Sun, fun and low taxes
It sounds simple: Retire to a place where the sun always shines and the living is cheap. Slow down. Moving abroad to make your nest egg last longer can be a pretty complicated proposition. Here's a primer to help you make all the right moves.
ANN KERR
Special to The Globe and Mail
Saturday, May 20, 2000
Next month, Douglas Livingston and Farida Darbar of Mississauga are making a move that many of us dream about. They're heading to the town of Ajijic, in western Mexico, where the temperature's always balmy, there's a mountain view, and they can live on a lot less than here in Canada.
The retired couple will be joining a community of about 10,000 Canadians who spend at least part of the year in the towns surrounding Lake Chapala, which is nestled between two mountain ranges and is half an hour from Guadalajara. About one-third of those sun-seeking Canucks live year-round in Mexico, as Mr. Livingston and Ms. Darbar plan to do.
"Despite what many people think about banditos, it's very secure in Mexico. Besides lovely weather, the history's fascinating and the Canadians down there seem like an adventurous, fun group," says Mr. Livingston, who figures they can live very comfortably on about $2,000 a month.
Better climate, lower taxes, cheaper living expenses -- those are the prime reasons motivating a small but, by some estimates, growing number of Canadians to retire permanently to other countries.
No government department or agency of any kind, it seems, keeps tabs on this particular category of expatriate. But John Lowden, a tax partner with Ernst & Young in Toronto, says there's enough interest from clients thinking of retiring out of the country to keep a staff of 50, including lawyers and accountants, working on clients' financial considerations full-time.
"A lot of our clients are wealthy, for sure, but it cuts across all income levels. I give advice to school teachers, too," Mr. Lowden says.
Property taxes as low as $30 a year for a two-bedroom condominium. Public health care for $35 a month for a couple. Fresh produce at prices at as little as less than a dollar for two kilos of tomatoes. Those are among the benefits drawing Canadians to Mexico, says Georgina Russell, finance director at Focus On Mexico A.C., a company in Ajijic that promotes the Lake Chapala region to foreigners such as Mr. Livingston and Ms. Darbar through 10-day information tours.
Costa Rica and Spain's Costa del Sol, two other places where the cost -- as well as the pace -- of living is easy, are also becoming popular, Mr. Lowden says. But the United States -- particularly Florida, Arizona and California -- remains by far the No. 1 retirement destination for Canadians, he says, because of proximity, language, similar culture, and tax relief.
Bertie Engel, originally of Toronto, lives in Walnut Creek, a retirement community near San Francisco. She's been in the United States since she retired and married an American in 1985. Mrs. Engel believes that she enjoys a higher standard of living in the United States than she would have if she'd stayed in Canada.
"The tax rate for my investments and pension are less than if I were a Canadian resident, the sales tax is only 8 per cent and, in California at least, the food is fresher and cheaper. I love Canada, but there's no way I could come back now," Mrs. Engel says.
Financial considerations
Still, you have to weigh all the financial considerations very carefully if you're moving to the United States. Tax rates generally are less, but they've been increasing recently, Mr. Lowden says.
The cost of goods and services is higher in many places, you'll have to pay thousands for health care and there are hefty estate taxes when you die, not to mention the appalling exchange rate. Kevin Moriarty, a principal with William M. Mercer Ltd. in Toronto, figures you need at least $60,000 a year to make a move across the border to the United States worthwhile.
"If you don't have at least that much Canadian [money], there's no point. You're not ahead of the game retiring to the U.S.," Mr. Moriarty says.
Pulling up stakes to go anywhere can be a lot more complicated, in fact, than packing your sunscreen and posting a "For Sale" sign on your home. You'll probably need professional advice in a number of areas including tax complexities, whether to cash in your Canadian investments, rewriting your will and foreign succession duties.
Tax complications
"The first thing to know is that Canada taxes on residency. You need to sever your residential ties here to really escape the Canadian tax system," Mr. Lowden says.
Proving to the revenue people that you're no longer a resident, though, isn't always easy. If you sell everything, get rid of your driver's licence, club memberships and credit cards and stay put in your new country except for brief visits, no problem. There are fuzzy areas, though, and if the feds decide you have too many ties to Canada, you could end up being hit with the full tax wallop for any holdings you still have in the country.
"You might be able to keep your house if you rent it out, but if it's available for you to use you'll be opening up the argument of whether you're a resident," Mr. Moriarty says.
Ditto with the family cottage.
"If it's way, way up north and only accessible for six weeks of the year, okay," says Colette Gentes-Hawn, a spokeswoman for the Canada Customs and Revenue Agency in Ottawa. More than that becomes suspect.
Forget extended visits
An extended four-month visit back home with the family every year? Forget it, Ms. Gentes-Hawn says.
That's practically like you never left. Not everyone who prefers to spend most of their time elsewhere wants to give up their Canadian resident status. But tax-wise, there are pretty compelling reasons to do so.
True, as a non-resident, you could get dinged with a 25-per-cent Canadian withholding tax every year for pension payouts and most investment interest and dividends generated here.
But Canada has signed tax treaties with numerous countries that, in many cases, reduce withholding taxes or wipe them out altogether. For non-residents living in Mexico, for instance, the Canadian withholding tax is 15 per cent across-the-board.
If you're an American resident, you don't pay withholding tax to Canada for private and government pensions, Ms. Gentes-Hawn says. Pensions are only taxable there, at U.S. rates. What's more, the withholding tax on investment interest is only 10 per cent. On dividends, it's 15 per cent.
Your new country will credit what you've paid to Canada against what you owe there and, since tax rates in many other places are considerably lower, it can work out to a whole lot less than if you'd stayed in Canada.
If you're "a tax junkie, the kind of person who will go to considerable lengths to avoid paying," Mr. Moriarty says, you may want to stack up on brochures about tax havens such as the Cayman Islands. Because Canada doesn't have tax treaties with these places, you'll have to pay the full 25-per-cent withholding levy if you keep any interests here. But that's more than offset by the near-zero taxation on your investments made there.
If traveling that route doesn't appeal, there are other options. While Britain and Ireland aren't exactly known for their tropical climates, their tax systems lure foreign residents from around the world, including Canada.
"In the U.K. and Ireland, you only pay tax on any income you've remitted there. What you do is have one account for your capital, which is what you live off, and another offshore in Guernsey in the Channel Islands, for instance, for your investment income, where it's non-taxable. When you need money, you transfer it into your capital account," Mr. Lowden says.
At that point the interest income would be taxable, but at a rate that would generally be lower that what you would expect to pay in Canada.
The only catch is that you can't be officially "domiciled" in the U.K. and Ireland, which basically means you won't be buried there. Some expats buy a burial plot in Canada, says Mr. Lowden, to prove their non-domiciled status to the local authorities.