"Our dilemma is this: Should we live six months in Panama and six months in Ontario in order to qualify for such things as Canadian health care benefits or should we live full time in Panama and pay for our health care? We are afraid that if we stay in Ontario, our pensions will not cover our expenses."

Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Henry and Dorothy in order to weigh the pluses and minuses of leaving Canada. His conclusion: There is not much of a tax benefit to be had by moving to Panama, but the cost of living is lower. The adjustment to leaving Canada is the unknown in the analysis.

Breaking ties with Canada and becoming residents of Panama has both financial and emotional costs, Mr. Moran notes. The chief financial cost is the requirement to pay Canada's departure tax, which requires that one pay tax on capital gains that have been accrued but not realized. Henry and Dorothy have $158,000 of taxable investments with accrued gains of $26,000. The capital gains tax will be about $6,000 based on recent prices of the couple's taxable mutual funds.

Henry and Dorothy plan a real estate swap as part of their move to Panama where they have bought a newly built condo for $112,000. They plan to sell their present $340,000 Toronto condo and move into a smaller one under construction that they have purchased for $270,000, using the difference to pay for the Panamanian condo. The Panamanian condo will be fully paid off by the time they retire.

Timing the move to Panama is critical. Henry can qualify for a pension at age 60 from his civil service job. The pension could be indexed, but the amounts for indexation are not guaranteed, Mr. Moran notes. Dorothy will qualify for a pension indexed to 75 per cent of increases in the consumer price index, the planner notes.

Henry and Dorothy want to complete their move to Panama in five years. Henry is five years from qualifying at age 60 for Canada Pension Plan benefits and Dorothy has 10 years to go for such benefits. If each works five more years, Henry will have earned 87 per cent of maximum CPP credits of $10,365 a year, or $9,054. Dorothy will have earned 75 per cent of credits, or $7,784.

The couple can take early CPP benefits when each reaches age 60. That will cost each 0.5 per cent per month for each month prior to age 65 that benefits begin. Early application would therefore reduce payments to $6,338 for Henry and $5,449 for Dorothy. But taking early benefits could be a wrong move, the planner cautions. CPP is indexed to Canadian consumer prices and is therefore a precious asset. Rather than lose indexation on 30 per cent of their CPP payments, the couple should use investment income for five years and preserve their full CPP entitlements, Mr. Moran suggests.

Henry and Dorothy would qualify for full Old Age Security at age 65 were they in Canada. They will still qualify in Panama, but will have to file a document called the Old Age Security Return of Income, which will determine if they will receive OAS. They will have to report their income and will therefore be subject to the clawback. Henry and Dorothy will each qualify for OAS payments, currently $5,974 per year and indexed. The clawback, which affects individuals with income over $63,511 in 2007, will not affect them, Mr. Moran says.

Payments from registered retirement savings plans or registered retirement income funds will be subject to a 25-per-cent withholding rate because Panama does not have a tax treaty with Canada. This amounts to a flat tax on these payments, since Panama will not tax them. They might be able to pay slightly less tax were they to remain residents of Ontario with only pension income, so a move to Panama will probably have no tax benefit, the planner notes.

In the end, if the couple do defer taking CPP to age 65, and assuming 6-per-cent growth of their assets and 3-per-cent annual inflation, they can expect annual income in a range of $74,800 to $81,100 a year in 2007 dollars, depending on the amount of inflation compensation Henry's company pension provides. This estimate assumes that all of their financial assets will have been exhausted by the time that Dorothy dies at an estimated age of 90. The cost of living in Panama is in many ways lower than in Canada, so their total pension income should be adequate for a pleasant way of life.

If Henry and Dorothy do cut their ties with Canada, they will lose their medical benefits. They can, they think, obtain full medical insurance for $100 a month each.

Cutting ties with Canada means spending six or more months of the year out of the country. If Henry and Dorothy plan to visit often, they will have to factor a good deal of travel into their budget. If they keep their Toronto condo, they may be able to rent it out year round for what might be a good return on their cost. However, if they wish to use the Toronto condo several months of the year on return trips to Canada, they may find it hard to get tenants willing to occupy for periods of only a few months.

If, as non-residents of Canada, Henry and Dorothy obtain rental income from their Toronto condo, they will have to pay non-resident taxes in Canada. They will have to ensure that withholding taxes are based on net rent rather than gross rent, the planner says. A Canada Revenue Agency form must be completed to set up this withholding plan, Mr. Moran says.

For now, the couple can make a single tax move to improve their returns. They have an $18,000 line of credit that they use to make progress payments on condos under construction. They could take a similar sum from their taxable investments and pay off the credit line. They could also borrow and reinvest. If they do that, interest paid would be tax deductible and would save them $430 a year, assuming interest is 6 per cent and they are in a 40-per-cent tax bracket, Mr. Moran explains.

Leaving one's home country for another can be a wrenching experience. Life in the tropics is appealing, but Henry and Dorothy ought to try it for half a year while remaining residents of Canada. They can get to know the local expatriate community and learn about living in Panama from Canadians who have made their homes there. If they decide to make their move permanent, they should contact CRA's International Tax Office for assistance.

"The couple has assumed that they can take profits on the Toronto real estate market to pay off their Panamanian condo," Mr. Moran says. "If the Ontario real estate market were to falter, the couple's plans would have to be reassessed. For now, however, a collapse in Toronto real estate prices seems unlikely."

"This analysis confirms the feasibility of our plans, but we are not sure that we want to delay taking CPP benefits to age 65," Dorothy says. "I come from a family with long life expectancy, so I don't want to run down my investments and RRIF income by waiting to 65 to take CPP."
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Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Henry and Dorothy in order to weigh the pluses and minuses of leaving Canada. His conclusion: There is not much of a tax benefit to be had by moving to Panama, but the cost of living is lower. The adjustment to leaving Canada is the unknown in the analysis.

Breaking ties with Canada and becoming residents of Panama has both financial and emotional costs, Mr. Moran notes. The chief financial cost is the requirement to pay Canada's departure tax, which requires that one pay tax on capital gains that have been accrued but not realized. Henry and Dorothy have $158,000 of taxable investments with accrued gains of $26,000. The capital gains tax will be about $6,000 based on recent prices of the couple's taxable mutual funds.

Henry and Dorothy plan a real estate swap as part of their move to Panama where they have bought a newly built condo for $112,000. They plan to sell their present $340,000 Toronto condo and move into a smaller one under construction that they have purchased for $270,000, using the difference to pay for the Panamanian condo. The Panamanian condo will be fully paid off by the time they retire.

Timing the move to Panama is critical. Henry can qualify for a pension at age 60 from his civil service job. The pension could be indexed, but the amounts for indexation are not guaranteed, Mr. Moran notes. Dorothy will qualify for a pension indexed to 75 per cent of increases in the consumer price index, the planner notes.

Henry and Dorothy want to complete their move to Panama in five years. Henry is five years from qualifying at age 60 for Canada Pension Plan benefits and Dorothy has 10 years to go for such benefits. If each works five more years, Henry will have earned 87 per cent of maximum CPP credits of $10,365 a year, or $9,054. Dorothy will have earned 75 per cent of credits, or $7,784.

The couple can take early CPP benefits when each reaches age 60. That will cost each 0.5 per cent per month for each month prior to age 65 that benefits begin. Early application would therefore reduce payments to $6,338 for Henry and $5,449 for Dorothy. But taking early benefits could be a wrong move, the planner cautions. CPP is indexed to Canadian consumer prices and is therefore a precious asset. Rather than lose indexation on 30 per cent of their CPP payments, the couple should use investment income for five years and preserve their full CPP entitlements, Mr. Moran suggests.

Henry and Dorothy would qualify for full Old Age Security at age 65 were they in Canada. They will still qualify in Panama, but will have to file a document called the Old Age Security Return of Income, which will determine if they will receive OAS. They will have to report their income and will therefore be subject to the clawback. Henry and Dorothy will each qualify for OAS payments, currently $5,974 per year and indexed. The clawback, which affects individuals with income over $63,511 in 2007, will not affect them, Mr. Moran says.

Payments from registered retirement savings plans or registered retirement income funds will be subject to a 25-per-cent withholding rate because Panama does not have a tax treaty with Canada. This amounts to a flat tax on these payments, since Panama will not tax them. They might be able to pay slightly less tax were they to remain residents of Ontario with only pension income, so a move to Panama will probably have no tax benefit, the planner notes.

In the end, if the couple do defer taking CPP to age 65, and assuming 6-per-cent growth of their assets and 3-per-cent annual inflation, they can expect annual income in a range of $74,800 to $81,100 a year in 2007 dollars, depending on the amount of inflation compensation Henry's company pension provides. This estimate assumes that all of their financial assets will have been exhausted by the time that Dorothy dies at an estimated age of 90. The cost of living in Panama is in many ways lower than in Canada, so their total pension income should be adequate for a pleasant way of life.

If Henry and Dorothy do cut their ties with Canada, they will lose their medical benefits. They can, they think, obtain full medical insurance for $100 a month each.

Cutting ties with Canada means spending six or more months of the year out of the country. If Henry and Dorothy plan to visit often, they will have to factor a good deal of travel into their budget. If they keep their Toronto condo, they may be able to rent it out year round for what might be a good return on their cost. However, if they wish to use the Toronto condo several months of the year on return trips to Canada, they may find it hard to get tenants willing to occupy for periods of only a few months.

If, as non-residents of Canada, Henry and Dorothy obtain rental income from their Toronto condo, they will have to pay non-resident taxes in Canada. They will have to ensure that withholding taxes are based on net rent rather than gross rent, the planner says. A Canada Revenue Agency form must be completed to set up this withholding plan, Mr. Moran says.

For now, the couple can make a single tax move to improve their returns. They have an $18,000 line of credit that they use to make progress payments on condos under construction. They could take a similar sum from their taxable investments and pay off the credit line. They could also borrow and reinvest. If they do that, interest paid would be tax deductible and would save them $430 a year, assuming interest is 6 per cent and they are in a 40-per-cent tax bracket, Mr. Moran explains.

Leaving one's home country for another can be a wrenching experience. Life in the tropics is appealing, but Henry and Dorothy ought to try it for half a year while remaining residents of Canada. They can get to know the local expatriate community and learn about living in Panama from Canadians who have made their homes there. If they decide to make their move permanent, they should contact CRA's International Tax Office for assistance.

"The couple has assumed that they can take profits on the Toronto real estate market to pay off their Panamanian condo," Mr. Moran says. "If the Ontario real estate market were to falter, the couple's plans would have to be reassessed. For now, however, a collapse in Toronto real estate prices seems unlikely."

"This analysis confirms the feasibility of our plans, but we are not sure that we want to delay taking CPP benefits to age 65," Dorothy says. "I come from a family with long life expectancy, so I don't want to run down my investments and RRIF income by waiting to 65 to take CPP."">            |   Bookmarks