Contributions made to a social security scheme in another country may qualify for inclusion, or at least treatment, for CPP and OAS.Artmim Oleg F/iStockPhoto / Getty Images
Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
The desire to live closer to family, lifestyle reasons, or worries about future health care costs have led many ex-pat professionals who have built their careers in other countries to choose to return to Canada for their retirement years.
But for returning retirees who have accumulated assets elsewhere, the move back home can come with complexities, advisors say. They can benefit from advanced, customized planning around investments, taxes and cost of living considerations.
Jason Heath, managing director at Objective Financial Partners Inc. in Markham, Ont., works with several clients employed abroad temporarily, including senior executives with multinational firms and teachers. Due to a demographic shift, inquiries have been steady from overseas professionals entering the retirement phase, he says.
“It’s important for everybody to plan ahead for their retirement, but this is much more so when people are moving back to Canada,” Mr. Heath says. “They need to crunch the numbers, do the math, understand the implications and be ready and prepared for a return.”
For returning retirees, a potential misstep can be miscalculating the cost of living in Canada after living elsewhere for years, he says.
“Somebody might be in a situation in which they could afford to retire based on their current lifestyle in another country,” says Mr. Heath. “They [could] underestimate the cost of real estate in Canada, the cost-of-living differential, or even the cost of being retired, especially if they’re hoping to be able to travel a little bit in retirement.”
As such, when working with clients returning to Canada, Mr. Heath aims to come up with real estate assumptions and cost of living differentials. He then runs retirement planning models to give individuals a clear picture of what retirement in Canada looks like – especially for those who may not have a workplace pension plan.
“That way, people can assess their trajectory to retirement, whether they can afford to retire back in Canada, [and] where in Canada,” he says.
For returning retirees who have a workplace pension plan in another country, advisors will consider whether the pension is eligible to be transferred into a Canadian registered retirement savings plan (RRSP) – if they have eligible contribution room – on a tax-deferred basis, which can simplify its investment and tax treatment, or whether it needs to stay in the country where the retiree worked. That can happen in the case of a defined-benefit pension plan with a monthly payment, Mr. Heath says.
Another factor to be aware of is any social security agreements between Canada and the country in which the client worked.
“Contributions that you’ve made to a social security scheme in another country may qualify for inclusion, or at least treatment, for [Canada Pension Plan (CPP)] and [Old Age Security] purposes,” he says. “Sometimes, they work to their benefit to increase pensions.”
When returning from the U.S.
Irina Matco, director, cross-border financial planning, at MCA Cross Border Advisors Inc. in Montreal, says many individuals may not be aware of the Canada-U.S. Totalization Agreement, for example, which allows those who have made less than the required 10 years of contributions to qualify for U.S. social security, to count years of CPP contributions toward their eligibility.
More broadly, Ms. Matco says she and her colleagues have seen a shift in the past few years in which more clients are looking to move back to Canada after having worked in the U.S.
But returning retirees who are considered U.S. persons – whether citizens or green card holders – face added complications as they are taxed based on citizenship rather than residency. That brings additional filing requirements as well as rules around how certain investments will be taxed.
Often, the first concern for clients returning to Canada from the U.S. to retire, she says, is understanding the implications of moving when it comes to the assets they’ve accumulated while outside of Canada, and how their retirement accounts will be taxed.
The answer, she says, depends on a client’s individual circumstances, including whether they’re still considered a U.S. person for tax purposes.
“The decision is what to do with those retirement accounts. If they have a 401k, should they just leave it there, roll it over to an [individual retirement account (RIA)], do a Roth IRA conversion [in which withdrawals are tax-free] or should they transfer it over to an RRSP?” she asks.
“At the end of the day, the decision of which one is best for the client will depend heavily on facts such as liquidity to pay for the taxes, when they will need the money, what’s their risk tolerance and overall goals.”
Everything needs to be looked at holistically, Ms. Matco adds.
‘Lots’ to be done prior to moving
Tiffany Woodfield, co-founder and associate portfolio manager with Swan Wealth Management at Raymond James Ltd. in Kelowna, B.C., says returning cross-border retirees who are considered to be U.S. persons also need to be aware of the implications of holding certain investments, such as Canadian mutual funds or exchange-traded funds.
“If you’re a U.S. person and you invest in just commonly used things in Canada, like Canadian mutual funds, you find that you get taxed negatively in the U.S.,” she says. “They’re considered [passive foreign investment companies] and require annual tax filings.”
Returning retirees also need to understand the rules and timing of withdrawals from tax-deferred accounts, she says. For example, in Canada, RRSPs must be converted to a registered retirement income fund by the end of the year a client turns 71. U.S. IRA account holders are required to start taking required minimum distributions at age 72.
Ideally, Ms. Woodfield says returning retirees should consider planning a minimum of one to two years in advance of their return to Canada with the help of cross-border professionals to ensure they take care of their obligations and consider any strategies and opportunities for tax planning.
“The worst case is just to move and not think about it and don’t look at anything because there’s a lot of things that you should do prior to moving, particularly with your investments,” she says.
For more from Globe Advisor, visit our homepage.