Recently, I have been hearing many Canadians living in Hong Kong consider returning to Canada either for their children’s education or for retirement. This article is about income payable by the government when returning to Canada to retire and a simplistic comparison of the after-tax income that could be generated from rental properties versus investments.
It is estimated that there are about 300,000 Canadian passport holders living in Hong Kong. Canada has always been a popular destination for emigration. Many Hong Kong people moved to Canada in the 1980s and 1990s. A number of them returned to Hong Kong for various reasons, such as more job opportunities and closer to families. Recently, I have been hearing many from this group are considering retirement in Canada.
Apart from cleaner air, more choices on recreational activities and relatively more peaceful environment, Canada is known for its generous benefit system. Can a Canadian citizen who has been living aboard for a long time enjoy the same benefits as other citizens?
Canada Pension Plan (CPP) retirement pension
If you had worked and contributed to CPP when you lived in Canada, you may qualify for CPP retirement pension. The amount is based on how much you contributed and how long you have been making the contribution at the time of application. The standard age for receiving the CPP is the month after you turn 65. You will receive less if you apply before you turn 65, or more if you apply after you turn 65. The latest date to apply is when you turn 70. After that, there is no advantage in deferring the payment. In 2017, the maximum amount per month is C$1,114.17 but the average amount is C$643.92. The amount is adjusted every January based on the consumer price index (CPI) if there is an increase in the cost of living. This is a taxable income. You may receive CPP while living outside of Canada.
Old Age Security (OAS)
Old Age Security starts at the age of 65 and provides additional income if you have lived in Canada for more than 10 years after the age of 18. OAS will be reduced if your net income exceeds a threshold. In 2017, the threshold is C$74,788. The amount is adjusted based on the CPI to ensure it keeps up with the cost of living. This is a taxable income. In many circumstances, you can receive it outside of Canada if you have resided in Canada for at least 20 years after turning 18.
Guaranteed Income Supplement (GIS)
GIS is a non-taxable benefit for individuals who are 65 or older and whose income is below a stipulated level. The amount is dependent on the marital status and a few other factors. It is only payable when you live in Canada.
Apart from studying different options of pension benefits, some have expressed concern that Canada is perceived as a high tax country. While tax rates in Canada are higher than Hong Kong, there are many tax credits available to reduce taxable income. Let’s take a look at the example below about investing in real estate versus equities.
Investing in real estate
Many Chinese investors prefer investing in real estate because they know it’s real and will not run away. Assuming an investor who lives in Ontario or B.C. buys a residential property for C$1 million, rents it out for C$3,500 a month through a real estate agent and the property tax is C$5,000 per year, the annual net income calculation may look like this:
Rental income C$3,500 x 12 = C$42,000
Less One-month rental commission = C$3,500
Less Property Tax = C$5,000
Net rental income = C$33,500
The 2016 tax payable, assuming there is no other income, would be C$4,458 on the rental income. Therefore, the after-tax income is C$29,042.
Investing in equities
Assuming the same investor invests C$1 million in publicly listed companies earning C$33,500 eligible dividends and he/she has no other income, there could be no income tax payable. Thus, the after-tax income is C$33,500.
According to some tax calculators, one may earn up to C$56,000 in dividends and not pay any income tax.
Eligible dividends are dividends paid by listed companies in Canada. These companies pay their dividends after they have paid corporate taxes. When filing the tax returns, the dividend received by an investor will be grossed up to about the same amount of the company’s pre-tax income. To prevent double taxation, tax credit equal to about the same amount that the company has already paid to the federal and provincial governments will be given to the investor.
The above analysis does not consider potential capital gains, expenses related to purchasing and maintenance of real estate, i.e. legal fees, land transfer tax, etc., leveraging and other income that an investor may have.
Every person’s situation is different. For proper planning of retirement or income tax planning, it would be best to consult a financial planner or tax accountant in Canada.
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