So You Want to Move Abroad? Part 2: Once You've Left
In part 1 of this series, we covered things you should be aware of before leaving Canada. In this part, we'll go through what happens once you've left.
Once You've Left
Withholding Taxes
This catches a lot of folks by surprise. Even when you become a non-resident for tax purposes in Canada, you will still be taxed on Canadian-source income even if you don't live in Canada.
Income might include benefits such as OAS and CPP, dividends received in Canada (even in foreign investments), RRSP/RRIF payments, and even things like royalties.
The CRA has a non-resident tax calculator here to estimate your tax liability. The institution that makes a payment to a non-resident is legally obliged to withhold these taxes at source (i.e. they reduce the payment and submit the taxes directly). Because the taxes are withheld at source, it is often considered your final tax obligation and you are no longer required to file a Canadian return.
There are a couple of exceptions to the above where you can elect to file a Canadian tax return as a non-resident for certain types of income.
This first would be pension income: OAS and CPP (including Disability Benefits) and RRSP/RRIF payments. You can read the complete list of acceptable income types here. This is referred to as a Section 217 election. For those on relatively low income retiring abroad, this will often reduce their effective tax rate. The second is Section 216, which we'll talk about in the section on renting out and selling your home after you've left.
Tax Treaties
Canada has tax treaties with nearly 100 countries. Most treaties are based on the OECD model. These treaties generally set out to avoid double taxation. Depending on the country that you move to, the treaty may also reduce or eliminate withholding taxes depending on the type of income.
Treaties also generally allow a credit for taxes paid in one country to be applied to offset taxes in another country. For example, if you had taxes withheld on your Canadian-source income, that amount could be used to offset any remaining tax bill in your destination country. This is generally referred to as a foreign tax credit.
An example of how a treaty can help you would be if you moved to Mexico but have dividend income from a taxable (unregistered) investment account held in Canada. The treaty would reduce the withholding taxes (WHT) on the dividend income from 25% to 15%. The treaty would also allow you to use that 15% tax that you paid in Canada to offset your Mexican tax bill.
For us, Costa Rica did not have a tax treaty with Canada. Costa Rica is unlikely to ever have a tax treaty unless it changes its tax regime as it has what's called a "territorial" tax system. Many countries view this as controversial (Panama also follows this practice). Under a territorial tax system, offshore income is not taxed at all in the country of residence (Costa Rica).
The catch here for us was that even though Costa Rica doesn't tax foreign income, Canada does – and our investments were in Canada. Because there was no tax treaty, every single dollar of interest and dividend income we receive would have 25% withheld and paid to the Canadian government.
A word of caution. Tax treaties generally include provisions for information sharing between tax authorities. They are not just there to facilitate you paying lower taxes.
Another word of caution is that tax authorities in other countries don't always follow the treaty rules. An example of that was a 2023 ruling by Spain's top court that their tax authorities must not override or interpret the tax treaties Spain has in place. Spanish tax authorities had taken it upon themselves to decide that a tie-breaker clause in a tax treaty didn't apply to an individual, even though he had a tax certificate from another country.
Renting Out or Selling Your Home Once You've Left
This section is super important. I've spoken to several people who want to "test the waters" when emigrating. They plan to keep their home in Canada, rent it out, and either use the rental income to live somewhere else or wait until they're settled and then sell.
Canadians are used to being able to sell their primary residence on a tax-free basis through the Principle Residency Exemption (PRE). However, if you leave Canada before selling your home and are no longer tax-resident, you will not be able to claim the PRE. You will now be liable for capital gains tax on the sale price of your home less its cost basis (purchase price).
However, there's another major pitfall here. Both lawyers and real estate agents conveying the sale are required to establish your tax residency status as part of the sale. If you indicate you are not a tax resident of Canada, the lawyer must now withhold 25% of the gross sale price of the home to ensure the tax liability is satisfied.
If your home was sold for CAD$1m, you would have CAD$250,000 (25%) withheld regardless of what your purchase price was and your subsequent tax liability.
If you have been renting out this home while non-resident, things get more complicated. For rental income, either your tenant or property manager is required to withhold taxes at the appropriate WHT rate for your country of residency and submit them directly to the CRA. This rule has caused a lot of controversy recently with a court case in Montreal where a tenant was found liable for their landlord's WHT. While the Minister of Finance has said the CRA won't enforce this rule for tenants, we are still in a predicament where Section VIII of the Income Tax Act does indeed outline this responsibility. You can, as previously mentioned, file a Section 216 election and avoid this situation.
To fully complete the sale of a rental property, you will be required to obtain a clearance certificate from the CRA. This assures all parties that appropriate measures have been taken concerning tax liabilities.
Canadian Benefits
You can still collect Canada Pension Plan (CPP) benefits if you leave Canada. There is no requirement to live in Canada or be a tax resident. Additionally, payments can be made directly in many local currencies into a local bank account – saving you from currency exchange costs and providing convenience.
Old Age Security (OAS) requires that you have lived in Canada for 20 years before collecting benefits as a non-resident. Note that this is longer than if you were to try and collect OAS while a Canadian tax resident.
If you worked in a country that had a social security agreement with Canada, that also counts towards that time. Just like CPP, OAS can be paid directly in local currency into a foreign account.
Taxes in the Country You Move To
You are likely liable for filing taxes in the country you move to as a resident of that country. You should get professional advice in that country on this matter.
Countries with tax treaties with Canada almost always provide some level of credit for withholding taxes on any Canadian source income to reduce potential double taxation.
If you maintain investment accounts such as RRSPs, RESPs, and TFSAs in Canada, there's a word of caution: they may become taxable in the country that you move to! For example, many countries will not recognize your TFSA and will tax any income (even interest and dividends that remain in the account).
Additionally, some countries have wealth taxes that are calculated on your entire worldwide assets rather than income. Spain and Italy are examples of countries that do this. It doesn't matter to them if the account is non-taxable in the country where it's held.
PwC has a really good tool here that summarizes international taxes.
Being "Stateless" and "Flag Theory"
In the eyes of Canadian tax law, you must be a tax resident somewhere. You cannot be a "perpetual traveller", although this concept is popularized under a term referred to as "Flag Theory'.
Even with Flag Theory, you need to establish a tax residency in a so-called tax haven. But if you have Canadian source income, please see the previous comments commentary about how withholding taxes and understand you will still be subject to that.
Currency Risk
In our case, Costa Rica is interesting because it has its official currency, the Costa Rican colón (CRC), and also unofficially uses US dollars in many tourist areas. The rent for our apartment lease was in USD, and my son's school fees were in USD, but things like shopping at the local market would have been in CRC.
Between our original departure date (October 2021) and the time of writing, the Costa Rican colón has appreciated approximately 24% against the Canadian dollar. And we would have been paying 25% WHT on that Canadian-source income, too. When you start to add the rampant inflation that just about everywhere in the world has seen recently, you can start to see this would have been a nightmare.
Right now, we're seeing $USDJPY nearing ¥160. Bear in mind that in early 2001, the Yen traded ~¥100. While Japan has had its fair share of economic issues, this is a developed nation that's seen massive currency erosion. It could happen just about anywhere with the right catalyst.
For me, the currency risk was too great. I'm not saying I'm clairvoyant here, but I do feel like we made the right decision to not get on the plane just based on currency issues alone.
Driving Licenses
I'm only familiar with B.C. and Ontario, but both of those provinces are a little bit fussy about having more than one driver's license. Additionally, you are not supposed to renew a Canadian license without actually being a resident of those provinces.
Another catch that folks don't think of is that you may need an International Driving Permit on your return to Canada if you've gone and got a foreign license. Any foreign license that's not written in French or English means you need an IDP to drive in Canada as a visitor.
Visiting Canada
Of course, you will have lost your provincial health insurance by becoming a non-resident. You'll want to make sure you have travel medical coverage for any trips back to Canada. A trip to the ER in Canada can cost $750-1000 for those who are uninsured through a provincial or territorial health plan. A stay in a hospital can cost thousands of dollars per day.
If you are electing to remain a Canadian tax resident because you maintain primary ties with Canada, you may also need to visit regularly. You should get expert advice on this as this is a somewhat grey matter.
Leaving for an Extended Absence
Everything written here is written based on leaving permanently. If you are planning on leaving on an extended absence, this might not necessarily apply to you.
Concerning taxes, the CRA will take into account your plans to return to Canada in determining tax residency. Again, you should get expert advice on your particular circumstances here.
Many countries consider you a tax resident if you spend more than 183 days or 6 months there in one tax year. Some countries, like Mexico, consider you a tax resident as soon as you establish a permanent home there (yet their tax code doesn't elaborate on what that means, so it's quite controversial).
Both B.C. and Ontario (I'm unfamiliar with other provinces and territories) can grant the ability to keep provincial health insurance during an extended absence. But you must apply and be granted this right before you leave, and the maximum extended absence must be less than two years/24 months.
Snowbirds
Even if you don't leave Canada permanently you may inadvertently trigger some unfavourable consequences.
Once upon a time, many Canadians flocked to Florida or Arizona for the winter. The U.S. has what's referred to as the "substantial presence test". If you were physically present in the United States:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
You are now obliged to file U.S. tax returns even though you have no immigration ties with the United States. You may not owe taxes, but it is still a financial and time burden.
Recap
I pay less taxes having stayed in Canada than I would have by moving to Costa Rica. Even though Costa Rica has a territorial tax regime and does not tax foreign income, Canada would have applied 25% withholding taxes to my dividend and interest income. That's not a marginal rate: that's 25% on every dollar from the very first dollar.
If you have Canadian-source income. moving to a country with a tax treaty is generally more favourable than one without one. The WHT on your Canadian income will likely be reduced.
Also, as highlighted earlier, we would have had quite a large erosion in local spending power due to the Costa Rican colón (CRC) strengthening against the Canadian dollar. Our local costs would have increased ~24% even before the effects of rapid inflation over the past few years.
Before contemplating a permanent move, I would at least read the CRA's tax folio on the matter: Determining Individual's Residency Status.
For our situation, I also consulted with a cross-border CPA (Certified Public Accountant). While he didn't have any specific experience with Costa Rica, he was very familiar with the pitfalls of leaving Canada.
Closing Thoughts
My wife and I have spoken about things several times since our aborted departure. While hindsight is 20/20, we're both glad we stayed put. Not just because of the financial implications, but because we're not sure we would have had a better life in Costa Rica.
Hopefully you enjoyed this series!
Whilst every effort is made to make sure this information is complete and accurate, it is not advice and you should talk to a professional about your circumstances.