Moving from Canada to Mexico: Tax and the Canada-Mexico Treaty

When does Canada stop taxing you after you move to Mexico?

Canada stops taxing you as a resident when you leave Canada to live in Mexico and cut your residential ties. If you move in stages, the CRA usually uses the latest of three dates: the day you leave, the day your spouse or common-law partner and dependants leave, and the day you become resident in Mexico. If the Canada-Mexico tax treaty (signed September 12, 2006) makes you resident only in Mexico, you are a non-resident from that day. From then on you are a non-resident: Canada taxes only Canadian-source income, mostly by withholding at the rates below (CRA: Leaving Canada).

A move is not simple if you keep a home in Canada, split the year between both countries, have a spouse staying behind, hold a large RRSP or non-registered portfolio, or own shares of a private company. Those facts decide your departure date and departure tax, and a wrong date or value is costly to fix after the CRA reviews it.

Gather: the date you moved and the date your spouse and dependants left, days spent in each country each year, what happened to your Canadian home, your spouse's plans, provincial health coverage, pension and RRIF statements, the value of investments on the day you left, each RRIF's value at the start of the year, and proof you are taxed as a resident of Mexico.

Snowbird or emigrant: when does living in Mexico end Canadian residency?

Spending winters in Mexico does not end Canadian residency. The CRA says a home, a spouse or common-law partner and dependants in Canada will almost always be significant residential ties, and keeping significant ties usually means you stay resident; provincial health coverage is a secondary tie. A long stay abroad, even most of the year, does not by itself end residency while those ties remain (CRA Folio S5-F1-C1, paragraphs 1.10 to 1.16).

A snowbird who keeps a Canadian home usually stays a Canadian resident, taxed on worldwide income as before. The exception is if Mexico also treats you as resident and the treaty tie-breaker below sends you there. For the winter-abroad pattern, see digital nomads and Canadian tax residency. For how each tie is weighed, see Canadian tax residency.

How does the Canada-Mexico treaty tie-breaker work?

If Canada and Mexico both treat you as resident, Article 4(2) of the Canada-Mexico convention decides, in this order:

1. Permanent home: the country where you have a permanent home available.
2. Centre of vital interests: if you have a home in both, the country where your personal and economic relations are closer.
3. Habitual abode: if that cannot be settled, or you have a home in neither, the country where you usually live.
4. Nationality: if still tied, the country of which you are a national.
5. Competent authorities: if you are a national of both or neither, the two governments agree.

If the tie-breaker sends you to Mexico, section 250(5) of the Income Tax Act deems you a non-resident of Canada for all purposes, and the departure rules apply from that date. The CRA assumes you are not resident in Mexico unless you show you are liable to tax there (Folio S5-F1-C1, paragraphs 1.37, 1.38 and 1.43). Keep Mexican residence and tax records. To ask the CRA for an opinion first, see asking the CRA to decide your residency.

What departure tax applies when you move to Mexico?

On the day you become a non-resident, Canada treats most of your property as sold at fair market value and taxes the gain on your final return. Canadian real estate, RRSPs, RRIFs, TFSAs and pension plans are excluded. Property you owned when you last became a Canadian resident, or inherited afterward, is also excluded if you were resident in Canada for no more than 60 months in the preceding 120 months before leaving (CRA: Dispositions of property). Form T1161 is required if your property was worth more than $25,000.

Enter your departure date on page 1 of the return. For the final return, T1161 and deferring the tax with security, see leaving Canada.

How does the treaty election give you a fair-market cost in Mexico?

Article 13(8) of the Canada-Mexico convention lets an individual who leaves Canada, becomes resident in Mexico right away and is taxed by Canada on the deemed sale elect to be treated in Mexico as if the property had been sold and bought back at fair market value just before becoming resident there. Without it, Mexico could tax growth that Canada already taxed on departure.

The election is made for Mexican tax purposes, so how and when to make it is a Mexican procedure this page does not cover. Keep the values you reported on T1161 and the departure return; they are the evidence for the stepped-up cost.

Can Canada still tax your gains for six years after you leave?

Yes, for some property. Article 13(7) preserves Canada's right to tax gains of an individual resident in Mexico who was resident in Canada at any time in the six years before the sale, which would otherwise be taxable only in Mexico under Article 13(6). It does not reach property covered by the Article 13(8) departure rules above (convention).

Canada uses this right only on gains its own law taxes when a non-resident sells: mainly taxable Canadian property, such as Canadian real estate and unlisted shares that get most of their value from it (Income Tax Act, s. 248(1)). Gains on Canadian real estate stay taxable in Canada at any time under Article 13(1). For a Canadian home sold after you leave, see selling your home after leaving Canada. If you plan to sell other Canadian assets within six years, have the Canadian and Mexican treatment checked before the sale.

How much does Canada withhold on CPP, OAS, RRIF and pensions paid to you in Mexico?

Service Canada lists 15% non-resident tax on OAS and CPP or QPP pensions paid to a resident of Mexico, and 25% on CPP or QPP death benefits (Service Canada: Taxes on pensions paid abroad). Without a treaty the rate would be 25%.

For periodic pension payments, Article 17(2) caps Canada's tax at the lesser of 15% of the gross payment and the tax you would pay on the year's periodic pensions as a Canadian resident (convention). RRIF payments count as periodic only up to a yearly limit: the greater of twice the RRIF minimum and 10% of the fund's value at the start of the year. Payments above that limit are not periodic (Income Tax Conventions Interpretation Act, s. 5).

If your pensions are small, the "lesser of" cap can mean Canada keeps less than the payer withheld. Getting it back takes a section 217 return; see non-resident return for pension and RRSP income. To have less withheld up front, see lower withholding on Canadian pensions abroad.

What does a lump-sum RRSP withdrawal pay instead?

A lump-sum RRSP withdrawal, a commutation of the plan, or a lump sum from a registered pension plan is not a periodic pension payment, so the treaty cap does not apply and Canada withholds 25% (Income Tax Conventions Interpretation Act, s. 5; CRA: Non-Residents and Income Tax). The same rate applies to the part of a year's RRIF payments above the periodic limit.

RRIF payments within the yearly limit are periodic and keep the treaty cap; an RRSP must first become a RRIF. See converting an RRSP to a RRIF as a non-resident. Whether to cash out before or after the move is covered in RRSP cash-out before or after leaving Canada.

How much does Canada withhold on dividends and interest paid to you in Mexico?

Canada withholds 15% on dividends paid to an individual resident in Mexico, instead of the statutory 25% (Article 10(2) of the convention). Most interest from an arm's-length payer, such as a bank deposit, has no Canadian withholding at all; Part XIII tax reaches mainly interest from a non-arm's-length payer and participating debt interest (Income Tax Act, s. 212(1)(b)). Where it applies, the treaty caps it at 10%.

Your bank or broker applies the treaty rate only after it knows you live in Mexico. See Canadian bank and brokerage accounts after leaving for Form NR301. Rent from a Canadian property has its own rules: see non-resident landlords.

Does the Canada-Mexico social security agreement help you keep OAS?

It can, if you lack enough Canadian residence to receive OAS while abroad. Normally you need 20 years of residence in Canada to receive OAS while living outside Canada (Service Canada: Social security agreements). The Canada-Mexico agreement, in force since May 1, 1996, lets Canada count periods credited under Mexico's pension program as residence in Canada (Service Canada: Canada-Mexico agreement). It helps you qualify; it does not raise the amount.

The CRA lists Mexico among the places whose residents who received OAS do not have to file the OAS Return of Income, the return that sets the OAS recovery tax (clawback), if at year end you lived in a listed country, you received OAS that year, and you do not plan to move to an unlisted country before the date the CRA gives (CRA: OAS Return of Income). The list and date are updated each year, so check them for the year you file. For OAS and CPP abroad in general, see retiring abroad from Canada.

Example

Illustrative figures in Canadian dollars, using the rates above.

A couple moves to Mérida full time

A retired couple sells their Winnipeg house, cancels provincial health coverage and moves to Mérida. Each receives C$10,000 of CPP and C$8,500 of OAS a year. Canada withholds 15% on each: about C$2,775 per person. That is the withholding, not necessarily the final tax: with pensions this small, the treaty's "lesser of" cap means a section 217 return may recover much of it. Their non-registered portfolio was deemed sold on the departure date and reported on the final return with T1161; the Article 13(8) election is then a Mexican filing step.

A snowbird keeps the Kelowna condo

A retiree keeps his Kelowna condo, his provincial health card and his family in Canada, and spends five months a year in Puerto Vallarta. Those ties almost always keep him a Canadian resident. Unless Mexico also treats him as resident and the treaty tie-breaker sends him there, he files a normal Canadian return on worldwide income and none of the non-resident rates apply.

Drawing a RRIF from Mexico

A 65-year-old living in Mexico has a C$300,000 RRIF at the start of the year. Her periodic limit is the greater of twice the minimum (2 x 4% x C$300,000 = C$24,000) and 10% of the value (C$30,000), so C$30,000.

• If she draws C$30,000 that year: All of it is periodic; 15% is withheld, C$4,500.
• If she draws C$60,000 that year instead: The first C$30,000 is periodic at 15% (C$4,500); the C$30,000 above the limit is withheld at 25% (C$7,500).

Different for you?

• You kept a home in Canada or split the year: your residency is uncertain and the departure date may be wrong. Review your ties in Canadian tax residency and get cross-border tax help.
• You have a large non-registered portfolio or private company shares: departure tax, the Article 13(8) election and any sale within six years need both countries' rules lined up. See leaving Canada and cross-border tax help.
• You already moved and never filed a departure return: the deemed sale and T1161 may be overdue. Start with leaving Canada and cross-border tax help.
• You plan a large RRSP or RRIF withdrawal: timing and the periodic limit decide whether Canada takes 15% or 25%. Compare timing in RRSP cash-out before or after leaving Canada and get cross-border tax help.
• Too much was withheld from your pensions: see non-resident return for pension and RRSP income.
• You rent out or sell your Canadian home: see non-resident landlords or selling your home after leaving Canada.
• You are moving somewhere else: see the UK, Portugal or Thailand pages.