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Pensions for Expats in Canada

Submitted: September 2013

Canadian social security is generally very hybrid. When it comes to retirement pensions, the system has three pillars:

  • Mandatory social insurance, namely pension contributions towards the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP)
  • Tax-efficient retirement savings products, and
  • Residence-based old-age benefits financed through the tax system.

It is essential to establish your pension entitlements through the combined analysis of all three pillars.

 

Mandatory social insurance

Contributions

All workers in Canada, along with their employer, are subject to social insurance legislation. Employers and employees are equally required to contribute. You must pay social insurance only for your earnings between the minimum amount and the maximum amount. In 2013, the minimum amount is $3,500 and the maximum amount is $51,100.

As in all countries, social insurance is compulsory, redistributive and on a pay-as-you-go basis. However, Canadian social insurance has only a limited extent, especially when compared with many Eurozone countries. In 2013, the contribution rates are as follows:

 

Canada (outside Quebec)

Quebec

Employee

4.95%

5.1%

Employer

4.95%

5.1%

Self-employed

9.9%

10.2%

Contribution rates have dramatically increased over the past decades due to Canada’s ageing population, and this trend is likely to go on. QPP contribution rates are scheduled to rise to 5.4% and 10.8% respectively by 2017.

Benefits

Social insurance includes CPP or QPP benefits, disability benefits and survivor’s benefits.

How much retirement pension you get depends on your average contributions since age 18. However, the months for which you had your lowest income may be disregarded ("general drop-out provision" for CPP). Under CPP, the 16% lowest months are disregarded, rising to 17% in 2014. Under QPP, only the 15% lowest months are disregarded.

As mentioned above, Canadian social insurance has a limited extent. Assuming you retire at 65, the maximum retirement pension you can get is $1,012.50 per month. On average, Canadians who retire at 65 are paid a retirement pension of around $600 per month.

Retirement pensions are taxable benefits.

 

Private pension schemes

There are many different types of private pension schemes in Canada.  The most common schemes are Registered Pension Plans (RPPs), Deferred Profit Sharing Plans (DPSPs) and Registered Retirement Savings Plans (RRSPs). RPPs and DPSPs are company pension schemes whereas RRSPs are nothing more than a superannuation product sold by an authorised trustee. Put simply, these products allow you to achieve tax deferral until you withdraw your pension benefits.

Tax-relieved schemes

Full tax deductibility on RRSP contributions is available when these do not exceed an amount specified by law. This maximum amount is reduced by a Pension Adjustment (PA), which is supposed to reflect your tax-deductible RPP/DPSP contributions, if applicable. In 2013, the maximum RRSP contributions you can make are the lower of:

  • 18% of your pensionable earnings, or
  • $23,820.

Pensionable earnings includes all income from active sources, whether salaried or not, minus your losses, deductible expenses and alimony liabilities. Rental income is treated as income from active sources. Any unused part of your RRSP allowance may be carried forward to future years.

Once your funds are within the pension pot, the capital is allowed to grow tax-free. Of course, the pension pot is regulated by law and it needs to comply with strict rules. This is not only about withdrawal restrictions, but it’s also a matter of investment restrictions. For example, you cannot invest in a business for which you already have a stake in excess of 10%. You should also check the extent to which you can make real estate or leveraged investments.

You can draw on your Canadian pension pot only in the event of:

  • Death
  • Permanent retirement
  • Borrowing from the RRSP for payment of higher education costs (up to $10,000 per year and a $20,000 lifetime allowance), or
  • Borrowing from the RRSP in order to buy a home for yourself or a disabled relative (up to $25,000)

Unauthorised withdrawals may attract hefty tax charges. Permanent disability is not a good reason for withdrawal. You may contribute to an RRSP by the end of the year in which you turn 71.

Unrelieved schemes

A pension product whose contributions do not qualify for tax relief has some advantages, including:

  • Tax-free capital growth
  • Tax-free payouts (in Canada), and
  • Applicability of lower income tax brackets, if you expect them to be higher when you retire.

Canada does not have any unrelieved pension scheme as such, like US "Roth" products. Instead, Canadian legislation provides for Tax-Free Savings Accounts (TFSAs), which are a hybrid between regular pension products and savings accounts. See Investment for Expats in Canada.

Investment losses

As capital growth within your pension pot is tax-exempt, you are not allowed to deduct your losses or interest expenses in connection with your pension pot.

Example

Mel has $50,000 in his RRSP, and he also has a share dealing account on which he has invested $150,000.

In 2014, Mel has a capital loss of $2,000 inside his RRSP, and a capital gain of $40,000 within his regular share dealing account.

Mel’s taxable capital gain is $40,000.

Superannuation practical tips

First and foremost, you should view superannuation as a complex financial product on which you are charged fees to get the superannuation industry running. These fees may vary greatly from one superannuation product to another. As superannuation products are strongly regulated, professional advice might be helpful if you want to make informed decisions and avoid potential penalties for non-compliance.

From a practical point of view, you should:

  • check how reliable your RRSP provider is
  • compare retirement products
  • check if DIY investing is available on your retirement plan, if you wish to manage your investments for yourself
  • feel free to consider switching, if you can
  • consolidate your superannuation arrangements
  • not panic if a fund manager underperforms for a particular year – you need it to deliver adequate returns over the long term

Financial planning issues

The Canadian tax system gives you some freedom as to when and how you build your pension pot. Most importantly, it lets you have some discretion as to when you would be taxed.

From a financial perspective, you are better off claiming tax benefits when you think you need it most. One may argue that you should claim tax benefits at the time of your life where your tax rate is highest. However, financial planning may involve many other dimensions, such as liquidity or personal considerations (like returning to your home country). Therefore, it is on a case-by-case basis and you might wish to seek professional advice.

If you eventually plan to leave Canada, you might be able to withdraw your superannuation benefits upon departure from Canada.

 

Old Age Security (OAS) Pension

OAS Pension is Canada’s residence-based pension system, which is funded through the tax system, and where entitlement depends on your previous contributions to the Canadian tax system. Its principle is similar to Australian Age Pension.

OAS Pension is designed to supplement Canadian social insurance and private superannuation benefits. It is hardly any means-tested. You are eligible for OAS Pension if:

  • you are aged 65 or over
  • you have resided in Canada for at least 10 years since age 18 (20 years if you live outside Canada), and
  • you are a Canadian citizen or a legal resident of Canada (you immigration status upon departure from Canada is taken into account if you live abroad)

From 2023 to 2029, the OAS Pension age will gradually rise to 67.

A full OAS Pension is worth $550.99 per month. This full rate is only available for individuals whose income does not exceed $70,954. Consequently your OAS Pension is gradually reduced if your income exceeds this threshold, and you get no OAS Pension at all if your income is more than $114,793.

A low-income pensioner may also qualify for social assistance through the Guaranteed Income Supplement (GIS) if his or her income is below $16,704 per year.

 

International matters

Social security agreements

Canada may have entered into a social security agreement with your home country. These agreements are primarily designed to avoid discrimination and double social security coverage. They may cover employees as well as self-employed individuals.

In addition, social security agreements may "totalise" your periods of contributions or residence in Canada and in your home country. This is particularly helpful if your home country expects you to contribute for a long time (e.g. you must have contributed for 40 years to avoid a pension rebate).

A list of social security agreements concluded by Canada is available here.

International superannuation planning

Superannuation schemes are tax-efficient products in Canada. Thus, they are heavily regulated in order to avoid undue tax base erosion. The same fundamental principle is likely to apply to foreign equivalents. Thus, you should check:

  • how your foreign pension arrangements are taxed whilst you are in Canada
  • if, as a Canadian resident, you can make tax-deductible contributions to a foreign pension pot
  • how your overseas investments within your Canada pension pot are taxed by foreign countries, and
  • how your Canadian pension pot may be taxed in your home country. Generally, this only affects payouts, but there is no guarantee that capital growth will be untaxed in your home country (e.g. under foreign investment fund rules)

Your home country may have a tax treaty with Canada to avoid double taxation on your foreign pensions. As a general rule, pension payouts are only taxable in your country of residence.

Retaining your foreign pension arrangements may be a practical option if you don’t intend to stay in Canada. Nevertheless, cross-border superannuation planning is always on a case-by-case basis. It is strongly recommended to seek professional advice regarding this matter.

 

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