Non-residents still eligible for RRSP contributions

(Special) – If you’re planning on leaving Canada soon, don’t give up on contributing to your Registered Retirement Savings Plan (RRSP). If you become a non-resident of Canada, you can still contribute to an RRSP provided you still have accumulated contribution room available.

“Your contribution room is determined by your Canadian source income,” explains Cleo Hamel, a senior tax specialist with American Expat Taxes. “Earned income for RRSP purposes may include employment income, rental income, self-employment income, royalties, research grants and alimony. You are allowed to carry forward unused RRSP contribution room every year so a non-resident may have room available even if they do not have Canadian source income during the year.”

There is no requirement to collapse any RRSPs or RRIFs upon becoming a non-resident. The general rule is that when a Canadian resident ceases to be a Canadian resident, he or she is deemed to have disposed of all their properties with certain exceptions. Two of those exceptions are RRSPs and RRIFs.

In most cases, it does not make sense to withdraw RRSP or RRIF monies prior to emigration since any withdrawals will be taxable at full marginal tax rates while the taxpayer is still a resident of Canada. This can have a significant impact since non-residents may not have the same amount of refundable credits to use against tax owing as a resident does.

Once you’ve left Canada, the earnings and growth inside the RRSP or RRIF continue to grow tax-deferred. It is recommended to discuss with a financial adviser the types of investments held in these accounts, as non-residents may have limitations on the type investments they can hold in the registered plans.

The Income Tax Act imposes a non-resident withholding tax on all payments out of the plans so this would affect anyone receiving RRIF payments. The rate of withholding varies from zero to 25 per cent, depending on the amount, the country of emigration and any tax treaties that Canada has entered into with foreign jurisdictions.

Canada has tax treaties with most countries in the world. There are sections of these treaties that deal with tax withholding. Part XIII or withholding tax is deducted from certain types of Canadian income including dividends, rental and royalty payments, pension payments, old age security pension, Canada Pension Plan and Quebec Pension Plan benefits, retiring allowances, RRIF and RRSP payments, annuity payments and management fees.

“To make sure the correct amount is deducted it’s important to tell Canadian payers like financial institutions that you’re a non-resident of Canada for tax purposes and your country of residence,” says Hamel. “If you receive Canadian income that is subject to withholding tax Canadian payers, including financial institutions, must deduct the tax when the income is paid or credited to you. The tax deducted is your final tax obligation to Canada on this income if the correct amount is deducted.”

The usual withholding tax rate is 25 per cent unless a tax treaty between Canada and your home country reduces the rate.

“Withholding tax is not refundable — therefore, do not file a Canadian tax return to report the income unless you elect to file a return because you receive either Canadian rental income from real or immovable properties or timber royalties or certain Canadian income such As Old Age Security, Canada and Quebec Pension Plans, other pensions and superannuations, RRSP, RRIF and Pooled Registered Pension Plan payments, death benefits, employment insurance benefits, retiring allowances, deferred profit-sharing plan payments, amounts received from or the purchase price of a retirement compensation arrangement, prescribed benefits under a government assistance program, and benefits under the Auto Pact.

For people immigrating into the country it is a little-known fact is that Canada is one of the few countries in the world that allows them to roll over their existing pension plans without paying tax and without affecting their RRSP contribution limits.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.