February is RRSP season, and that means thinking about retirement. In the 21st century, Canadians are living longer, private pensions are less common and inflation continues to erode purchasing power.
Canadians are crunching the numbers and fearing that they may not have enough to retire and live the lifestyle they want. If spending less or working more do not sound attractive, consider another way to make more of your retirement nest egg: pay less tax.
Registered retirement savings plans (RRSPs) are great retirement savings vehicles. Depending on your income level and which province you live in, you get a tax deduction of up to 54 per cent when you make a contribution. Your money then grows, tax-deferred. Eventually, upon withdrawal, funds in the RRSP are subject to tax at the same high marginal rates of up to 54 per cent.
Many Canadians are surprised to hear that Canada taxes those who become non-residents much more favourably than those who remain Canadian tax residents. For example, non-residents of Canada who move to the U.S. can withdraw their RRSPs at much lower tax rates. Rather than pay tax at the top marginal rate of 54 per cent mentioned above, Canadians who become U.S. residents can withdraw from their RRSPs at 25 per cent. With proper planning, the tax rate can drop even lower – to 15 per cent. On a $1-million RRSP, that is a savings of nearly $400,000 of tax. Furthermore, there are opportunities to characterize the tax paid to Canada as a foreign tax credit, which can be used in future years as a way to grind the tax bill down even further.
Another advantage Canada gives to its non-residents involves the Old Age Security pension (OAS). At age 65, Canadians are eligible to receive approximately $7,000 per year if they have spent enough of their adult life as Canadian residents. Unfortunately, many Canadians never receive this annual benefit, because they are subject to something known as OAS clawback.
If you speak to those affected by it, the clawback is as painful as it sounds. if a Canadian's income exceeds a threshold amount ($74,788 for tax year of 2017), they have to repay part or all of their OAS pension benefit in the form of a recovery tax commonly referred to as "clawback."
Once again, Canadian expats enjoy favourable tax treatment since Canadians who move to the U.S. are not subject to OAS clawback. For a Canadian couple, avoiding clawback amounts to additional income of about $14,000 per year.
Moreover, since Canada's tax system is based on residency, Canadians are no longer taxed by Canada on their worldwide income after they exit the country for tax purposes. Canadians who have departed will have no trouble getting used to the lower income tax rates in the U.S.
For example, someone who moves from Ontario to Florida would go from a top rate of 53.53 per cent (which kicks in at $220,000) to a top rate of 37 per cent (which kicks in at US$500,000, or US$600,000 if filing jointly with a spouse).
Not everyone can take advantage of these strategies. First, to substantiate an exit from Canada, you need to obtain a U.S. visa or green card allowing you to spend more time in the U.S. Health care planning is also a must, as exiting Canada from a tax perspective means giving up eligibility for Canadian health insurance. Finally, you need a well-thought-out cross-border tax and financial plan to deal with various hurdles along the way, such as Canadian departure tax and U.S. estate tax.
Remember, exiting Canada for tax purposes doesn't mean you stop being Canadian. You can always keep your Canadian citizenship, enjoy summer months north of the border and cheer on your favourite Canadian hockey team.
So the next time you are staring in the mirror and asking the question, "How am I going to reach my retirement goals?" look south of the border, and you just might find your answer.
Matt Altro is the president and CEO of MCA Cross Border Advisors Inc. and a certified financial planner in Canada and the United States.
David Altro is the managing partner of Altro LLP, which specializes in cross-border tax and estate planning, real estate and immigration and has offices in Canada and the United States.