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Beware of tax consequences for your TFSA, RRSP accounts if you become a non-resident

Many individuals take advantage of registered savings plans in Canada. The most commonly known plans are Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). There are certain rules and restrictions to be aware of for Canadians who have such plans and become non-residents for tax purposes. In a prior blog, “Moving to the U.S. and Retirement Plans”, we looked at a few planning strategies regarding registered plans in the context of emigrating to the U.S.

TFSA

A TFSA lets you put money in a registered plan, and any income the plan earns is tax-free. The contribution limit for 2022 is $6,000. If a taxpayer did not contribute the maximum in previous years, he or she may be able to contribute more.

If a Canadian tax resident has a TFSA and emigrates from Canada, the accumulated funds may remain in the account without any Canadian tax consequences.

The income earned in the TFSA may be taxable in the new country of residence, depending on any tax treaty between Canada and the country of residence. For example, in the U.S., a TFSA does not have any special status and there are no relieving provisions in the tax treaty between Canada and the U.S., so any income earned in a TFSA is taxable to a U.S. taxpayer. This tax mismatch is one reason U.S. citizens living in Canada often do not hold TFSAs.

While a non-resident, the account holder should not make further contributions since the account will not have any tax benefits and will attract penalties. In the event the non-resident account holder contributes to the TFSA while a non-resident, the contributions will be subject to a 1% tax for each month the contribution stays in the account until the earlier of:

  • the date the excess contribution is removed from the TFSA; or
  • the date the non-resident re-establishes his or her Canadian tax residency.

As a non-resident, the account holder can continue to withdraw money from the TFSA without paying any Canadian tax. The withdrawals will not be subject to withholding tax.

Any withdrawals made during the period that the account holder was a non-resident will be added back to his or her TFSA contribution room and will be available in the following year from when it was withdrawn if the account holder becomes a Canadian tax resident again in the future. While a non-resident, the contribution room will not increase or accrue.

RRSP

An RRSP lets you put money into a registered plan and defer paying taxes on the money you deposit, as well as any earnings it produces, until you withdraw it from the plan. An individual may contribute to an RRSP based on 18% of earned income of the prior year, up to an annual maximum (which in 2022 is $29,210). Unused contribution room can be used in subsequent years.

If a Canadian tax resident has an RRSP and emigrates from Canada, he or she can continue to contribute to his or her RRSP. The amount that the account holder can contribute will depend on his or her Canadian-source income.

A person may make withdrawals from an RRSP account, but the withdrawals will be subject to withholding tax. The amount of the withholding tax is dependent on whether a tax treaty exists between the taxpayer’s country of residence and Canada.

The year in which the individual turns 71 is the last year the individual can contribute to his or her RRSP, at which time it can be converted to an RRIF (among other options).

There are various tax considerations when emigrating from Canada, including with respect to registered savings plans, and it’s important to seek tax advice. It’s also important to ensure these plans are integrated into your overall estate plan, including ensuring the beneficiary designations are up to date and to seek professional advice in this regard.

— Marly Peikes

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.
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