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Tax Traps & Tips: Non-Residents and Their RRSPs
Beyond Numbers · September 2011

By Lawrence Bell, CA

Although maintaining a registered retirement savings plan (RRSP) or locked-in RRSP is one of many factors when determining an individual's residency status, there is no rule under the Income Tax Act (Act) requiring an individual to wind up their RRSP accounts in order to qualify as a non-resident of Canada.

On becoming a non-resident of Canada, the individual should notify their financial institutions of their change in residency status. Certain financial institutions have administrative rules restricting the individual's ability to invest in equity investments (including mutual funds) due to regulatory concerns in many foreign jurisdictions. Given these limitations, individuals need to assess whether it is prudent to maintain these existing retirement plans or close them. Should they decide to maintain their current RRSP accounts, they will need to consider the tax treatment of these accounts in their new country of residency.

RRSP accounts

If an individual decides to close their existing accounts, they will be required to withdraw the funds. If the funds are withdrawn while the individual is a resident of Canada, the amount of the withdrawal will be subject to Canadian tax at the individual's top marginal tax rate for the year. By contrast, if the funds are withdrawn while the individual is a non-resident of Canada, said individual will be subject to a final, non-resident Canadian withholding tax of 25%.[1] However, it should be noted that the foreign jurisdiction in which the individual resides may want to tax the withdrawal in accordance with its own rules.

If the individual relocates to a country that has signed an income tax treaty with Canada, there is usually a reduction in the rate of non-resident withholding tax to 15% for periodic pension payments. The term "periodic pension payment" is not defined in the Act; nor is it defined in most of the applicable income tax conventions; therefore, to the extent that a term in a convention is not defined, it is necessary to refer to Canada's Income Tax Conventions Interpretation Act (ITCIA). The ITCIA defines "pension" to include payments arising under an RRSP and a retirement income fund (RRIF), but defines "periodic pension payment" to exclude withdrawals from a RRSP.[2]

As withdrawals from an RRSP are not included in the definition of a "periodic pension payment," individuals must convert their RRSPs into RRIFs in order to take advantage of the reduced non-resident withholding tax rate. At any time before the maturity of their RRSP plan (currently age 71), an individual can transfer any property from the RRSP to an RRIF.[3] And as long as a withdrawal from the RRIF does not exceed the greater of twice the "minimum amount" (as defined in the Act[4]) and 10% of the fund value at the beginning of the year, the withdrawal should qualify as a periodic pension payment eligible for the reduced non-resident withholding tax rate. Any withdrawals in excess of the periodic pension amount would be subject to the non-resident withholding tax of 25%.[5]

Therefore, to ensure that there is an eligible amount to withdraw from the RRIF in any given year, the RRSP should be converted to an RRIF at any time during the taxation year prior to December 31 of the previous year.

To the extent that withdrawals are subject to tax in the new country of residence, the Canadian withholding tax may be creditable against any tax liability in the new country of residence.

Alternatively, instead of paying tax at non-resident withholding tax rates, an election is available to have the withdrawals taxed at the individual's graduated tax rates. The individual can accomplish this by electing to file a Canadian tax return[6] within six months of the end of the taxation year for which they are making the election. This elective tax return calculates the tax liability based on the individual's worldwide income. A special tax credit is available to back out the proportion of the tax allocated to their foreign-source income and Canadian-source income, which remain subject to non-resident withholding tax. However, this election can potentially increase the applicable rate of tax on the withdrawals; generally, it is only advantageous where the individual has a minimal amount of foreign income.

Locked-in RRSP accounts

Many individuals who move from one employer to another are required to collapse their pension plans with their former employers. Although transfers from a registered pension plan to either an RRSP or RRIF are permitted,[7] provincial pension legislation will generally require that the pension funds are transferred to a locked-in RRSP or life income fund (essentially a locked-in RRIF). The reason for this requirement is that provincial pension legislation regulates the maximum amount that can be withdrawn each year from these locked-in accounts. For example, in British Columbia, the maximum withdrawal is based on the owner's age, current long-term interest rates, and the previous year's investment returns for the fund.

Individuals with locked-in accounts are generally precluded from collapsing these accounts because of provincial and federal regulations. (Provincial pension legislation generally covers employment pension plans that have members in their respective provinces, while the Office of the Superintendent of Financial Institutions Canada administers federally regulated pension plans.) However, some provinces do allow for the unlocking of all or a portion of a locked-in account under certain circumstances—for example, if an individual becomes a non-resident of Canada.

In BC, a pension entitlement held in a locked-in account can be unlocked if the individual satisfies the following conditions:

  • Completing Form 6, "Certificate of Non-Residency"[8] and filing a copy with the financial institution where the locked-in account is held;
  • Attaching written evidence that the CRA has determined them to be a non-resident of Canada for tax purposes; and
  • Ensuring that their spouse (if the individual has a spouse) waives any entitlement by completing Form 2, "Spouse's Waiver of Entitlements Under a Pension Plan, an RRSP, a Life Annuity, or a LIF Contract."[9]

Written evidence of an individual's residency status can be obtained from the CRA by completing Form NR73 – Determination of Residency Status (Leaving Canada).

For locked-in accounts that are federally regulated, the pension entitlement can be unlocked if an individual ceased to be a resident of Canada at least two consecutive calendar years prior, and if the individual is no longer employed by the employer from which the pension funds originated. Where the unlocking is due to an individual being a non-resident of Canada, no prescribed forms are required; furthermore, no spousal consent is required, but, administratively, a financial institution may require some form of waiver under its risk management policies.

Other Canadian provinces, such as Alberta, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan, allow individuals to unlock accounts.

Once the accounts are unlocked, the individual can decide whether or not to collapse the plans as discussed above. If the individual decides not to collapse the plans, they should still seriously consider unlocking the accounts, as an unlocked account may provide greater flexibility for withdrawals in their retirement years.

Lawrence Bell, CA, is a senior manager with the International Assignments and Rewards practice of PricewaterhouseCoopers LLP in Vancouver.

Two additional tips to consider:

  1. RRSPs are excluded from the departure tax rules[10] once the individual has been determined to be either a factual non-resident or a deemed non-resident.[11]
  2. Where an individual participates in the Home Buyers Plan or the Lifelong Learning Plan prior to emigrating, they are required to include into their income any outstanding plan balances less amounts repaid within 60 days of becoming a non-resident of Canada.[12]

Footnotes

  1. Income Tax Act, Paragraph 212(1)(l).
  2. ITCIA, Section 5.
  3. Income Tax Act, Paragraph 146(16)(a).
  4. Subsection 146.3(1). Deemed to be nil for the year the fund was entered into, otherwise Regulation 7308 sets out the prescribed factor.
  5. Paragraph 212(1)(q).
  6. Section 217.
  7. Subsections 147.3(1) and 147.3(4).
  8. www.fic.gov.bc.ca/responsibilities/pension/rsp-lif/except
  9. Ibid.
  10. Excluded rights and interests are defined in Subsection 128.1(10) of the Act.
  11. Subsection 250(5).
  12. Subsection 146.01(5) with respect to the Home Buyers Plan and Subsection 146.02(5) with respect to the Lifelong Learning Plan.

 

 

 

 

 

 

 

 

 

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