Investing is a critical component of planificación financiera for Canadian expats. Moving abroad introduces unique challenges, such as navigating different tax laws, managing cross-border regulations, and addressing currency risks.
Si desea invertir como expatriado o particular con un elevado patrimonio neto, que es en lo que estoy especializado, puede enviarme un correo electrónico (advice@adamfayed.com) o WhatsApp (+44-7393-450-837).
This includes if you are looking for a second opinion or alternative investments.
Some of the facts might change from the time of writing, and nothing written here is financial, legal, tax or any other kind of individual advice, nor a solicitation to invest.
Proper planning ensures that Canadian expat investment options can be good for growing wealth, meeting long-term financial goals, and minimizing tax burden.
Investing as a Canadian expat
Unlike residents in Canada who primarily deal with domestic investment products and tax rules, expats must consider their tax residency status, the financial systems in their host country, and the potential loss of access to Canadian-registered accounts.
Determining Tax Residency
Canada determines tax residency based on ties to Canada, which are categorized as primary and secondary:
- Primary Ties: A home in Canada, a spouse or common-law partner in Canada, and dependents in Canada.
- Secondary Ties: Bank accounts, driver’s licenses, memberships, and Canadian healthcare coverage.
If you maintain significant ties, you are likely considered a Canadian tax resident. If not, you may be classified as a non-resident.
Deemed residency applies to individuals who spend 183 days or more in Canada during a calendar year but do not establish residency elsewhere.
Do Canadian expats pay taxes on investments?
Tax residency status has a significant impact on how investment income is taxed.
Residents of Canada are taxed on their worldwide income, which includes all investment income earned both in Canada and abroad.
To avoid double taxation, residents may claim foreign tax credits to offset taxes paid on the same income in their host country.
Non-residents, on the other hand, are only taxed on Canadian-sourced income. This includes dividends, which are subject to a 25% withholding tax unless a tax treaty reduces this rate.
Interest income is often exempt from withholding tax, provided it is paid to an arm’s-length non-resident.
Finally, capital gains are generally exempt from Canadian taxes, except for gains on taxable Canadian property, such as real estate or shares in private Canadian companies.
It should be noted that non-residents must also comply with the tax regulations in their host country, which may tax worldwide income or only income earned locally.
Also Canada has tax treaties with many countries to prevent double taxation and clarify which country has primary taxing rights for different types of income.
Foreign tax credits are a mechanism to reduce double taxation.
For instance, if investment income is taxed in your host country, Canada may allow you to claim a credit for the taxes paid abroad, reducing your Canadian tax liability.
Reporting requirements for Canadian expat taxes
Canadian expats with investments must meet specific reporting obligations:
- T1135 Foreign Income Verification Statement: Expat residents must file this form if they own specified foreign property with a cumulative cost base exceeding CAD 100,000. As per the Income Tax Act, this includes:
- Foreign bank accounts.
- Stocks or bonds held in foreign brokerage accounts.
- Foreign real estate (excluding personal-use property).
- Annual Income Tax Returns: Residents file a T1 General Income Tax Return, reporting worldwide income, while non-residents can file specific returns for Canadian-sourced income (e.g., electing under section 216 of the Income Tax Act for rental income and electing under section 217 for pensions).
Failure to comply with reporting obligations can result in severe penalties, including fines of up to CAD 2,500 per year for failing to file Form T1135.
Taxes on investments in host countries
In addition to Canadian tax rules, expats must follow the tax laws of their host country. Many countries tax residents on worldwide income, including Canadian investment income. Non-compliance can lead to penalties and legal issues.
What are the best investment options in Canada?
Registered Retirement Savings Plan (RRSP)
En RRSP is a tax-deferred investment account designed to help Canadians save for retirement.
Canadian expats can retain their RRSP accounts while living abroad, and the investments within the account will continue to grow tax-deferred.
However, non-residents generally cannot contribute to an RRSP unless they have earned income in Canada and file a Canadian tax return.
Withdrawals from an RRSP while living abroad are subject to a 25% withholding tax for non-residents. This rate may be reduced under a tax treaty between Canada and the host country.
For instance, the Canada-U.S. tax treaty reduces the withholding tax on periodic withdrawals (e.g., from a Registered Retirement Income Fund or RRIF) to 15%.
Withdrawals must also be declared as income in the host country, potentially leading to double taxation if no tax treaty exists.
Tax-Free Savings Account (TFSA)
TFSAs are attractive investment vehicles in Canada because they allow tax-free growth and withdrawals.
However, Canadian expats cannot contribute to their TFSA while they are classified as non-residents. Contributions made as a non-resident are subject to a 1% penalty tax per month on the contributed amount until it is withdrawn.
Investment gains within the TFSA remain tax-free in Canada, but this tax-free status is often not recognized by other countries.
For example, in the United States, TFSA income is fully taxable and must be reported to the IRS. Expats should carefully evaluate whether maintaining a TFSA is beneficial based on the tax treatment in their host country.
Registered Education Savings Plan (RESP) / Registered Disability Savings Plan (RDSP)
RESPs and RDSPs can be maintained while living abroad, but contributions may be restricted for non-residents.
Additionally, grants or bonds provided by the Canadian government for these accounts may stop if the account holder no longer resides in Canada.
Withdrawals may trigger withholding tax, and income generated in these accounts may be taxable in the expat’s host country.
Non-Registered Accounts
Non-registered accounts offer flexibility as an investment option for Canadian expats, as they are not subject to contribution limits or specific account rules like registered accounts.
Expats can hold a wide range of investments in these accounts, including:
- Stocks and Bonds: Individual equity and fixed-income securities traded on Canadian or international markets.
- Exchange-Traded Funds (ETFs) and Mutual Funds: Diversified options for investing in broad market indices, sectors, or asset classes.
- Alternative Investments: Hedge funds, private equity, or other non-traditional investments.
Investment income from non-registered accounts is taxed differently for non-residents:
- Dividends: Subject to a 25% withholding tax, which may be reduced under a tax treaty.
- Interest Income: Typically exempt from Canadian withholding tax if it meets specific conditions, such as being paid by an arm’s-length Canadian payer.
- Capital Gains: Non-residents are generally not taxed on capital gains from the sale of Canadian securities, except for taxable Canadian property (e.g., real estate or shares in private Canadian companies).
Non-residents must also report income earned in these accounts to the tax authorities in their host country, where additional taxes may apply.
Can expats buy property in Canada?
Real estate is a popular investment for Canadian expats due to its potential for long-term capital appreciation and rental income. However, non-residents face specific tax obligations when investing in Canadian property.
- Rental Income: Rental income earned by non-residents is subject to a 25% withholding tax on the gross rent. Non-residents can file an NR6 form to pay tax on net rental income (gross rent minus allowable expenses) instead. Filing a Section 216 return allows for accurate calculation and potential tax refunds.
- Capital Gains on Sale: When a non-resident sells Canadian real estate, they are subject to capital gains tax. To comply with CRA rules, the buyer must withhold 25% of the sale price until the seller obtains a Certificate of Compliance (Form T2062). This certificate ensures that the seller has paid the necessary taxes on the capital gain. Non-compliance with this process can result in significant penalties.
Real estate investments are also taxable in the host country, depending on local tax laws. Expats must ensure they meet both Canadian and foreign tax obligations for their property.
Offshore investment options for Canadian expats
Offshore Investment Accounts
Offshore investment accounts are designed for individuals living abroad who want access to global markets and flexibility in managing their wealth.
These accounts are typically held in jurisdictions with favorable tax and regulatory environments, such as Singapore, Switzerland, or the Cayman Islands.
Host Country Investment Accounts
Opening an investment account in the host country is another option for Canadian expats. These accounts provide access to local financial markets and are often integrated with the host country’s banking systems.
Global ETFs and Mutual Funds
Exchange-Traded Funds (ETFs) and mutual funds with international exposure are excellent tools for Canadian expats seeking diversified global investments. These funds are typically available through offshore or host country brokerage accounts.
Alternative Investments
For expats with higher risk tolerance or specific financial goals, alternative investments offer unique opportunities for diversification and returns.
Options Include:
- Real Estate Investment Trusts (REITs): REITs provide exposure to global real estate markets without direct ownership. Expats can invest in REITs listed on major stock exchanges or private real estate funds.
- Hedge Funds and Private Equity: Available through offshore accounts or high-net-worth platforms, these investments focus on strategies like leveraged positions, distressed assets, or venture capital.
Alternative investments often have higher entry requirements, such as minimum investment amounts, and require thorough due diligence to ensure compliance with Canadian and host country laws.
For more guidance, consulting an expat financial advisor is highly recommended.
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Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
