So you’ve finally decided it’s too cold here, or you’re sick of Tim Hortons coffee, or some beautiful person has stolen your heart and keeping it hostage in another country. Whatever the circumstance you’re exiting Canada for an unspecified amount of time. But what do you do with your massive swollen nest egg all tucked away in the Toronto Stock Exchange?
Option 1: Don’t Change Anything, Freeze Your Account
If your brokerage allows it you can keep your investment accounts as-is when you leave and potentially avoid:
- Transaction fees
- Account closing fees
- Wire transfer fees (Assuming you don’t use Transferwise)
- Currency conversion fees
- Realized gains/loses from selling your investments
- Lost growth during the lag time between selling in Canada and re-investing in your new country
That’s a lot of fees that can be avoided. But they might be pennies compared to the financial disadvantages. Normally if you leave your account it will become FROZEN, meaning you can’t do anything except watch what happens. Some of the implications of a frozen account include:
- No rebalancing
- Dividends sit as cash
- Complex cross-border taxes
- No access to funds if they’re needed
Icing your account is one thing, but what about selling everything and closing the account?
Option 2: Liquidate Accounts and Re-invest in Your New Country
Depending on your brokerage, selling might be your only option (Questrade, for example, does not allow non-residents to hold a margin account). Taking your money with you has some benefits:
- Lower taxes (maybe)
- Access to better investments (maybe)
- Simplified tax reporting (probably)
- Avoidance of jail time and/or $10,000+ fines (your Canadian investments might be considered offshore tax evasion)
Of course the tax benefit won’t matter if Canada is still taxing your worldwide income, and that’s the next thing you need to check:
Determine if you will remain a Canadian resident for tax purposes
Disclaimer: I’m here to get your started, but ultimately it’s up to the CRA, don’t take anything I say as absolute fact.
Another Disclaimer: Much of the advice is based on moving to the USA, double check everything if you’re going somewhere else (or to the USA)
According to the Canadian Revenue Agency (CRA), there is no cut and dry answer. They determine residency on a case by case basis. However, satisfying any of the following three conditions basically guarantee Canadian residency and you paying Canadian tax on worldwide income:
- You keep a permanent home in Canada (not a rental property)
- You have a spouse in Canada
- You have children/dependents in Canada
If you want to break residency you’ll first need to take your immediate family (wife/husband/kids) to your new country and sell or rent your permanent Canadian address. After that it’s up in the air, but typically if your intention is to stay abroad, they’ll consider you a non-resident. How do you communicate your intent to stay abroad? Start cutting your secondary residential ties:
- Personal Property
- Are you storing furniture/vehicles/clothing at a friend’s while you’re gone? Don’t. Sell it all
- Social Ties
- Are you a member of any professional/religious/social organizations? Cancel your membership
- Economic Ties
- Quit your Canadian job already, you’re moving away! Cancel your Canadian credit cards and bank accounts, maybe liquidate your investment accounts – more on that later
- Canadian Work Permits
- Why do you have a work permit if you’re leaving? Cancel it, or don’t renew it
- Canadian Insurance
- Blue cross medical? Cancel it or let it expire
- Canadian Drivers license
- You might need this for the first year in your new home, get a new license when appropriate
- Sell your car, or import it to your new country
- Canadian Passport
- Realistically you’ll still need your Canadian passport, it takes years to gain foreign citizenship. The CRA should be pretty lenient on this one
So now you’ve broken most of your secondary ties and the CRA recognizes that you have an intention to stay abroad. Next check the Substantial Presence Test:
Substantial Presence – Physically in a country for more than 183 days per year (that’s 6 months).
Unfortunately you left Canada after July 3rd. That means you were in Canada for 184 days in the calendar year, and you’ll only be in your new country for 182 days, which means you’ll be paying Canadian tax (at least for the USA). All this gets confusion, I know. Here are two clarifying points:
Remember you have to be a resident somewhere! If you were in three different countries for 4 months each you’ll most likely remain a Canadian resident.
And you can’t be a resident of two places (That is, Canada and one of the countries we have a tax treaty with)
Who does Canada have tax treaties with?
According to this list, and as of September, 2016:
Gabon (Today I learned there is a country in central Africa called Gabon)
Papua New Guinea
Republic of the Ivory Coast
Trinidad and Tobago
United Arab Emirates
What if you’re not moving to one of those countries? Then beat it, you’re on your own chump. Call the CRA.
I’m breaking Canadian residency, what now?
The next step is to do a deemed disposition on your taxable assets. You pretend you sold everything and pay the tax on the realized income. Afterwards you can actually sell it and take the money to your new country, or freeze your account.
Deemed disposition clarification – A deemed disposition and the associated taxes are filed on the following years tax return. Make sure to record the value of your assets on the day you leave Canada to use as the fair market value on your tax return.
If you leave it you’ll be subject to 25% withholding tax on any future proceeds. But more importantly the CRA may still consider you a resident if you try to fiddle with your accounts. It’s best to assume that you can’t touch your accounts after the deemed disposition (that includes more contributions, buying, selling, re-balancing, withdrawing dividends, DRIP).
From now on let’s assume you did the deemed disposition but are keeping your accounts as-is. You’ll need to inform your brokerage that you are becoming a non-resident and you’ll be subject to the 25% withholding tax. You are now a foreign investor.
But wait! What about cash dividends? Too bad. While your account is frozen they’ll just sit as cash. Maybe. Check with your brokerage to see if you can continue to DRIP your dividends, but don’t get your hopes up as normally it counts as active trading. So what should you hold in a frozen account? I go over this in Part 2.
Ok I have all this CAD that I need to convert to <foreign currency>
Making an error on this step could lose you hundreds or thousands depending on how much you want to convert. The easiest way to convert large sums is to do a wire transfer. The receiving bank will convert the money into the local currency unless you specify otherwise. The issue is that banks often put hidden fees into these transfers. If the going rate for USD is $1.30 CAD the bank will charge you $1.33 on top of a transfer fee.
A second option is Norbert’s Gambit. Basically buy stock in CAD and sell it in USD to get closer to the real exchange rate. Seems like a good idea but you can’t immediately buy and sell the stock in the same day and as a result can get burned with multi-day price fluctuations.
Transferwise is a company that specializes in cross country currency exchange. They use the true exchange rate and only charge a small 1-2% fee (based on the currency) as opposed to 3-5% for typical banks and there’s no risk of losing money to currency fluctuations unlike Norbert’s Gambit. Read more about what I think of Transferwise by clicking here or click the banner below to be taken to their website.
Do these things BEFORE you leave:
- Determine if and when you’ll break Canadian residency
- Check with your brokerage to see if they’ll let you keep your accounts open
- Sell your investments and prepare to transfer cash, my recommendation: Transferwise
- Alternatively prepare your DEEMED DISPOSITION for assets that will stay in Canada.
A Note About the USA and TFSA
If you are becoming a tax resident of the USA my advice is to LIQUIDATE AND CLOSE YOUR TFSA. It’s legal to keep it, but the IRS will tax your gains. Furthermore taxes will get really complex if any of your holdings are considered Passive Foreign Investment Companies. AND if you screw up your reporting the fines can cripple you, sometimes they are $10,000 or 25% of your gross holdings, whichever is more. You should only keep your TFSA if you’ve spoken to a cross border accountant.
A Note About the RRSP
In most cases you won’t need to close your RRSP. The USA, for example, recognizes it as a tax shelter and you should only need to report how much is in it. Check with your brokerage if you can keep trading during your time as a non-residentSpam your friends: