Australian Expats Holding Canadian RRSPs – For Australian expats residing in Canada, understanding the Canadian financial system is crucial for making informed financial decisions.
One key element of Canadian financial planning is the Registered Retirement Savings Plan (RRSP). In this article, we will discuss the RRSP, its relevance to Australian expats, withdrawal options and what happens to your RRSP when returning to Australia.
What is an RRSP?
The RRSP is a tax-advantaged investment account in Canada, specifically designed to help individuals save for their retirement. It incentivises Canadians to save for their golden years by offering unique tax benefits.
Contributions made to an RRSP are tax-deductible and the investments within the plan grow tax-free until they are withdrawn. This vehicle can hold various investments including stocks, bonds, mutual funds and more.
Wat are the benefits of using an RRSP?
For Australian expats living in Canada, determining whether an RRSP is a valuable financial tool involves several considerations:
- Tax Advantages: Contributing to an RRSP can reduce your taxable income in Canada which can be particularly beneficial if you find yourself in a higher tax bracket. Further, the income earned in your RRSP is not taxed until it is withdrawn.
- Long-Term Growth: If you plan to remain in Canada for an extended period or even retire there, using an RRSP can help you accumulate a substantial nest egg for your retirement by compounding returns.
- Retirement Planning: An RRSP can serve as a crucial component of your retirement strategy, especially for long term planning. By the time you begin to withdraw the funds at retirement, you will likely be in a lower tax bracket than during your earning years.
Can You Withdraw from an RRSP?
Absolutely, you can make withdrawals from your RRSP, but doing so involves some important considerations:
- Tax Implications: Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. However, you generally have to pay tax when you cash in, make withdrawals or receive payments from the plan. If you own locked-in RRSPs, generally you will not be allowed to withdraw funds from them. When you withdraw funds from an RRSP, your financial institution withhold the tax. The rates depend on your residency and the amount you withdraw.
- Contribution Room: Keep in mind that withdrawals from your RRSP permanently reduce your contribution room and these amounts cannot be re-contributed.
- Homebuyer’s Plan and Lifelong Learning Plan: Canadians have the option to make tax-free withdrawals for specific purposes through the Homebuyer’s Plan and Lifelong Learning Plan. However, as an Australian expat, you might not qualify for these programs.
What Happens if You Leave Canada and Return to Australia?
When leaving Canada and returning to Australia, you have various options regarding your RRSP:
- Keep it as the retirement vehicle it is: You can choose to leave your RRSP untouched in Canada, where your investments will continue to grow tax-deferred. However, you’ll need to manage it from abroad.
- Withdraw and Pay Taxes: If you decide to make withdrawals, be aware that Canadian tax obligations apply.
How does Australia treat your RRSP?
The ATO does not respect the nature of your RRSP as a foreign Superannuation fund. In most cases, it will be viewed as a foreign trust.
If you are an Australian tax resident at the time you make a withdrawal from the account, this will naturally be captured by the ATO and be a reportable item. Generally, the ATO will respect the corpus (personal contributions) as tax exempt however will look to apply taxation on the investment earnings (capital gains and income).
The RRSP is a valuable asset for Australian expats in Canada aiming to save for their retirement and reduce their taxable income. Nevertheless, understanding the tax implications and considering your long-term financial goals, especially when contemplating a return to Australia, is crucial.
We always encourage you to reach out to a professional to determine how this might apply to your unique situation.