TAXES A CLOUD FOR SUN-SEEKING PAIR
Acouple we’ll call Eric, 49, and Louise, 58, live in Ontario. Both civil servants, t hey bring home $ 4,653 a month, save conscientiously, yet have a dilemma. Their plan is to work another nine years, then retire perhaps to the Caribbean or Central America where they would have less need for central heating and parkas and, they expect, a much lower cost of living.
“We want to leave Canada for good or, if that is not feasible, then to downsize our house and move to the East or West coast and live abroad for six months of the year,” Eric says. “We’d like $ 85,000 a year income before tax. What needs to be done now to achieve this goal?”
Family Finance asked planner Guil Perreault, head of G. Perreault Financial Inc. in Winnipeg, to work with Eric and Louise. In his view, the plan will work in the simple sense of living economically in a low-cost country. But breaking ties to Canada is the larger problem.
“CRA considers residency on a case-by-case basis,” Perreault says. “Living in Canada for less than 183 days a year is only one test. CRA also considers financial ties, social ties, driver’s licences, where you bank — it all has to be evaluated.”
ESTIMATING RETIREMENT INCOME
Their present financial assets are $ 681,100. They have $ 86,600 in TFSAs and contribute $ 750 a month to the plans. At this rate of contribution, growing at three per cent a year after inflation, in nine more years they would have $207,170 in 2016 dollars
Eric and Louise have $538,000 in RRSPs and contribute $ 1,980 a year to the plans. In nine years, growing through contributions and at three per cent after inflation, the RRSPs would have a value of $ 722,700. Their $ 46,500 non- registered savings with no further contributions would have appreciated to $60,700. Allowing for tax on accrued but unrealized gains and no tax on principal, we’ll assume that they have $50,000 ready for travel.
RRSP income can be paid abroad with a withholding tax that is usually 15 per cent, but can be as much as 25 per cent depending on the tax treaty between Canada and the other country. TFSA balances could be cashed with no tax. Non- registered investments would be subject to a departure tax, which is effectively an acceleration of accrued but unrealized capital gains to a theoretical or actual sale.
We’ l l assume they sell their home, which would have a theoretical value of $ 913,000 after nine years of growth in price at three per cent after inflation. There would be preparation for sale and selling costs totalling about five per cent, or $ 46,000, reducing the cash obtained to $867,000. If they keep $500,000 for a home in a warm place, they would be able to add $367,000 to their funds for living abroad.
On t he eve of departure, the couple would have $ 624,170 in total financial assets.
In nine years, Louise will be 67. She will be entitled to $ 9,000 in CPP at age 65, or she can wait to 67 to obtain an enhanced benefits of $10,512.
Eric would be two years from early application for CPP. If he chooses to start benefits at 60, he would receive the basic $ 13,110 less 36 per cent, for $ 8,390 a year. Eric’s company pension would start at $45,550 a year at age 58 with a drop to about $ 44,000 a year at 65. Louise would have a company pension of $ 12,000 a year starting at age 63.
Adding it all up, when each partner is at l east 65, t hey will have combined company pensions of $ 56,000; combined CPP benefits of $ 18,902, assuming Eric starts his benefits at 60, and Louise waits until 67; and two OAS benefits, $7,832 for Louise if she waits until she is 67 to start benefits, and $6,846 for Eric, assuming he starts his benefits at 65.
The sum of their various pension incomes would be $ 89,580, or $ 76,150 a year after 15- per- cent withholding on government pensions and similar rates for other income streams. Their capital, if annuitized at three per cent after inflation for 28 years to Louise’s age 95 would generate $ 32,300 before tax. Allowing for zero tax on TFSA payments and assuming that other income is subject to 15-per-cent average tax in their new jurisdiction, they would net $27,450 a year. With these assumptions, they would have pension and investment income of about $ 103,600 a year after 15-per-cent withholding.
LEAVING CANADA
The idea of breaking all ties with Canada for financial advantage is superficially easy but in practice quite problematic. For this couple, replacing coverage by the Ontario Health Insurance Plan could be costly if they have to buy private health insurance. If they remain in Canada for residence, then, ironically, their tax rates would rise to perhaps 17 per cent in British Columbia or 20 per cent in Nova Scotia based on current tax schedules and splits of eligible pension income.
“Our analysis is not by any means definitive,” Perreault explains. “If they choose to leave Canada, the couple must take advice from a tax professional who specializes in international tax and from a lawyer with experience in the expatriation process.”