Over 10,000 Irish people move to Canada annually in order to work or study, with many eventually making the country their permanent home. However, the vast majority of people end up returning to Ireland after a number of years.
During their time in Canada, anybody who worked would have had deductions taken automatically from their salary, to cater for contributions made into the Canadian version of the Irish state pension. In addition to this, individuals may have possibly accrued a private pension fund through contributions from their employer or by paying in personal contributions into pension schemes.
Upon returning home, these pensions can very often fall by the wayside due to a lack of knowledge about entitlements or what options are available. These benefits should not be overlooked and can be another source of income in retirement, which can be incorporated into your overall retirement plan.
How does the Canadian Pension System work?
The Canadian retirement funding system is made up of three components:
- Old Age Security (OAS)
- The Canadian Pension Plan (CPP)
- Voluntary Private Pensions
What is Old Age Security (OAS)?
This is Canada’s largest pension program and is funded out of the Government's general tax revenues rather than individuals paying into it directly. The OAS pension is a taxable monthly payment available to seniors who are aged 65 and older and who meet the eligibility requirements.
What happens to my Old Age Security (OAS) when I leave Canada?
In order to qualify for this payment, an individual must have been a citizen for at least 10 years. However, in the case of an individual who lives outside of Canada, you must have been a Canadian citizen or legal resident before you left Canada and you must have lived in Canada for at least 20 years.
You should apply to the Canadian authorities to see if you think you may be eligible.
What is the Canadian Pension Plan (CPP)?
The CPP is an earnings-related pension scheme. It covers self-employed and employed. When an individual reaches retirement age, their benefits are determined based on the number of years they contributed the required maximum amounts. An individual would need to have 40 years of full contributions to receive the maximum amount.
What happens to my Canadian Pension Plan Entitlement when I leave Canada?
CPP benefits, in the schemes current format, can be claimed even when an individual decides to relocate permanently from Canada.
There is an agreement in place between Canada and Ireland where an individual can receive benefits from both states. The benefit amount paid by each country will reflect the portion of the period from which the individual worked and paid credits in each country’s pension program.
Alternatively, under a bilateral social security agreement in place, contributions paid in Canada can be used to satisfy PRSI conditions in Ireland. In this case, the individual would forfeit their pension entitlements in Canada.
What is Voluntary Private pension funding in Canada?
Occupational pension plans and Registered Retirement Savings Plans (RRSPs) enable individuals to accrue supplementary pension funding so they are not reliant on only the state pension. Much like Irish pensions, contributions go into these pension Gross of tax (within certain limits) and they are allowed to grow tax-free until such a time they are withdrawn. Contributions can be made by both employers and employees.
What happens to my Voluntary Private Pension Funding when I leave Canada?
When you sever your residential ties with Canada, you will need to file a final departure tax return. On that day, you will cease to be a resident of Canada and a deemed disposal of your assets will be applied which means a capital gains tax will be applied as if the assets were sold on that day at their fair market value. Pension funds are not included in this deemed disposal; however, Tax will be applied when withdrawals are made.
Depending on the pension scheme, you may have a couple of options available to you.
- Withdraw all the funds.
The general rule is that a withholding tax of 25% is charged when a non-resident makes a withdrawal. This withdrawal will also be treated as income so will also be subject to Irish taxation at the marginal rate on the full amount plus the Universal Social Charge. An individual will normally be able to claim a foreign tax credit against the tax which is paid in Canada.
This is different than the Irish Pension rules where you cannot access your pensions until at least age 50 in most circumstances.
- Leave the pensions in Canada.
With this option, they will continue to grow tax-free until such a time that you start remitting the funds back to Ireland. Some pension providers may not deal with non-residents so it is important to speak with the provider if an individual is considering this option. Again, the funds you withdraw in retirement from the Canadian pension will be treated as income and will be taxed accordingly by the Irish authorities. One must also bear in mind the longer-term risk of currency fluctuations having a negative impact on your future income if, for example, the Canadian dollar were to weaken substantially over the years against the €uro.
Unlike other jurisdictions which allow the tax-free transfer of pensions, Canada operates a different ruling and these type of transfers are not permitted unless the transfer is to the United States. Therefore, any pension transfer out of Ireland will be a deemed distribution under Canadian tax law and subject to withholding tax.
Ireland has a double taxation agreement in place with Canada where any tax that is held at source by the Canadian revenue authorities is credited against the Irish tax which you need to pay when the funds are remitted. This prevents the individual from being taxed twice. This should be discussed with a qualified Irish Financial Advisor.
It is worth noting that if you decide to leave the Canadian Pension where it is, this will not be taken into account for when calculating an individual’s Irish Standard Fund Threshold (SFT). The current threshold is set at €2 million. This means that an individual can only build up a total pension pot (excluding the state pension) of up to the value of €2 million without incurring any penalties, however, only pensions accrued in Ireland are taken into account for this threshold. Anything above this amount is charged tax at a rate of 40%.
Individuals should be reluctant in withdrawing any funds from their pension unless the capital is being invested in another vehicle designed to give a supplementary source of income in retirement as the majority of people simply do not have enough pension provisions in place.
You should speak to your Canadian financial advisor as well as your Irish financial advisor well in advance of your proposed move back to Ireland in order to put an informed plan in place. This will mean you are well-positioned to make the various decisions in relation to your personal finances.
We are conveniently located on the Southern Cross Road between Bray and Greystones which can be accessed via junction 7 of the N11.
This is ideal for servicing clients from the surrounding South Dublin, Wicklow and greater Leinster areas.
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