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Q. We’re eager about transferring to Mexico full-time after we retire. The place would we pay earnings tax on our month-to-month Canadian pensions?
–Marianna
A. Many Canadians dream of a retirement that features journey overseas. Some even stay overseas a part of the 12 months or a lot of the 12 months, or hand over their Canadian residency completely.
Within the case of Mexico, Marianna, a taxpayer is taken into account a resident of Mexico if they’ve a everlasting dwelling accessible to them in Mexico. If they’ve properties in each Mexico and Canada, the situation of their centre of significant pursuits—their private and financial ties—should be thought-about. It is a situation of the Canada–Mexico Earnings Tax Conference, a tax treaty that’s like many others that Canada enters into with different international locations to ascertain tax guidelines between them.
The courts sometimes check with the residence article of the OECD Mannequin Tax Conference when defining the centre of significant pursuits:
“If the person has a everlasting dwelling in each Contracting States, it’s obligatory to have a look at the information in an effort to verify with which of the 2 States his private and financial relations are nearer. Thus, regard will probably be needed to his household and social relations, his occupations, his political, cultural, or different actions, his office, the place from which he administers his property, and so forth. The circumstances should be examined as an entire, however it’s nonetheless apparent that concerns based mostly on the non-public acts of the person should obtain particular consideration. If an individual who has a house in a single State units up a second within the different State whereas retaining the primary, the truth that he retains the primary within the setting the place he has all the time lived, the place he has labored, and the place he has his household and possessions, can, along with different parts, go to show that he has retained his centre of significant pursuits within the first State.”
For those who promote or lease out your property in Canada, and set up nearer ties to Mexico, you’ll possible change into a non-resident of Canada. There could also be tax implications for property you personal once you depart or are deemed to depart from Canada. Belongings like non-registered investments will probably be topic to a deemed disposition (notional sale) and this will likely set off capital beneficial properties tax. Different property, like pensions and investments, will probably be topic to withholding tax on earnings after you permit.
You ask particularly about month-to-month pensions, Marianna. Registered pension plan (RPP) periodic funds like a month-to-month outlined profit (DB) pension are topic to 15% Canadian withholding tax for a Mexican resident. The identical 15% charge applies to Canada Pension Plan (CPP), Outdated Age Safety (OAS) and registered retirement financial savings plan (RRSP) or registered retirement earnings fund (RRIF) periodic funds. A lump sum cost from an RRSP or RRIF is topic to 25% withholding tax.
Tax on non-registered investments is proscribed to dividends or belief (mutual fund or exchange-traded fund) distributions. The speed is 15%. Most Canadian curiosity earned by a Mexican resident will not be topic to withholding tax in Canada.
Capital beneficial properties on non-registered investments earned by a non-resident are usually not topic to Canadian withholding tax both.
In case your Canadian earnings is comparatively low, it’s possible you’ll profit from electing beneath part 217 of the Earnings Tax Act to file a Canadian tax return voluntarily. The tax can be calculated in your qualifying Canadian earnings. Qualifying earnings contains CPP, OAS, pensions, RRSP/RRIF withdrawals, and some different sources of Canadian earnings. For those who owe much less tax than the tax withheld, you may get a refund.
Canadian tax is barely a part of the story although, Marianna. Mexican residents pay tax on their worldwide earnings. Tax charges on low and average ranges of earnings are akin to Canadian charges. The highest tax charge on earnings over about $260,000 Canadian (at present alternate charges) is barely 35%, in comparison with over 50% in most Canadian provinces and territories.
Canadian and different overseas withholding tax can typically be claimed as a overseas tax credit score in Mexico to scale back the Mexican tax payable on that overseas earnings. This typically avoids double taxation. However search native tax recommendation in your Mexican tax submitting obligations, Marianna.
In response to Worldwide Dwelling, a cushty retirement in Mexico, together with personal medical insurance, may price about USD$2,500 monthly.
Good luck along with your retirement plans!
Jason Heath is a fee-only, advice-only Licensed Monetary Planner (CFP) at Goal Monetary Companions Inc. in Toronto. He doesn’t promote any monetary merchandise in any way.
This text was initially printed on April 20, 2021, and up to date on Oct. 26, 2022.