The article “Moving Overseas for Work? Prepare to Complicate Your Finances.” was originally published on The Financial Post on July 24, 2015.
Financial planning can be challenging for average Canadians, but is that much more complex for Canadian expatriates, who are often tasked with managing Canadian investments, pensions, real estate and taxes while balancing these same considerations abroad.
Finding the right advice can be difficult. Canadian investment advisers tend to have both limited knowledge and restrictive regulations when working with expats. Foreign advisers are unlikely to have Canadian expertise. And though tax and legal advice can be sought from accountants and lawyers at multi-national firms, the price tag may make this an option only open to the ultra-wealthy.
According to Andrew Hallam, author of The Global Expatriate’s Guide to Investing, “advisers overseas can be hungry wolves. They don’t play by the same rules.” Hallam is a Canadian expat himself and speaks from experience. In his new book, he looks to help global expats navigate through investment, tax and retirement complexities that result from going global.
Take the case of my client, Kayla, not her real name. She’s a teacher in Singapore who bought an Investment-Linked Assurance Scheme (ILAS) that was promoted as an offshore pension with mandatory long-term contributions. High fees have caused her mutual fund returns to be negative over the past 10 years despite the fact that stock markets have risen during that time. She stopped contributing as a result and just found out she’s being charged an 8 per cent annual fee for inactivity.
“Most of the world’s 200 million expats float in stormy seas. Few can contribute to their home country social programs. They’re often forced to fend for themselves when they retire,” says Hallam. His book sets out to give these expats some of the tools they need to take control of their finances.
Taxation tends to be a primary concern for expats. In Canada, tax is determined based upon residency status, with Canadian residents taxed on their worldwide income. Residency is established by significant ties, such as a house, spouse or dependents in Canada, as well as secondary residency ties, like personal property, social memberships, bank accounts, credit cards, driver’s license or passport.
According to the Canada Revenue Agency, “the residential ties you establish or maintain in other countries may also be relevant.” In other words, residency and Canadian taxation are not always clear-cut, and those living in other countries are not necessarily exempt from tax filing obligations back home.
Take Andrew and Anna, for example. They are pharmacy executives who have relocated to the U.S. but have rental properties in Canada. Despite being non-residents for Canadian tax purposes, they will have to file special Canadian tax returns to report their rental income and expenses, and pay 25 per cent tax on their net rental income.
Canadian source income is typically taxed at 25 per cent for non-residents, but tax treaties and provisions often allow for lower rates.
True non-residents are typically only required to file a Canadian tax return if they have certain types of Canadian source income — like employment income, business income or rental income in Canada. Many countries have tax treaties with Canada to ensure that taxes paid in either country are credited towards taxes payable in the other country
Most of the world’s 200 million expats float in stormy seas
The financial benefits of becoming a non-resident may be a lower cost of living abroad or, quite often, a lower tax rate, particularly in low- or no-tax jurisdictions like the Middle East or Caribbean.
Take the case of Kendall, a lawyer working for an intergovernmental organization in Cambodia. His employment and investment income are both tax-free. As he builds his investment portfolio, he needs to figure out the right jurisdiction and the right investment products to ensure that his withholding tax at source is limited, but that he’s building an investment portfolio that will allow him to retire back in North America.
RRSPs and TFSAs can generally continue to grow tax-free for Canadians abroad. Non-residents can’t contribute to TFSAs and shouldn’t contribute to RRSPs. Some Canadians consider cashing out their RRSPs when they go abroad and paying a one-time tax hit of 25 per cent. Whether this makes sense is based on personal circumstances.
For example, a client of mine I will call Kevin works for a technology company in England. When we evaluated whether or not to cash out his RRSP, he opted to keep it to use toward a home downpayment under the Home Buyer’s Plan when he returns to Canada in a few years.
RESPs can generally be maintained for children, but the ability to make ongoing contributions is based on the child’s residency. Contributions shouldn’t be made once a child becomes a non-resident.
CPP and OAS pensions generally stop accruing for non-residents, but whether Canadians retire at home or abroad, they are still entitled to one day receive the government pensions they earned before leaving.
Canadian non-residents cannot buy Canadian mutual funds. They can simply continue to hold the ones they already own, if applicable. They can buy Canadian stocks, bonds, GICs and exchange-traded funds while abroad. But whether or not they should continue to hold their investments in Canada depends on the particulars of their short and long-term plans.
Ron and Wanda work at a school in Saudi Arabia, but they have Canadian RRSPs invested in mutual funds with a bank in Canada. They want to move the money into a self-directed brokerage account – which can be tricky, administratively, while a non-resident – but doing so will allow them to invest in their desired passive ETF strategy with lower fees.
From an estate planning perspective, ex-pats need to know that their Canadian wills and powers of attorney may not necessarily cut it when they are living abroad and accumulating international assets. According to Singapore-based lawyer, Philip Duckworth, “the restrictions on who can draft wills and who can benefit … are generally resolved with local wills limited to cover assets and debts there.”
Insurance coverage in Canada would typically be portable and payable for expats living and working outside of Canada. According to Chad Larmond of Larmond Risk Management in Toronto, “insurance coverage would generally maintain and be eligible for payment regardless of where someone is living. Benefits would be payable in Canadian funds.”
Retirement planning for expats often becomes more art than science. Unlike the typical salaried employee with a predictable defined benefit pension, retirement for expats does not often entail 60 per cent of salary paid for life from age 60. Expats often live and work in different countries and may not even know which country they will ultimately retire in.
It can be complicated to determine how to best build retirement savings, mitigate foreign exchange risk, plan for a retirement home or even determine a reasonable retirement budget. By evaluating your options and engaging in scenario analysis, you can set short-term targets to begin to work towards your long-term goals.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.