Retiring or Moving to Portugal from Canada: Tax and Treaty

Canada-Portugal tax treaty: what changes when you move to Portugal?

Yes, Canada and Portugal have a tax treaty, and Finance Canada lists it as in force. Canada stops taxing you as a resident when you leave and cut your residential ties, or when the treaty tie-breaker makes you a resident of Portugal only. From then on, Canada taxes only your Canadian income, mostly by withholding at source. The treaty caps that withholding:

A case stops being simple when you keep a home in Canada, hold a large RRSP or RRIF, own a Canadian corporation or rental, or leave from Quebec. Gather your move date, your spouse's and dependants' move dates, proof you became a Portuguese tax resident, a list of what you owned and its value on the day you left, pension and RRIF statements, and whether an NR5 is on file.

When does Canada stop taxing me after a move to Portugal?

You usually become a non-resident on the latest of the day you leave, the day your spouse or common-law partner and dependants leave, and the day you become a resident of Portugal (CRA). The CRA says the most important test is whether you cut your significant residential ties: a home, a spouse or partner, and dependants in Canada (Folio S5-F1-C1). Whether your ties are cut is covered in Canadian tax residency.

If you keep ties and are still a Canadian resident under Canadian law but also a resident of Portugal under Portuguese law, the treaty's Article 4 tie-breaker decides, in this order:

1. Where you have a permanent home available.
2. If you have a home in both, where your personal and economic relations are closer (centre of vital interests).
3. If that cannot be decided, or you have a home in neither, where you have a habitual abode.
4. If still tied, the country of which you are a national.
5. If you are a national of both or neither, the two tax authorities settle it by agreement.

If the tie-breaker sends you to Portugal, Canadian law deems you not resident in Canada (Income Tax Act s. 250(5)), and the emigrant rules apply from that time. The CRA may assume you are not a treaty resident of Portugal unless you show you are liable to tax there (Folio S5-F1-C1), so keep Portuguese residence and tax records. To ask the CRA for its view, see asking the CRA to decide your residency.

What departure tax applies, and can Canada tax my gains after I leave?

On the day you leave, Canada treats you as having sold most of your property at fair market value, and the gain goes on your final return (CRA). Canadian real property, RRSPs, RRIFs, TFSAs and pensions are excluded. If you were resident in Canada no more than 60 months in the preceding 120 months before leaving, property you owned when you last arrived, or inherited after, is also excluded. You list your property on Form T1161 if it was worth more than $25,000 in total, and you can defer payment of the tax with Form T1244, elected by April 30 of the year after departure. A late T1161 costs $25 a day, at least $100 and at most $2,500. The calculation, forms and deadlines are in leaving Canada.

After you leave, the treaty gives Canada the right to tax:

• Gains on Canadian real property, and on shares or partnership or trust interests whose value comes mainly from Canadian real property (Article 13(1) and 13(4)). Selling your Canadian home or rental later is covered in non-residents selling Canadian property.
• Gains on other property if you are a Canadian national, or were a Canadian resident for fifteen years or more before the sale, and you were a Canadian resident at any time in the five years before the sale (Article 13(6)).

Other gains are taxable only in Portugal (Article 13(5)). Canada uses these rights only where Canadian law still taxes a non-resident, which for gains means taxable Canadian property (Income Tax Act s. 2(3)).

The treaty's protocol (item 9) replaces Article 13(6) with a different rule if Canada changed its former-resident rules in a way it announced before the treaty was signed; no official page cited here says whether that has happened. If you may sell property within five years of leaving, treat the rule as unsettled and get advice before relying on either version.

How much does Canada withhold on CPP, OAS and RRIF payments in Portugal?

For a resident of Portugal, Service Canada lists non-resident tax of 15% on OAS and on CPP/QPP pensions, and 25% on CPP/QPP death benefits (Service Canada). Without a treaty, the rate is 25%.

Article 18(2) of the treaty caps Canada's tax on periodic pension payments at the lesser of:

• 15% of the year's gross periodic pension payments above $12,000, and
• the tax you would pay on those payments if you were a resident of Canada.

Portugal can also tax these pensions (Article 18(1)). Under Article 22, Portugal deducts the Canadian tax from its own tax on the same income, up to the Portuguese tax on it.

Service Canada applies the exemption on the first $12,000 of pensions from Canada, except death benefits, and says Form NR5 is required (Service Canada). The exemption is one amount for the year across all your Canadian periodic pensions, not one per payer.

RRIF payments count as periodic only up to a yearly line: the greater of twice the RRIF minimum and 10% of the fund's value at the start of the year (Income Tax Conventions Interpretation Act s. 5). Payments above that line, and lump sums from a registered pension plan, are not periodic.

Why file an NR5, and what does a lump-sum RRSP withdrawal pay instead?

Form NR5 is how the payers learn your yearly exemption and the lower rate, so withholding starts from the right amount instead of the full payment. The CRA asks for it by October 1 or before the first payment is due (Form NR5); Service Canada says by October 31. Sending by the earlier date meets both. Once approved, the lower withholding starts the following January, so payments before then are withheld on the full amount. An approval covers five tax years unless your income changes, and starting a new pension needs a new NR5 (Service Canada). For a Portugal resident asking only for the treaty exemption, the form says you are not electing under section 217 and need not file a Canadian return; Service Canada says a return is still due each year, so follow your approval letter. If you also elect under section 217, a return is due by June 30 for each approved year, and the CRA cannot process a late one. How to apply, and what to do when your income changes, is in lower withholding on Canadian pensions abroad.

A lump-sum RRSP withdrawal is not a periodic pension payment (s. 5), so the treaty cap does not reach it and Canada withholds 25%. A section 217 return can sometimes lower the tax on RRSP and pension income; see the non-resident return for pension and RRSP income. Whether to withdraw before or after leaving is in RRSP cash-out before or after leaving Canada.

How much does Canada withhold on dividends and interest paid to me in Portugal?

Canada may tax dividends from Canadian companies paid to an individual resident of Portugal at up to 15% of the gross dividend (Article 10(2)), down from the statutory 25% (Income Tax Act s. 212). The treaty caps Canadian tax on interest at 10% (Article 11(2)). Under Canadian law, interest paid to a non-resident at arm's length is generally not subject to withholding unless it is participating debt interest (s. 212(1)(b)), so the interest cap matters mostly for interest from a related person or your own company.

To get the treaty rate, your bank or broker needs your non-resident status and treaty country; see Canadian bank and brokerage accounts after leaving. Portugal credits this Canadian tax the same way (Article 22).

Does the Canada-Portugal social security agreement help me keep OAS?

It can help you qualify, but it never raises the amount. Service Canada says you normally need 20 years of residence in Canada to keep receiving OAS while living outside Canada, and Portugal is a country with a social security agreement (Service Canada). An agreement can combine your residence or contributions in both countries to meet eligibility rules, but it "does not increase your payment amount".

Service Canada says that if you live in a country where the non-resident tax on Canadian pensions is lower than 25%, as listed for Portugal, you do not need to file an OAS Return of Income (Service Canada). Applying for OAS and CPP from abroad is in retiring abroad from Canada.

What do I file in Canada each year after moving to Portugal?

For the year you leave, you file a final return with your departure date on page 1 and Form T1161 if required (CRA). After that, it depends on your Canadian income:

The full test is in do you file every year after leaving Canada.

Example

All figures are illustrative and in Canadian dollars.

A retired couple moves to Portugal

Each spouse receives C$9,000 QPP, C$8,500 OAS and a C$10,000 RRIF minimum payment, C$27,500 each. They sold their Montreal duplex before leaving and report that sale on their final return; Canadian real property is never part of the departure sale. From the January after their NR5 is approved, the first C$12,000 each is exempt and at most 15% applies to the other C$15,500: no more than C$2,325 each for the year. If a Canadian resident would owe less tax on the same C$27,500, the treaty caps Canada's tax at that lower amount. Without the NR5, the exemption is not applied at source: at 15% on the full C$27,500, withholding is about C$4,125 each, and more if a payer does not apply the treaty rate; the excess over the treaty cap can be claimed back on Form NR7-R within two years. Because they left Quebec, they also have Revenu Québec steps.

The same couple cashes in a C$100,000 RRSP

A single lump-sum withdrawal is not a periodic pension payment, so the C$12,000 exemption and the treaty cap do not apply. The payer withholds 25%, C$25,000. A section 217 return may lower that tax, depending on their other Canadian income.

A retiree with 12 years in Canada and 10 years earlier in Portugal

Twelve years of Canadian residence is short of the 20 years normally needed to keep OAS abroad. Under the Canada-Portugal agreement, Canada counts years lived in Portugal after age 18 as Canadian residence when you do not otherwise qualify, so if all 10 Portuguese years were after 18, the retiree may be able to keep receiving OAS in Portugal. The OAS amount is still based on the 12 Canadian years.

Different for you?

• You keep a home, spouse or dependants in Canada, so your residence turns on ties or the treaty tie-breaker: Canadian tax residency, asking the CRA to decide your residency, or a cross-border tax review.
• You own shares, crypto or a private company with large gains on the departure date: leaving Canada, departure tax on private company shares, and the cross-border tax service.
• You are leaving Quebec: leaving Quebec, and cross-border tax help for both final returns.
• You own a Canadian corporation: close or keep your corporation when leaving Canada, paying yourself from your corporation after moving abroad, and the corporate tax service.
• You will rent out your Canadian home: non-resident landlords.
• You have a large RRSP and are deciding when to draw it: RRSP cash-out before or after leaving Canada, or a cross-border tax review before the first withdrawal.
• You have an NR5 but have not filed a Canadian return each year: the non-resident return for pension and RRSP income or cross-border tax help.
• Too much was withheld from your pension or RRSP: the non-resident return for pension and RRSP income.
• You left in a past year and never filed a departure return: cross-border tax help.
• You are moving somewhere else: moving from Canada to Spain, moving from Canada to France.