Can a non-resident open an investment account in Canada?

My contract in Sweden ends in 2024, but it is possible that I stay there, move back to Canada or move elsewhere in the world.

My questions: Would it make sense to contribute to an RRSP given that I have no Canadian income to offset? And what would be the consequences of withdrawing in a few years if I end up staying in Sweden? Or would you consider the ISK, or some other alternative?

—Kyle

How being a non-resident of Canada can affect your investments

Canadian residents are taxable on their worldwide income. Non-residents of Canada are subject to withholding tax on income in Canada that generally ranges from 15% to 25%. But they typically only file a tax return for certain types of income, like rental property income or the sale of real estate. A resident of another country generally files taxes, if applicable, in that foreign country.

According to the Canada Revenue Agency (CRA):

“To determine your residency status, all of the relevant facts in your case must be considered, including residential ties with Canada and the length of time, purpose, intent and continuity of the stay while living inside and outside Canada.”

Residential ties are the most important factor to determine residency. CRA considers the following three “significant” residential ties to being a resident:

1. Having a home in Canada;
2. Having a spouse or common law partner in Canada; or
3. Having dependents, like children, in Canada.

If you are temporarily studying, working or vacationing outside of Canada, while maintaining significant residential ties here, you may be considered a Canadian resident. This means your worldwide income may be taxable in Canada and you may require a Canadian tax return.

However, even if you could be considered a resident, if you have residential ties in a country that has a tax treaty in Canada (most countries do), you may instead be considered a deemed non-resident of Canada. A deemed non-resident is like a non-resident, paying withholding tax in Canada and only filing tax returns in Canada in select circumstances (rental income or sale of real estate, for example).

The Canada-Sweden tax treaty determines residency status as follows:

“He shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests).”

It sounds like you live in Sweden, go to school and work there, and do not have a home, a spouse, or children in Canada, so, I would agree, Kyle—it sounds like you are a non-resident of Canada.

Where and how to invest as a non-resident of Canada

As you note, you should not contribute to a tax-free savings account (TFSA) as a non-resident. If you do, you will be subject to a penalty of 1% per month on those contributions. You can maintain an existing TFSA as a non-resident, but the account may be subject to tax in a foreign country.

In your case, Kyle, Sweden taxes residents on their worldwide income. Registered retirement savings plans (RRSPs), and similar retirement accounts, are generally recognized as being tax deferred in another country. But TFSAs may not get special tax treatment in another country that taxes worldwide income, and they are accounts that are unique to Canada.

RRSP contributions are permissible as a non-resident but as you have noted, Kyle, there is no immediate benefit because you have no Canadian income to offset. The contributions would grow tax deferred thereafter but it sounds like you are not sure where you will end up in the long run.

You may stay in Sweden or go somewhere else. I think I would be more inclined to forgo RRSP contributions and consider contributions to a local tax-preferred account or to a regular investment account.

Withdrawing from investments when you don’t live in Canada

You ask about RRSP withdrawals in the future. As a Swedish resident, withdrawals would be subject to 25% Canadian withholding tax.

In retirement, registered retirement income fund (RRIF) withdrawals may be subject to a lower 15% rate. But if you contribute now, and then want the money out in a few years when you’re a non-resident, you will save no tax on the contribution and be subject to 25% on the withdrawal—a bad outcome.

Canadians investing in ISKs

Sweden offers an investeringssparkonto (ISK) account that has similarities to a Canadian TFSA. Instead of the income earned in the account being subject to tax, the account value is subject to a flat 30% tax rate, payable on a standard income rate that changes from year to year.

The standard income rate for 2022 is 1.25%, so 30% tax is payable on 1.25% times the account value. Interest, dividends and capital gains are generally taxed at 30% in Sweden as well, so as long as you can earn more than 1.25% on your ISK investments, you should be better off investing in that account than a regular, taxable investment account.

It seems like an ISK account is a good option for you to consider, Kyle, even if you are in Sweden just temporarily. If you return to Canada, you can use your RRSP room and contribute to an RRSP at that time, when the tax deductions are actually of use to you. TFSA room will begin to accumulate again as well, and you can make TFSA contributions.

RRSPs and TFSAs for Canadians abroad

Until that time, you can maintain your existing RRSP and TFSA accounts. You can even have a regular investment account in Canada. Withholding tax of 10% would apply for interest income, 15% for dividends and trust (mutual fund or exchange traded funds, a.k.a. ETFs) distributions, and no withholding tax would be payable on capital gains on your investments as a Swedish resident. Canadian withholding tax would generally be eligible to claim against the tax on those investments in Sweden.

Canadian non-residents cannot buy new Canadian mutual funds, but they can continue to hold existing mutual funds. Some financial institutions are more flexible than others when it comes to working with non-residents of Canada. Most will allow you to maintain an account after becoming a non-resident but opening a new account as a Canadian non-resident can be difficult.

I hope that helps, Kyle. Good luck with your Canadian and foreign investing and figuring out where your expat adventure will take you next!

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Read more from Jason Heath:

• U.S. withholding tax in an RRSP for Canadians
• Moving to the U.S.? Here’s what to do with your Canadian investments
• Where do we pay income tax if we retire abroad?
• RESPs and Canadian non-residency

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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