Q: I have certain questions for the RRSP. My situation is:
1. I am Canadian
2. I work abroad and pay tax abroad, too
May I buy Canadian RRSPs?
A: You are not unlike many Canadians, Karl, who emigrate from Canada for school or work. From experience, I can tell you that lots of them still keep in touch with Canadian personal finance via MoneySense!
As you likely know, non-residents can continue to hold a Registered Retirement Savings Plan (RRSP) after leaving Canada. Income and gains in an RRSP continue to be earned on a tax-deferred basis—at least as far as the Canada Revenue Agency (CRA) is concerned.
Foreign taxation authorities may tax income and gains in an RRSP on an annual basis rather than upon withdrawal, or in order to ensure continued tax deferral, special tax filings in your country of residence may be required to qualify. You should clarify this with a local accountant, Karl.
As far as making new contributions, the ability to do so depends on your circumstances. If you have RRSP room from your working years in Canada, you can in fact contribute despite being a non-resident.
If you are a non-resident for tax purposes, however, your employment income abroad will generally not be taxable in Canada and won’t be considered eligible income for RRSP purposes either—meaning no new RRSP room will be created after you leave.
One exception is for non-residents who own rental properties. Canadian rental income requires Canadian tax filings and is considered earned income for both residents and non-residents for RRSP purposes.
The question is whether or not it makes sense to contribute to an RRSP for a non-resident in the first place. The main advantage of an RRSP contribution is the tax deduction and resulting reduction on your tax return. If you are not paying tax in Canada, you lose this key benefit, Karl.
You can make an RRSP contribution and carry the contribution forward to deduct in a future year, which may be advantageous if you have rental income, own real estate in Canada that you might sell some day or if you intend to return at some point in the future to Canada and will have tax payable that you can reduce by claiming the deduction.
My experience, Karl, has been that many Canadian non-residents have issues with respect to their financial institutions not working with non-residents. Or they are limited in terms of the investments that they can buy within their RRSP or within other investment accounts.
So forget RRSP contributions—sometimes the frustrations make people just want to withdraw their RRSP savings. In some cases, this actually isn’t a bad strategy, as it so happens. Withholding tax of 25% would generally apply, but if your deductions came at a higher rate of tax and you live in a low or no tax jurisdiction, you can actually come out ahead.
In your case, Karl, you may want to consider retirement savings options in your new country of residence. They may be more tax advantageous than an RRSP contribution and having more money in your RRSP as a non-resident may not necessarily be the best long-run strategy anyway.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.