they choose to live outside Canada full-time. Canada’s federal government ceases GIS payments to individuals who have been out of the country for longer than six months.
Clients must file income tax returns in their new country of residence, declaring all income, including pension income and withdrawals from RRSPs or RRIFs. For income on which a client has paid withholding taxes in Canada, he or she can apply for a foreign tax credit in their new country.
“[RRSP withdrawals] may be subject to taxes in that other jurisdiction; but, typically, you can get a foreign tax credit so you’re not double-taxed,” says Prashant Patel, vice president of high net-worth planning services with Royal Bank of Canada’s wealth-management division in Toronto.
– Health care
Residency requirements for Canadian health-care coverage vary slightly from province to province. For example, Ontario residents can be outside the province for up to 212 days during a 12-month period without losing coverage, provided the province remains their primary place of residence.
So, clients who plan to become full-time residents of another country will have to give up their Canadian public health-care coverage and make alternative arrangements, such as buying private insurance.
Clients, especially those with special health-care needs, should look into the quality of health care available in their chosen location, including the availability of hospitals and clinics – then purchase the necessary insurance.
– Legal documents
Clients should revisit their legal documents before moving to another country. A client’s will – drafted and signed in Canada – may not be appropriate for his or her new location. Clients should meet with a qualified lawyer in the new country to update their documents.
“If your plan is to live [outside Canada] for the long term,” Patel says, “you probably want to draft a new will or power of attorney that’s applicable in that jurisdiction [using] a lawyer in that jurisdiction.”
– Living abroad
Clients will have to update their budgets prior to moving to another country in order to account for everything that will keep themselves comfortable, from living arrangements to food and entertainment.
Clients also will need to make several decisions regarding housing, including whether to rent or buy and in what location to settle. For example, do they want to live in a city or a rural area? Do they want to live in a gated community among other expats or among locals?
“There’s no right or wrong answer,” Nuschke says. “It depends on the person and how comfortable they are in terms of the language or the safety issues.”
Part of that decision will determine what clients bring with them to their new country. In Mexico, for example, many rental residences come fully furnished, which can reduce shipping expenses for clients.
Indeed, clients must think carefully about what they intend to bring with them because the cost to ship their belongings to their new home can add up quickly. Nuschke recommends creating a “must bring” list and a “want to bring” list, then pricing out what those items will cost to ship.
Says Nuschke: “Quite a few people move with just suitcases.”