Non-residents and Registered Retirement Savings Plans (“RRSPs”)
Non-residents of Canada can continue to hold RRSPs after leaving Canada. Income and gains in an RRSP are considered tax-free in Canada and in many foreign countries with which Canada has tax treaties and where non-residents may live.
As such, non-resident taxpayers may consider contributing to RRSPs for various reasons, if they have Canadian taxable income and RRSP contribution room.
For one, taxpayers can enjoy an immediate tax savings as RRSP contributions are deducted from Canadian taxable income.
Withdrawals may be taxed only at 25%, or even a lower tax rate of 15%. A lump-sum withdrawal is taxed at a 25% withholding tax rate. A periodic withdrawal, if structured properly, may be eligible for a reduced rate of 15%, depending on the tax treaty between Canada and the country of residence. Taxes may be further reduced by electing under section 217 of the Canadian Income Tax Act to pay tax at the same rate as residents of Canada on Canadian-source pensions or other benefits.
In addition, if the non-resident taxpayer does not take their deduction in the current year, they may carry the contribution forward to deduct in a future year. This may be advantageous if they own real estate in Canada that might be sold for a substantial gain or if they intend to return to Canada in the future and will have tax payable that can be reduced by claiming the deduction.
On the other hand, it may also be good tax planning for non-residents of Canada to withdraw RRSPs to take advantage of the lower tax rates. This is particularly beneficial to those who intend to move back to Canada with high income. An RRSP would otherwise be taxable to a Canadian resident at their marginal tax rate. Withdrawing from an RRSP as a non-resident of Canada may result in a potential tax savings of over 35%.
Please consult an MCA planner if you intend to contribute to or withdraw from your RRSP.