Situation: Nearly a decade apart in ages, couple wants to anticipate pension income and tax abroad
Solution: Verify payment of pensions abroad, taxes on pensions, replacement costs for social benefits
A couple we’ll call Eric, 49, and Louise, 58, live in Ontario. Both civil servants, they bring home ,653 a month, save conscientiously, yet have a dilemma. Their plan is to work another nine years, then retire perhaps to the Caribbean or Central America where they would have less need for central heating and parkas and, they expect, a much lower cost of living.
“We want to leave Canada for good or, if that is not feasible, then to downsize our house and move to the East or West coast and live abroad for six months of the year,” Eric says. “We’d like ,000 a year income before tax. What needs to be done now to achieve this goal?”
Email for a free Family Finance analysis
Family Finance asked planner Guil Perreault, head of G. Perreault Financial Inc. in Winnipeg, to work with Eric and Louise. In his view, the plan will work in the simple sense of living economically in a low cost country. But breaking ties to Canada is the larger problem.
“CRA considers residency on a case by case basis,” Perreault says. “Living in Canada for less than 183 days a year is only one test. CRA also considers financial ties, social ties, driver’s licences, where you bank — it all has to be evaluated.”
The first issue is whether the couple can afford to leave. Their income in nine years, when they hope to leave, will consist of investment income from present and future contributions to their RRSPs, TFSAs and non-registered assets, work pensions for each, and Canada Pension Plan and Old Age Security benefits when each is eligible.
Estimating retirement income
Their present financial assets are 1,100. They have ,600 in TFSAs and contribute 0 a month to the plans. At this rate of contribution, growing at three per cent a year after inflation, in nine more years they would have 7,170 in 2016 dollars.
Eric and Louise have 8,000 in RRSPs and contribute ,980 a year to the plans. In nine years, growing through contributions and at three per cent after inflation, the RRSPs would have a value of 2,700. Their ,500 non-registered savings with no further contributions would have appreciated to ,700. Allowing for tax on accrued but unrealized gains and no tax on principal, we’ll assume that they have ,000 ready for travel.
RRSP income can be paid abroad with a withholding tax that is usually 15 per cent, but can be as much as 25 per cent depending on the tax treaty between Canada and the other country. TFSA balances could be cashed with no tax. Non-registered investments would be subject to a departure tax, which is effectively an acceleration of accrued but unrealized capital gains to a theoretical or actual sale.
We’ll assume that the couple sells their 0,000 house, which would have a theoretical value of 3,000 after nine years of growth in price at three per cent after inflation. There would be preparation for sale and selling costs totaling about five per cent, or ,000, reducing the cash obtained to 7,000. If they keep 0,000 for a home in a warm place, they would be able to add 7,000 to their funds for living abroad.
On the eve of departure, the couple would have TFSA cash of 7,170, cash surplus from sale of their house of 7,000, and non-registered assets of ,000 — 4,170 total.
In nine years, Louise will be 67. She will be entitled to CPP of ,000 at 65, or she can wait to 67 when leaving Canada to obtain an enhanced benefit, with an 8.4 per cent per year bonus, net ,512. The virtue of postponing the benefit is that it enlarges the basis for indexation, which, despite foreign residence, will still apply.
Eric would be two years from early application for CPP. If he chooses to start benefits at 60, he would receive the basic ,110 less 36 per cent, for ,390 a year. Eric’s company pension would start at ,550 a year at age 58 with a drop to about ,000 a year at 65. Louise would have a company pension of ,000 a year starting at age 63.
Adding it all up, when each partner is at least 65, they will have combined company pensions of ,000; CPP benefits of ,390 for Eric with a start at his age 60, and ,512 for Louise with a start at her age 67; and two OAS benefits, ,832 for Louise if she waits until she is 67 to start benefits, and ,846 for Eric, assuming he starts his benefits at 65.
The sum of their various pension incomes would be ,580, or ,150 a year after 15 per cent withholding on government pensions and similar rates for other income streams, depending on how they are structured for income, capital gains and return of capital. Their own 4,170 of capital, if annuitized at three per cent after inflation for 28 years to Louise’s age 95 would generate ,300 before tax. Allowing for zero tax on TFSA payments and assuming that other income is subject to 15 per cent average tax in their new jurisdiction, they would net ,450 a year. With these assumptions, they would have pension and investment income of about 3,600 a year after 15 per cent withholding. They would surpass their goal of ,000 a year before tax.
The idea of breaking all ties with Canada for financial advantage is superficially easy but in practice quite problematic. For this couple, replacing coverage by the Ontario Health Insurance Plan could be costly if they have to buy private health insurance. If they remain in Canada for residence, then, ironically, their tax rates would rise to perhaps 17 per cent in British Columbia or 20 per cent in Nova Scotia based on current tax schedules and splits of eligible pension income. But there would be no departure tax to pay on accrued by unrealized capital gains.
“Our analysis is not by any means definitive,” Perreault explains. “If they choose to leave Canada, the couple must take advice from a tax professional who specializes in international tax and from a lawyer with experience in the expatriation process. There are potential financial gains to be had from living in a warm, low tax jurisdiction. On the other hand, low tax countries may have less developed health care systems. It can be costly to replace Canadian provincial health insurance depending on the foreign jurisdiction.”