Mobility can be a key differentiator as one’s career grows within the financial services industry. However, when making a decision to leave Canada to work abroad permanently or temporarily, one has to consider potential tax consequences. The question that needs to be asked is, what is the tax treatment of a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA)? What happens when the owner of an RRSP or a TFSA becomes a non-resident of Canada for income tax purposes? Questions such as this could be asked by CFA charterholders of their clients and associates.

The answers, however, depend on the situation. Generally speaking, when a resident becomes a non-resident, the resident is deemed to have disposed of all of his or her assets at fair market value. These deemed dispositions would cause unrealized gains to become taxable immediately. However, there are many exceptions to this general rule, and two of them are RRSPs and TFSAs.

Canadian Tax Residency

Before we start discussing the options available for a non-resident with an RRSP or a TFSA, we should first define who a non-resident is and what the implications are. All US citizens (and green card holders) are subject to US income tax on worldwide income, but in Canada, only Canadian residents are subject to Canadian income tax on worldwide income. Non-residents only pay Canadian income tax on Canadian income.

Unfortunately, the Income Tax Act does not define the term resident clearly. It says a resident is someone who ordinarily resides in Canada. Therefore, we can only rely on the interpretations of the Canada Revenue Agency and the court, which state that a resident is someone who is connected to Canada personally, socially, or economically. For example, if a taxpayer moves to the US to work, leaving behind his family in Canada, that taxpayer is very likely to be considered a Canadian resident because of his personal connections to Canada.

But this is only Canadian domestic law; we also need to refer to the US–Canada Tax Treaty to obtain the final answer, which overrides Canadian domestic law (which, in itself, is already ambiguous enough). Clearly, it takes quite a bit of professional knowledge and judgment to determine the residency of a taxpayer accurately.

Lastly, it is worthwhile to point out that it is often possible—and advantageous—to engage in residency planning—proactively structuring one’s affairs in order to be taxed as a resident of a particular country. And residency planning does not always mean only strategies for becoming a non-resident of Canada. In many situations, it is more advantageous to be taxed as resident rather than non-resident. But, of course, abusive residency planning could potentially be challenged by the General Anti-Avoidance Rule.

Options for RRSPs

For RRSPs, a taxpayer can choose to cash out his or her RRSP and be taxed on the proceeds, based on the marginal tax rate of the taxpayer, prior to becoming a non-resident. Alternatively, a taxpayer can choose to maintain the RRSP, although the taxpayer is not allowed to make further contributions to the RRSP. If the taxpayer chooses to maintain the RRSP, there will be non-resident withholding tax when withdrawals are made in the future. The standard non-resident withholding tax rate is 25 percent, but it could be reduced by a tax treaty. The adjusted non-resident withholding tax rate can be significantly lower than the standard rate of 25 percent. As well, in some situations, some relief could be available. A non-resident may be able to use certain provisions in the Income Tax Act to claim back a portion of the non-resident withholding tax.

So far, we have only dealt with Canadian tax liability. However, RRSP withdrawals can be taxable in the current country of residency of the taxpayer as well, depending on the tax rules in that country. To complicate things further, RRSP withdrawals can be taxable in the current country of residency, based on the domestic tax rules of that country, but a provision in the tax treaty might exempt withdrawals or reduce the tax rate. Therefore, the ultimate tax consequence can only be determined after a thorough analysis of the domestic tax rules of the current country of residency, the tax treaty (if any), and the income situation of the taxpayer at that time.

Options for TFSAs

TFSAs differ from RRSPs in that withdrawals are not taxable and not classified as taxable income. A taxpayer can choose to cash out a TFSA when becoming a non-resident without facing any tax consequences. Of course, a non-resident cannot contribute to a TFSA anymore or he or she will face penalties. A taxpayer can also choose to maintain a TFSA when becoming a non-resident. If we only look at Canadian domestic tax law, the decision is fairly easy to make. The taxpayer should simply maintain the TFSA to allow for further tax-free growth of the assets inside the TFSA. TFSA withdrawals by a non-resident are not subject to Canadian taxation.

However, it becomes more complicated when we consider the fact that the taxpayer is now a tax resident of another country. The tax rules in that country may or may not treat the TFSA withdrawals as tax-free withdrawals. Therefore, the tax rules of that country must be consulted. However, as with RRSPs, complications can arise because of the existence of a tax treaty, which can completely change the ultimate tax consequence.