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You technically have to pay just 15% on your Canadian income, but there's more to the story
Q: We have a friend living in Mexico 10 months of the year.
She says she pays a flat 15% income tax on her total Canadian incomes. This is a working pension, CPP and OAS.
Is this for real?
—Merry
A: I gather your friend has you interested in retiring to Mexico as well, Merry? Her story sounds good at first pass – but it may or may not be upon closer examination.
If someone has a “permanent home” in Mexico, they are generally considered a Mexican tax resident. A permanent home can be rented or owned. The permanence just means it’s not just for occasional use, like a rental for the winter. It needs to be a long-term lease or a property they own.
If your friend has a permanent home available in Canada as well as Mexico, her residency would also depend on her “centre of vital interests.” So the taxation authorities would consider things like family, job, memberships, assets, etc. to assess personal and economic ties to see if she had a closer tie to one country or the other.
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If the centre of vital interests test was unclear, tax residency would be based on the country where your friend had a “habitual abode.” Spending 10 months in Mexico should make your friend a Mexican tax resident, Merry.
The Canada-Mexico Income Tax Convention was first signed in 1991 and updated in 2006. Canada has tax treaties like this with many countries around the world to determine how income originating in one country is taxed for residents of the other country.
The convention with Mexico is such that 15% withholding tax applies at source for Canada Pension Plan (CPP), Old Age Security (OAS) and defined benefit (DB) pensions. I suspect this is the magical 15% tax rate to which your friend is referring.
That said, Merry, Mexico taxes its residents on their worldwide income. So there’s more to the story than just the withholding tax in Canada. There is an exemption for pensions of up to nine times a region’s legal minimum salary making this amount exempt from tax. So depending on the region where your friend resides and her total pension income, she may be at least partially exempt from Mexican tax.
But I can tell you from experience that Canadian expats in other countries who are required to report Canadian source income often innocently or intentionally ignore local tax reporting or even filing requirements. It’s important to get local tax advice and adhere to proper tax compliance. I’m not saying this is the case for your friend, but you may only be getting part of the story, Merry.
Mexico has a progressive tax system like Canada, with different tax brackets applying to escalating levels of income. The top rate is 35%, which is lower than all Canadian provinces for high levels of income.
Most Canadians would have an average tax rate of about 15% at about $40,000 of income. This doesn’t take into account any tax deductions or credits other than the basic personal amount all Canadians are entitled to claim. So most people could probably have $40,000 of income or more and still pay a comparable 15% tax rate to the one that has you interested in a Mexican retirement, Merry.
Keep in mind that once you are outside of Canada for a certain period of time, your provincial health coverage may no longer apply. There are differences between different provinces, but the key is you can’t have your cake and eat it too. If you become non-resident, that generally means giving up Canadian health care. Coverage for Canadian citizens is subject to different reinstatement requirements upon returning, so ensuring adequate health care coverage while abroad is important.
In summary, Merry, your friend is probably correct that she’s paying 15% withholding tax on her Canadian pensions. She may or may not be subject to additional Mexican income tax on her income. Her cost of living may also be lower than what it would be in Canada. So financially, she may come out ahead spending her golden years in the Mexican sun.
Of note – Mexico was rated #1 in International Living’s list of The World’s Best Places to Retire in 2017.
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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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Q.?/
What is the justification for CRA, to charge 15% Holding Tax, on a Canadian Pension income of less than $20,000.
I am a ‘Permanente’, living in Mexico, with my bank in Canada as well as my Mexican wife.
Am I required to file taxes in Mexico?
Bill,
You are not required to file taxes in Mexico on your pension since it does not originate in Mexico. Only if you receive income from a Mexican source you’d be required to file taxes. Mexico has a treaty with several countries like Canada and the US to avoid double taxation.