Retirement planning for immigrants

Whether you have an employer-sponsored pension plan or not, like most Canadians you will also rely on government pension plans and personal savings when you retire. If you’re an immigrant, you need to be aware that the number of years you spend living in Canada will have an impact on the amount of retirement income you can reasonably expect to receive.

Meet Charlie and Carlos. Both men were born on the same day in 1980. As it happens, they are both software engineers working for the same company. They hold exactly the same position, have identical salaries and benefits, and they started working for the company on the same day in 2015. For the sake of argument, we’ll assume that both men entered the workforce at the same time, and that they had parallel careers and comparable incomes in the years before they started in their current position in 2015. Their level of saving and spending is also similar throughout the years.

All those things being equal, you would assume that Charlie’s and Carlos’ retirement incomes from government plans and personal savings would be the same, wouldn’t you? Well, they’re not.

Saving for retirement

Charlie was born in Big Beaver, Saskatchewan and is a life-long resident of Canada. Carlos, on the other hand, was born in Chihuahua, Mexico. He immigrated to Canada in 2015. The following table shows how their retirement income will differ when they retire in 2045, aged 65.

Click for larger view of table

Generating income in retirement

Fast forward to 2045, and both Charlie and Carlos are retiring. With the omnipotence of a writer, we’ll give them another 20 years to live, to age 85, which is a little higher than the average life expectancy that Statistics Canada has laid out for our guidance. Here is the money Charlie and Carlos will have at their disposal during retirement:

Click for larger view of table

Charlie’s guaranteed income from Canadian government plans (OAS and CPP) is higher than that of Carlos by about 25%, or $430 per month (2018 amounts). His Canadian personal retirement savings are nearly 40% higher than those of Carlos – a difference of almost $600,000 worth of income-producing capital. That amounts to a considerable income gap for every year spent in retirement. You’ll have noticed that the biggest difference lies in the amounts accumulated in the personal retirement savings plans (RRSP and TFSA), not the government plans. Now that’s something to think about.

The bright side

The case of Charlie and Carlos described above has been simplified to make our point more clearly: if you’ve spent time abroad, you will need to look at your retirement plan differently, as you may have some catching up to do. For immigrants like Carlos, the situation is not all that grim, as they’re likely to have other sources of retirement income that Charlie doesn’t have:

• Many immigrants may qualify for private and government pension plans in their home country, based on their career prior to moving to Canada. In the case of some countries, this can be a big plus: U.S. Social Security, for instance, provides generally larger benefits than CPP or QPP, at least for those with good incomes.
• Immigrants may also have had access to personal retirement savings plans in their home country, similar to our RRSP and TFSA accounts, as well as non-registered savings.
• Pension payments in a currency stronger than the Canadian dollar have the added benefit of an advantageous exchange rate (think of the euro or the U.S. dollar in recent years).

Lived or living outside Canada?

You’ll want to find out whether there’s a social security agreement between Canada and your country of origin, and the terms of that agreement.† Social security agreements can help you qualify for government benefits in both countries, which means contributions to foreign plans could be deemed to be contributions made to the CPP. You may be able to count years of residency in another country as years of residency in Canada to qualify for minimum OAS benefits, and vice versa.

Some of these agreements provide tax relief for foreign pensions received by residents of Canada. Under a certain threshold, those pensions may also be tax exempt in your country of origin, or subject to a lower rate based on the applicable tax treaty with Canada.

Regardless of the non-resident tax charged by the foreign government, it is important to remember that you must report your worldwide income on your Canadian tax return. To avoid double taxation you would claim a foreign tax credit for any taxes paid to foreign tax jurisdictions.

Retirement planning is complex – and any international components that are thrown into the mix add extra layers of complexity. If you spent part of your working life in another country, you need to do the math to see if you have some catching up to do. Your financial planner will be happy to explore possible strategies with you.

Willem Lebegge, Contributing Editor
T.E. Wealth, Montreal

†The province of Quebec has its own social security agreements with countries around the world.

This article was published in T.E. Wealth’s Strategies newsletter, March 2018 edition. Read the full edition here.