# Partial Tax Year from Emigrating



## oob (Apr 4, 2011)

Hypothetical situation: in 2016, I leave Canada in January and cease to be a tax resident. 
At what rate do I get taxed? Do the thresholds get adjusted on a pro-rata basis? 

If not pro-rata, is this a good way to withdraw some RRSPs and minimize the associated tax liabilities?
I'm 26 and would not expect to return to Canada any time soon. RRSP has ~$75k in it right now, so I would conceivably take out $15-20k and pay a low tax rate on that,


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## gibor365 (Apr 1, 2011)

> RRSP has ~$75k in it right now, so I would conceivably take out $15-20k and pay a low tax rate on that,


 Convert to RRIF , get minimum , no taxes


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## Eclectic12 (Oct 20, 2010)

oob said:


> Hypothetical situation: in 2016, I leave Canada in January and cease to be a tax resident.
> At what rate do I get taxed? Do the thresholds get adjusted on a pro-rata basis?


As I understand it ... you owe what you owe - only the time frame has changed and possibly the base income.

For example, stay all year in Canada making $60K means one owes on the full $60K income. Leave Canada in say March, having earned $20K income (1/3 of the yearly income), one owes on $20K income.

Note that if one has certain types of property - such as stocks in a taxable account, there is also capital gains tax to calculate plus potentially pay, regardless of whether one sold the stock or not. This is typically called a departure tax.


http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/lvng-eng.html
http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/dspstn-eng.html




oob said:


> If not pro-rata, is this a good way to withdraw some RRSPs and minimize the associated tax liabilities?
> ... RRSP has ~$75k in it right now, so I would conceivably take out $15-20k and pay a low tax rate on that,


Depends ... what you'll have to figure out is whether withdrawing from the RRSP in the final tax year of low income plus potentially capital gains taxes ends up being lower than the tax from withdrawing after becoming a non-resident (NR).

Withdrawing before leaving means having a withholding tax taken from the RRSP payment plus adding income to the final Canadian tax return. The final tax return should take care of situations where too little or too much was withheld.
http://www.taxtips.ca/rrsp/withholdingtax.htm


Waiting until one is in another country where one has notified the financial institution that one is no longer a resident, then the RRSP withdrawal is likely at a max of 25% (though a tax treaty with the resident country may reduce this).


Bottom line is that what is best will change depending on the final Canadian tax return versus whatever the new resident country's taxes are like as well as any changes a Canada-resident country tax treaty makes.


Cheers


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## Eclectic12 (Oct 20, 2010)

gibor said:


> Convert to RRIF , get minimum , no taxes


AFAICT - using the minimum RRIF payment means avoiding the withholding tax. 

One still reports the RRIF $$$ on one's tax return to be taxed. Just like one gets a T4 employment income, the RRIF payments generate a T4RIF "Statement of income from a RRIF".

For someone who setup a RRIF then moved to another country, CRA explicitly says:


> Part XIII tax is deducted from the types of income listed below. To make sure the correct amount is deducted, it's important to tell Canadian payers:
> that you're a non-resident of Canada for tax purposes; and
> your country of residence.
> 
> ...


http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html

Note that Part XIII tax is typically 25% unless there is a tax treaty that reduces it.


Unless I'm missing something, a RRIF does not equal "no taxes".


Cheers

*PS*

Another source says:


> Like an RRSP, RRIF income is completely tax sheltered inside your RRIF account, but all withdrawals are taxable.


http://www.thestar.com/business/per...0/08/03/rrifs_10_things_you_need_to_know.html


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## gibor365 (Apr 1, 2011)

> Unless I'm missing something, a RRIF does not equal "no taxes".


 If from his RRIF he takes only minimum payments and there is tax treaty , why would he own any taxes?


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## Eclectic12 (Oct 20, 2010)

As per the links above - as a NR, RRIF payments are subject to Part XIII tax.

CRA's link for Non-residents of Canada included in post #4 says:


> The usual Part XIII tax rate is 25% (unless a tax treaty between Canada and your home country *reduces the rate*).


While most of the articles that talk about this situation in detail are slanted to the US situation - knowing that having a Canada-US tax treaty does not reduce the Part XIII tax to zero, why would the Canadian gov't agree to do so for any other country? After all, the US is Canada's largest trading partner who is likely to be able to negotiate the best deal.


Quoting a G&M article about a Canadian moving to the US:



> If he instead makes withdrawals from his RRSP after he takes up residence in the U.S., he’ll pay a simple withholding tax to the Canada Revenue Agency (CRA).
> 
> The rate of tax under our tax law is 25 per cent, but *that rate can be reduced to just 15 per cent under the Canada-U.S. tax treaty * on periodic withdrawals


http://www.theglobeandmail.com/glob...er-before-you-move-to-the-us/article21934012/


If one takes a step back ... having a treaty that reduced the NR tax to 0% means the RRSP/RRIF are tax free. How likely is it that the Canadian gov't would be happy with no taxes at all?


Cheers


*PS*

I haven't made a study of all the tax treaties and am not an expert so one should followup to be sure.


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## oob (Apr 4, 2011)

Not sure I understand how the RRIF would work. For context, I would be moving to the U.S. and expect to have a ~40% marginal income tax rate there. I'll be subject to a higher rate in Canada in 2015, but perhaps could get around that in 2016 stub year since my Canadian earnings pre-departure will de minimis?

If I convert to an RRIF, I would be subject to a withholding tax topped up to my marginal income tax rate in the US right?


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## Eclectic12 (Oct 20, 2010)

With more time to think about - I believe there is another factor the OP should consider.


Looking at Ontario's tax tables for 2015 ... best case is for a final tax return with zero other income is to pay 20.05% on income up to $40,922. This saves 4.95% versus the Part XIII tax for a NR. Income from 40,922 up to $44,701 then is pretty much the same as the Part XIII tax as it is 24.15%.

After that, the NR is at least 6.15% or better cheaper.


Unless the RRSP is not tax free in the new country or there is a similar account to put the money into ... what is having the RRSP continue to grow tax-free worth compared to a relatively small tax saving of 5%?

Then too province matters for the RRSP withdrawal tax rates.
If the OP is in Alberta ... the first $44,701 is currently taxed at 25% so it's even.
If the OP is in BC ... the first $37,869 saves just under 5%, then $37,869 up to $44,701 saves 2.3% and above has no saving.
If the OP is in Quebec ... Part XIII tax is cheaper at any income level.



Cheers


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## Eclectic12 (Oct 20, 2010)

oob said:


> Not sure I understand how the RRIF would work. For context, I would be moving to the U.S. and expect to have a ~40% marginal income tax rate there.


As I understand it, the RRIF is going to put one on a schedule of withdrawals. An RRSP I believe would allow one to pick and choose so that more is withdrawn when one has a lower US income and less (or none) when one has a higher income.




> I'll be subject to a higher rate in Canada in 2015, but perhaps could get around that in 2016 stub year since my Canadian earnings pre-departure will de minimis?


Even starting with $0 income in 2016, the tax treaty rate of 15% gives a distinct advantage for the Canadian tax rates.




oob said:


> If I convert to an RRIF, I would be subject to a withholding tax topped up to my marginal income tax rate in the US right?


If by "topped up" you mean the Canadian tax goes to Canada and the US tax goes to the US, I suppose. I'm not comfortable with this way of describing it as this ignores the fact on the US income tax return, there is supposed to be a tax deduction/credit for the Canadian tax paid.

The Canadian side is going to have the Part XIII tax (max of 25%, likely 15% when treaty is applied). The US side is going to have their own rules.

As an example of how complicated it can get, this article says that the cost base can be taken out US tax free so that only the profits are taxed. So where one has established the cost base to one's advantage - only part of the withdrawn $$$ are going to included on the US tax return.
http://gedeonlawcpa.com/do-i-pay-u-s-taxes-on-my-rrsp-withdrawal/

It also claims saying that converting to the RRIF plus claiming the treaty benefits is what reduces Canada's rate to 15%


Here is another article that reinforces that talking to a tax expert is probably a good idea. It says that proper paperwork is needed or the IRS will tax the RRSP / RRIF accrued earnings despite being in the registered account.


> The operative words, however, is “may elect”.
> 
> US taxpayers that have failed to specifically elect tax relief under Article XVIII(7) are required to pay US income tax on the accrued earning within the plan. The IRS considers those taxpayers that have failed to make the election and have not paid the taxes on earnings within Canadian RRSPs and RRIFs to be non-compliant.


http://agtax.ca/canada-us-tax/understanding-us-tax-treatment-of-canadian-rrsps-and-rrifs


Again, talking to a professional who is versed in the two tax systems is probably a good idea.


Cheers


*PS*

If you have a TFSA, the US outright taxes it so you are likely better off to collapse the TFSA before going to the US.


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## oob (Apr 4, 2011)

Thanks. Appreciate the guidance. Looks like some of this stuff is over my head... I will consult a tax expert.

Yeah I'm thinking through the TFSA as well.
Do you have experience of going through a move? Is there a fee "efficient" way of doing this, like transferring-in-kind to a brokerage with Canadian and US operations like Interactive Brokers and then having them "port" the account over to the US side?


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## AltaRed (Jun 8, 2009)

I agree with all that Eclectic12 has said. Converting the RRSP to a RRIF is a bad idea. Any withdrawal from a RRIF or a RRSP is taxable income wherever the OP is. I agree there is a benefit to considering an RRSP withdrawal prior to exiting Canada and having the income declared on the Canadian T1 General at a lower rate than the suggested 40% MTR in the USA. I believe personal deductions are prorated for the amount of time spent in the specific country but a tax accountant could clarify that. The OP could also consider tappinng into Serbinski's Tax Forum which specifically addresses US/Canada issues.


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## Eclectic12 (Oct 20, 2010)

The "RRSP withdrawn on the Canadian return to avoid the suggested 40% US MTR" is another area that a tax accountant can clarify.

I finally found the G&M article I was looking for. It suggests that a way to reduce the US tax on RRSP profits is to sell then re-invest the RRSP portfolio just before moving to the US. The sale is not a taxable event for Canada as it happens within the RRSP, at a time when only the Canadian tax system is involved. 

When the US tax system takes over for the withdrawal, the cost has been reset to such a high number that profits left that are subject to US tax are minimal. Canada still charges their 25% or 15%.

http://www.theglobeandmail.com/glob...er-before-you-move-to-the-us/article21934012/


Cheers


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## gibor365 (Apr 1, 2011)

> As per the links above - as a NR, RRIF payments are subject to Part XIII tax.


 I'm not an expert  , but assuming I convert my RRSP to RRIF and move my "tax home" to another country... My income from RRIF 12K and no income in another country.... Would i still pay tax on RRIF withdrawals? 
Same question about TFSA?


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## Eclectic12 (Oct 20, 2010)

AFAICT ... having RRSP or RRIF withdrawals means paying tax to CRA and Canada, regardless of where one's tax home is.

From a Canadian tax perspective, the only question is what tax rate will be applied to the $12K from the RRIF.

After that, it depends on the new tax country as to whether they also want a piece of the action plus whether there are any actions or treaties that will help.


The TFSA is Canadian tax free so the new tax country is the only one that would be taxing the TFSA withdrawal.


Cheers


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## Eclectic12 (Oct 20, 2010)

oob said:


> Thanks. Appreciate the guidance. Looks like some of this stuff is over my head... I will consult a tax expert.
> 
> Yeah I'm thinking through the TFSA as well.
> Do you have experience of going through a move?


I've only ever had to file a US tax return for the same tax year as I filed a Canadian tax return as I was a Canadian tax resident working temporarily in the US.

You'll probably be interested in the following thread as some CMF-ers had to decide whether to move their tax home or not.
http://canadianmoneyforum.com/showthread.php/34418-Working-in-US-tax-resident-of-Canada
http://canadianmoneyforum.com/archive/index.php/t-16629.html




oob said:


> Is there a fee "efficient" way of doing this, like transferring-in-kind to a brokerage with Canadian and US operations like Interactive Brokers and then having them "port" the account over to the US side?


Maybe for a taxable account.

I doubt one could port say an RRSP to a US registered account but have never tried. Plus if it were that easy, I'd expect to find articles recommending it.


Cheers


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## gibor365 (Apr 1, 2011)

If I have 12K income, I don't pay any taxes if i live in Canada .... If I also not supposed to pay taxes on 12K income in a new country, my understanding I wouldn't be paying any taxes at all.... is it true?



> The TFSA is Canadian tax free so the new tax country is the only one that would be taxing the TFSA withdrawal.


 Probably it's true ... if you declare TFSA withdrawals in a new country 

And if you don't move your tax home, you don't need to pay any taxes in scenario above


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## oob (Apr 4, 2011)

Eclectic12 said:


> The "RRSP withdrawn on the Canadian return to avoid the suggested 40% US MTR" is another area that a tax accountant can clarify.
> 
> I finally found the G&M article I was looking for. It suggests that a way to reduce the US tax on RRSP profits is to sell then re-invest the RRSP portfolio just before moving to the US. The sale is not a taxable event for Canada as it happens within the RRSP, at a time when only the Canadian tax system is involved.
> 
> ...


Thanks for the link! That looks like a great way to go about it.


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## Eclectic12 (Oct 20, 2010)

gibor said:


> If I have 12K income, I don't pay any taxes if i live in Canada .... If I also not supposed to pay taxes on 12K income in a new country, my understanding I wouldn't be paying any taxes at all.... is it true?


Where one does not file a Canadian tax return, it sounds like the Canadian financial institution will remit to CRA what they think the correct Part XIII tax based on the info they have. With no tax return to provide reductions such as the basic personal amount, I expect one would pay taxes to Canada.

Digging deeper, I found that there is the choice of having an alternative method used to calculate the tax by electing to file a Canadian tax return under section 217. It seems this section is intended to ensure a NR is no worse off than a Canadian tax resident. It apparently makes available the same deductions and credits that a normal Canadian taxpayer would have.

Without running a sample calculation, I'm not sure. If it really does level the tax playing field as described, then no taxes would be due to Canada.

http://www.taxdoctorscanada.ca/fina...ms/section-217-and-non-resident-pensions.html
http://www.cramagazine.com/issues/fall08/article04.htm


Yet another reminder of how valuable a knowledgeable tax advisor is. :biggrin:


Cheers


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## gibor365 (Apr 1, 2011)

> Yet another reminder of how valuable a knowledgeable tax advisor is.


 True 
The problem to find knowledgeable tax advisor even in Canada.... imagine to look for such advisor if you live somewhere in Ecuador, Spain or Russia 

It probably will be better to work directly with something like Tax Doctors Canada , even if it's more expensive....


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