In Canada for three years, tax stratergy, RRSP, TFSA

[royals1982]

Background:

27 year old, single, New Zealand citizen. I have lived the last ten years in the US, on a student visa and for the last four on an H1B (work visa). I am currently in Calgary on a Canadian work permit and plan on remaining here until May 2013. After that I will be returning to the US to work for three more years on my H1B and then returning to New Zealand. The following is my tax strategy whilst in Canada. I would appreciate any comments or recommendations.

2010
Salary + Bonus = $80,000
TFSA Contribution = $5,000
RRSP Contribution = not allowed

2011
Salary + Bonus = $95,000
TFSA Contribution = $5,000
RRSP Contribution = $11,000 (18% of prior years income, note that I was not in Canada for the full year)

2012
Salary + Bonus = $100,000
TFSA Contribution = $5,000
RRSP Contribution = $17,100

2013
Salary + Bonus = $110,000
TFSA Contribution = $5,000
RRSP Contribution = $18,000

Time to leave

Balances

TFSA - $25,000 (assuming modest growth)
RRSP - $55,000 (assuming modest growth)

Withdrawal Strategy

TFSA – not too much strategy here, I will simply sell everything in my account and request a cheque from Questrade prior to leaving Canada.

RRSP – For simplicity sake let’s say I am leaving at the end of May, 2013. In early May I will sell all the investments in my RRSP and buy new investments, thus increasing the basis in my investments to the current market value. I will then leave Canada cutting all ties for tax purposes, upon returning to the US I will begin making periodic withdrawals from my RRSP which should only be exposed to the 15% Canadian withholding plus any capital gains that have amassed (since increasing my basis by selling a re-buying my portfolio in May, 2013) would be subject to tax in the US.

OK here are my questions:

The withholding rate is confusing to me, I spoke with Questrade and they told me that they withhold the following on withdrawal amounts of $0-$5,000 = 5%, $5,001 - $15,000 = 10%, >$15,000 = 15%.

From reading the CRA website and the US/Canada treaty it appears that the withholding should be either 15% or 25% dependent on if the withdrawal is made as a periodic payment or a lump sum.

So if I make periodic withdrawals over 2013-2017 am I required to file a Canadian tax return each year? Additionally how do I determine the allowable withdrawal amount to qualify for “periodic withdrawalâ€￾ status?

My ideal situation would be to pull it out in $15,000 chunks and pay the 10% withholding through Questrade and be done with it from a Canadian tax prospectus, is this possible or just wishful thinking?

[nelsona]

The withdrawal rates you were quoted are for withdrawals made by Cdn RESIDENTS, and have nothing to do with the final tax you would owe/pay on that income when residing in canada. Residents are required to add any RRSP withdrawals to their income, and be taxed on it, The withholding is merely to avoid a huge tax bill.

For NON_residents, like you would plan to be when making the withdrawal, the TAX is a flat 25% withheld at source and that is it -- you do not file a tax return for this. Your withdrawal would not be considered periodic, even if taken over 4 years, unless (a) you converted to a RRIF, and (b) each year you only took out twice the minimum RRIF ammount, which judging from your age would proboably be less that $1000 per year. This is meant for true pensioners.

So your tax rate will be 25%, whether you take a dollar or the whole sum.
Take the whole sum. You will still be saving the tax money you would have paid had you not RRSPed.

Job for you: research the NZ-Canada treaty to see if there is a better tax rate for Cdn pensions paid to NZ citizens regardless of country of residence. My guess is there is not, but you never know.

[royals1982]

Thanks for the advise, I had a look in my tax facts book and the NZ/CDN Treaty is the same as the US/CDN (15%/25%). So I guess my tax savings wont be quite as large as I had hoped but savings none the less.

[royals1982]

Well on second thoughts I may be better just to keep my funds in a margin account and take more of a dividend yield approach......well at least now I know the implications of an RRSP now I just need to put together a few scenarios in excel....assuming no growth or loss or dividends a RRSP would be a no brainer, however if I have any of those the benefit of the RRSP starts decreasing and with a starting benefit of 11% (36% marginal less 25% witholding) it would not take much to destroy that margin..

[nelsona]

Your home could also be used as a tax-free investment.