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Should Canadian non-residents keep their TFSAs?
Tax-free savings accounts (TFSAs) can remain tax-free for a non-resident of Canada—at least from a Canadian perspective.
If a foreign country taxes worldwide income, that would generally include TFSA interest, dividends or capital gains. So, a non-resident may have no tax advantage to keeping a TFSA. These accounts are more likely to be withdrawn and the funds taken abroad.
That said, if the person expects to return to Canada, leaving their TFSA to grow tax-free could be advantageous. If a $50,000 account grows to $150,000 and they re-immigrate to Canada, they would have a $150,000 tax-free account to leverage. If they instead withdrew their TFSA savings, their TFSA room would increase by that amount but their contribution room would not otherwise grow while they were abroad.
What to do with non-registered accounts
Taxable non-registered accounts are generally subject to a deemed disposition when a person leaves Canada. It’s treated as though all the investments were sold on the date of the account holder’s departure, triggering any accrued capital gains and resulting income tax.
If the federal tax owing is more than $16,500 on the person’s final tax return, they can choose to defer payment of the tax. This is done by completing Form T1244, Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property.
Since there’s generally no tax advantage to leaving non-registered investments in Canada, it’s common to see non-residents liquidate and reopen accounts abroad. Some investors prefer to leave them in Canada because they have other accounts, like RRSPs, that they cannot liquidate. Others keep their investments in place because they trust the regulatory environment in Canada more than the one in their new country.
Withholding tax on non-registered accounts
If you leave non-registered accounts in Canada, they will be subject to withholding tax at the financial institution. Interest, dividends, and mutual fund or exchange-traded fund (ETF) distributions are generally subject to 15% to 25% tax at source. The rate varies based on the tax treaty between the country of residence and Canada.
This withholding tax represents your final tax obligation to Canada, so you do not need to file a Canadian tax return for this income.
Capital gains on securities are not subject to withholding tax for non-residents. Capital gains on real estate and some other assets are subject to Canadian withholding tax and even require the non-resident to file a tax return.
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Jason Heath, CFP
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