Commuted Value or Keep Your Pension When Leaving Canada

Defined benefit pension when leaving Canada: your three choices

When you leave a Canadian job, the pension plan usually offers a deferred pension (paid later), a commuted value transfer (the lump-sum value moved to a locked-in account), and sometimes cash. Pension law and the plan's terms decide which choices you have; tax law decides what each one costs.

A case stops being simple when the commuted value is large, a spouse has survivor rights, your departure date and payout date are close, or you are moving to a country that also taxes the pension. Gather the termination statement, the commuted value and the prescribed amount the administrator shows, your departure date, and your RRSP deduction limit.

Does leaving Canada trigger tax on my pension?

No. Your right to a registered pension is an "excluded right or interest" under section 128.1, so it is not part of the departure deemed sale. Tax arises only when money is paid out. For departure tax on other property, see leaving Canada.

If I keep the pension, how does Canada tax each payment abroad?

Canada withholds Part XIII tax (its flat non-resident withholding tax) of 25% on each pension payment to a non-resident (section 212(1)(h)). A tax treaty often lowers the rate for periodic pension payments; the Canada–US treaty caps it at 15% (treaty). For other countries, check the treaty or the CRA Part XIII tax calculator (IC76-12R8).

The payer reports each year's payments on an NR4 slip, code 39 for periodic pension payments and code 40 for lump sums (CRA). The tax withheld is generally your final Canadian tax on that income unless you elect to file (T4058). To have the treaty rate applied, see lower withholding on Canadian pensions abroad; to recover tax by filing, see the section 217 return.

How much of a commuted value moves tax-free, and what happens to the excess?

From a defined benefit plan, only the prescribed amount moves tax-free to a locked-in RRSP, a locked-in retirement account (LIRA), a RRIF or another plan's money purchase (defined contribution) account (section 147.3(4)). Only Canadian registered plans qualify, not a pension plan in your new country. Regulation 8517 sets it as your annual lifetime pension given up times an age factor: 9.0 under age 50, rising to 12.4 at ages 64 and 65, then falling. When you take the whole value out, the prescribed amount is at least the balance of your own contributions with interest (Regulation 8517(2)). If you are already a non-resident when the transfer is made, give the administrator Form NRTA1 first; without it, the transfer is withheld at 25% too (section 212(1)(h)(iii.1)).

The rest is the excess. The CRA says the excess is included in your income and has to be paid to you (Newsletter 04-1). Where pension law forbids a cash payment, it may instead go to a money purchase account, but it is still taxed as if paid to you and contributed, and the RRSP over-contribution tax may apply.

You can deduct an RRSP contribution of the excess only within your unused RRSP deduction limit, and only on a return that reports the excess: your final resident return if it is paid before you leave, or a section 217 return if it is paid after. Withholding alone gives no credit for it. Above that limit, see RRSP over-contributions. If the excess went into your RRSP or RRIF instead of being paid to you and exceeds your room, you can withdraw that part and deduct the withdrawal with Form T1043, so it is not taxed twice (section 147.3(13.1)). The locked-in account the tax-free part lands in has its own rules; see unlocking a LIRA after leaving Canada.

How is a cash lump sum taxed if I'm a non-resident when it is paid?

A lump sum, including the taxable excess of a commuted value, is withheld at 25% when paid to a non-resident (section 212(1)(h)). Treaty rates for periodic pensions generally do not help: the CRA notes the treaty definition of a periodic pension payment excludes lump sums and full or partial commutation payments (IC76-12R8). Check your own treaty's pension article, since wording varies: Australia's caps Canadian tax on all pension payments, lump sums included, at 15% (treaty, Article 18), while the US and UK treaties limit relief to periodic payments.

A pension amount transferred directly to an RRSP, RPP or RRIF can avoid withholding only if it qualifies and you complete Form NRTA1 first (5013-G). The exemption covers only amounts that would be tax-free under the transfer rules or deductible under narrow rollover rules if you were resident (section 212(1)(h)(iii.1)). The taxable excess of a registered pension plan commuted value is neither, so it is generally withheld even if it goes to your RRSP.

Does it matter if the payout comes before or after my departure date?

Yes. Paid while you are still resident, the excess or cash goes on your final resident return and is taxed at graduated federal and provincial rates, with tax withheld at source counted as a credit. Paid after your departure date, it is a Part XIII payment withheld at 25%, usually final unless you elect to file a section 217 return by June 30 of the following year, which may refund part of it (T4058).

Which rule applies depends on whether the payment is made before or after the day your Canadian residency ends, and that day is set by facts such as when you move and cut your ties, not by choice. Plans often take weeks to pay, so ask the administrator for the expected payment date and compare it with your departure facts.

What is different for a defined contribution plan or a group RRSP?

A defined contribution (money purchase) balance can move in full, tax-free, directly to a locked-in RRSP, LIRA, RRIF or another plan, with Form NRTA1 if you are already a non-resident (section 147.3(1)). There is no prescribed amount and no taxable excess. Cash out of the plan is taxed like any other pension lump sum.

A group RRSP is an RRSP, not a pension plan: it stays yours, is not taxed on departure, and withdrawals follow RRSP rules. For timing a withdrawal, see RRSP cash-out before or after leaving Canada.

Is any of my pension exempt because I earned it working abroad?

Only a narrow part. Section 212(1)(h) does not tax the portion of a pension reasonably attributable to service in tax years in which you were not resident in Canada at any time and were not employed, or only occasionally employed, in Canada (section 212). Years you worked abroad while still a Canadian resident do not qualify. Ask the plan administrator whether it will apply the split, and keep records of where and when you worked.

What should I ask the plan administrator before I choose?

Ask for these in writing:

1. Which choices do I have: deferred pension, commuted value transfer, cash, or unlocking because I am leaving Canada?
2. What is my commuted value, my prescribed amount, and the taxable excess?
3. Where can the tax-free part go, and is it locked in?
4. On what date will the excess or cash be paid, and how much tax will you withhold?
5. Will you take Form NRTA1 for a direct transfer, will you apply a treaty rate or a CRA-approved NR5 rate to monthly payments, and what residency proof do you need?
6. What survivor benefits does my spouse lose with each choice, and must they sign a waiver?
7. Is the plan federally or provincially regulated?

Whether the plan or the locked-in account can be unlocked because you left Canada depends on the pension law that governs the plan; see unlocking a LIRA after leaving Canada.

Example

These examples use Canadian dollars and round, illustrative numbers.

Engineer, 45, leaving Alberta for Australia

Her commuted value is C$400,000. Her prescribed amount is about C$300,000 (a lifetime pension of about C$33,300 a year times the under-50 factor of 9.0), which moves tax-free to a LIRA. The C$100,000 excess is taxable. Paid after she leaves, the NR4 shows code 40. The default withholding would be C$25,000 (25%), but Australia's treaty caps Canadian tax on pensions, lump sums included, at 15%, so once she gives the payer Form NR301 it withholds C$15,000. Paid before she leaves, it goes on her final resident return at graduated rates.

Retiree, 66, moving to the UK

He keeps a C$3,000-a-month pension. Each payment is a periodic pension. Under the Canada–UK treaty, periodic pensions are taxable only in the UK, so once the payer has his residency declaration it withholds no Canadian tax (2003 Protocol, Article VIII). He still receives an NR4 with code 39 each year.

Defined contribution member

An employee moves a C$50,000 defined contribution balance to a LIRA before leaving, with no tax. Two calendar years after becoming a non-resident, he asks whether the LIRA can be unlocked under the non-residency rule that applies to it.

Different for you?

• A large defined benefit commuted value, or a payout date close to your departure: the excess and its timing set the tax; get individual tax help.
• A spouse with survivor rights: each choice changes what they receive; review it with individual tax help before signing.
• Moving to the US: both countries may tax the payout, and the treaty treats lump sums and periodic payments differently; get individual tax help. For RRSPs and TFSAs, see RRSPs and TFSAs after leaving Canada.
• You want to unlock the LIRA or LIF: see unlocking a LIRA after leaving Canada.
• Too much tax withheld from monthly payments: see lower withholding on Canadian pensions abroad and the section 217 return.
• Severance or a retiring allowance: see severance and final pay after leaving Canada.
• CPP and OAS: see retiring abroad from Canada.
• Years of Canadian returns not filed: see non-resident returns and catch-up.