Reader Case: Retiring Earlier as an Expat

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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.

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A few days ago Canada recently announced that they’re removing quarantine restrictions for fully vaccinated travellers. We aren’t fully vaccinated yet (FIRECracker and I both have received only 1 shot), but that development has awoken the traveller part of our brain that has been basically lying dormant for the past year. FIRECracker is already back to furiously checking flights that we might be able to get on once we get our second dose. Dare we dream? Could our nomadic life be on the verge of coming back?

Which fits in nicely with today’s reader case, who is also eyeing the world beyond our borders and daring to dream about something that just a few months ago would have been seen as a laughably impossible idea: retiring overseas.

Dear FIRECRACKER and WANDERER,

You guys have been a huge inspiration to me and my partner. We devoured Quit Like a Millionaire and have been following in your footsteps towards FI for the last few years. My partner is Colombian and as a result I also have Colombian citizenship.

We currently both live in Calgary and work in the public sector in Alberta. We have been saving  diligently and recently crossed the $800,000 threshold.  Our dream is to move to Medellin Colombia, where we have purchased a small condo (we still owe about $34,000 on it).  The condo will be fully built by the end of this year 2021.

When we first developed our FIRE plans the goal was to save $1,000,000. However after doing more research and learning that we only need about $1,000 to $1,500 per month to live in Medellin Colombia, we have considered pulling the trigger out about 850,000 or 900,000  so long as we have completely paid off our condo in Medellin Colombia.

We also own a condo, which is currently rented out, and Edmonton. Unfortunately, the condo has lost value. We purchased it at $260,000, now estimated to be worth $220,000. This is, of course, due to the economic downturn in Alberta. We hope to sell this property before we pull the trigger, but aren’t sure if we’ll be able to sell it given how soft a market is in Edmonton. We will be lucky to walk away with the down payment we put down to purchase the condo of about $60,000. We are doing the smith maneuver – I think we have about 103,000 left on the mortgage (2.05% interest rate), but have borrowed about 90,000 from the HELOC to invest in XEQT. Given that I have such a high tax bracket, it makes sense to try to make some of my income tax deductible…

We have both been accumulating defined-benefit pensions. According to the latest statement, if we were to stop working today,  I would receive $2,280 and my wife would receive $550 per month once we retire at the age of 65 ( 2045 for me and 2047 from my wife/partner).

My annual income is $165,000 and my wife’s is $69,000. My job is quite stressful and takes a toll, so we are keen to hit our number so that we can move to Medellin, Colombia (assuming we can get vaccinated by the end of the year, of course).

We spend about 2,400 to 2,600 a month on rent, bills (internet, hydro etc), food, car insurance etc. Looking to sell our old car and start using a car share service in the neighbourhood instead, would save us a good 130-180 per month. The car can’t be worth more than $4,000.

Which strategy should we choose?

1. Split our time between Canada and Colombia 50/50, which would require us to maintain a residence in Canada?
2.  Live in Colombia full time with a lower cost of living?

The benefits of maintaining residence in Canada is that we can mention our health care coverage but also continue to accumulate TFSA room every year.  

If we were to take option 2, we’re not so sure what that would mean for our investment accounts with questrade, especially if we’re living outside of Canada for a prolonged time. Does the government force you to “ sell your” non-registered accounts and tax you on this? I seem to think I heard this somewhere but would be curious to hear what your experience has been given your nomad lifestyles and you likely not living in Canada anymore ( notwithstanding the pandemic of course).

I’ve also started to focus on the Yield Shield strategy by starting to purchase dividend ETFs. The idea is that we can generate monthly income of about 1,500 to $2,000 a month from the portfolio and therefore not have to sell our positions, especially if there is a downturn.

Our questions to you are as follows:

• Are we able to pull the trigger when we hit 850,000 or $900,000 in our portfolios  living 50% of the time in Canada and the other 50% in Colombia?
•  If we are to attempt the Colombia 100% time option, what is the best strategy or approach to ensure we are managing the tax implications of living in Colombia while maintaining our portfolios that generate income in Canada?
• After having a look through our numbers, do you have any recommendations or suggestions for us in terms of tweaking our portfolio, or preparing a portfolio to pull the trigger at the end of 2021 or perhaps mid 2022?

Appreciate your analysis and response in advance!!

You guys rock!!

Warm regards,

Colombia-bound

Ah, the thought of travelling again warms my heart. As we discovered, travelling is not only a great way to spend your hard-earned retirement, if done right it can actually reduce your post-retirement living expenses and help you get to your FIRE goal sooner to boot. You can’t afford not to travel!

Colombia-bound has definitely got the right idea. Retiring to South America is a great way to reduce your expenses, and pretty much every country on the continent will cost a fraction of what it costs to live in Canada or the US. Granted, your Spanish/Portuguese is going to have to be pretty solid, but I’m going to assume that’s not a problem for our couple since they’re, you know, Colombian citizens.

The numbers are actually pretty stark. Staying in Canada where their expenses range from $2400 to $2600 a month means that their FIRE target will be $2600 (to be conservative) x 12 x 25 = $780,000. They have $800,000 saved so it works, but just barely.

But in Colombia, their expenses will be a fraction of this, coming in around $1000 to $1500 a month by their estimates. At that spend level, their FIRE target is only $1500 x 12 x 25 = $450,000. They have nearly double that. Not only does that makes their retirement way more stable, they don’t have to deal with another Edmonton winter ever again!

And of course a 50/50 Canada/Colombia split is somewhere between those two numbers. A year spent like this would cost them $2600 x 6 + $1500 x 6 = $24,600 for living expenses. A round trip flight from Edmonton to Medellin costs about $1200 according to Google Flights, so we tack on two of those for a budget of $24,600 + $2400 = $27,000, which requires a portfolio of $27,000 x 25 = $675,000 to support.

So from a mathematical perspective, all 3 options work because our reader has done such a great job saving and investing (despite the non-performing rental). So this isn’t so much a math issue, it’s more of a lifestyle question of which option is the best fit for them.

The Tax Residency Trap

One really important thing to consider when choosing where to live is where do you want to be tax resident. Because becoming a tax non-resident of Canada is a pain in the ass.

First of all, you get dinged with a potentially huge departure tax. At the moment you become an emigrant, the CRA (our version of the IRS) assumes you’ve sold everything in your taxable account at fair market value and charges you capital gains tax on that make-believe sale. This is called a deemed disposition and if you have a lot of investments, this could be very expensive.

Secondly, you start getting charged withholding tax on dividends since you’re now a foreigner. As a Canadian tax resident dividends are taxed at extremely favourable rates (often 0% if you’re retired) but once you become non-resident you start getting hit with a non-refundable 25% tax on all Canadian-sourced income going forward.

And thirdly, you lose the ability to make free RRSP withdrawals. As a Canadian tax resident with no other income, if you make RRSP withdrawals equal to your personal exemption, you won’t have to pay tax on it, but once you’re a non-resident RRSP withdrawals get hit with a 25% flat tax rate no matter what your income level is.

So with these fairly big drawbacks, does it ever make sense to choose to become tax resident in another country if you have a lot of investments in Canada?

Sure, if the financial benefit of doing so outweighs the tax hits you’ll take when you leave. Generally, this happens because of 3 factors:

1. The tax rates of the new country are much lower than your old one
2. The new country has a territorial taxation system which doesn’t tax offshore income
3. The cost of living is lower in the new country

For Columbia, the tax rates are comparable to Canada, so scenario #1 doesn’t really make sense. And Columbia doesn’t use a territorial taxation, so scenario #2 doesn’t apply either.

Scenario #3 might apply since Columbia does have a lower cost of living than Canada, but I’d argue that there’s a way to get most of the benefit of Columbia’s lower cost of living without becoming a tax resident there.

Taking Advantage of the 183 Day Rule

How each country determines tax residency is up to them, but generally if you spend more than 183 days somewhere, you become tax resident there.

That limit is what Colombia-Bound is referring to in his 50/50 plan. However, just because you’re trying to avoid that 183 day limit, that doesn’t actually mean you have to return home. You can hop into a plane and go visit another country! You could theoretically spend 6 months in Colombia, then 3 months in Ecuador, then 3 months in Peru, and your cost of living will be just as low for the entire year without triggering tax implications. Just as long as you don’t spend 183 days in any one country, you won’t become tax resident anywhere else and will therefore retain your Canadian tax residency.

This is what we did when we were travelling the world before the pandemic hit. Because we didn’t spend enough time in any one country to become tax residents there, we fell under the CRA’s classification of a “factual resident,” which is someone travelling outside Canada on a temporary basis. And for tax purposes, a factual resident is treated the same as a normal resident, so I had to file and pay Canadian taxes every year, but it made sense for me considering the massive departure tax I would have to pay if I ever officially “left.”

Note, however, that even if you retain Canadian tax residency by hopping around different countries, if you’re not physically present in Canada for at least 5 months, you will lose your Canadian health insurance coverage and will need to purchase expat insurance (like we did), so that’s another thing to be aware of.

Conclusion

Permanently moving and becoming tax resident in a new country can have major financial consequences, and is not a decision to be taken lightly. While it might make financial sense for some, the downsides of becoming tax non-resident don’t appear to be worth the upside for our reader, especially if they can simply hop around South America continuously and get the benefit of a lower cost of living without getting hit with a massive departure tax bill.

What would you do? Would you consider moving permanently to another country to make your retirement come faster? Let’s hear it in the comments below!

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