Ah, retirement planning – that topic we all know is important but keeps getting pushed to tomorrow's to-do list. If you've moved to Canada as a professional immigrant, you might think, "I just got here! Retirement seems like a problem for Future Me."
Today, we’ll explore the elusive topic of retirement planning. I call it elusive because, although most people would agree it is an integral aspect of their future, many struggle to relate to it due to the emotional disconnect that occurs when planning for their “future self.” You can reference my blog post on the challenges of connecting with your future self.
Trust me, Future You will be much happier if Present You starts planning now.
Define Your Lifestyle
Before we dive into the dollars and cents, let's talk about something most financial advisors skip over: what do you want your ideal retirement to look like? This should be the primary focus of retirement planning. The earlier you begin outlining your lifestyle, the easier it will be to implement strategies for optimization.
As an immigrant, your vision for retirement is likely to be more dynamic and encompass multiple time zones as you navigate reconnecting with family and friends you haven't seen or connected with in person in decades. This raises the question: do you plan to retire in Canada? Or do you envision a combination of retirement in Canada and spending time back home? This consideration becomes especially important, as the cost of living back home may be lower than in Canada, along with significantly better weather, which I am sure you would appreciate as you grow older.
Another aspect to consider regarding retirement is determining whether once retired, you expect to maintain a good level of real human connection with family and friends. One of the longest-running studies, the Harvard Study of Adult Development, conducted since 1938, focuses on factors contributing to a fulfilling life, health, and happiness, emphasizing the importance of relationships. They found that genuine connectedness and deep relationships are the pillars of individuals' happiness, health, and longevity. Given this, I would argue that the foundational metrics for retirement planning must include happiness, health, and longevity. From there, you can build on financial tools to ensure you can support your foundation and sustain a fulfilling life. Money will only take you so far!
Government Pension Programs: Your Canadian Retirement Foundation
The simplest tools for achieving retirement are your government pension programs, including Old Age Security (OAS) and the Canadian Pension Plan (CPP) or Quebec Pension Plan (QPP).
OAS
OAS is Canada's way of saying "thanks for being here" during your golden years. Unlike other pensions, you don't need to have worked in Canada to qualify – you need to have lived here as a legal resident.
The OAS offers monthly taxable pension payments (up to $727.67) to eligible seniors aged 65 and older. The payments are adjusted quarterly for the cost of living. However, for immigrants in Canada, there is a residency requirement that directly relates to the length of time you have lived in Canada as an adult.
To qualify for the maximum OAS pension, you generally need 40 years of residency in Canada after turning 18. Accumulating 40 years before age 65 can be particularly challenging if you immigrate during your adult years. Nonetheless, you may choose to delay receiving OAS until age 70. For each month of deferral, the OAS pension amount increases by 0.6%, resulting in a maximum increase of 36% for a full five-year deferral, making this a strategic consideration for meeting the 40-year requirement.
More often than not, you're likely to qualify for a partial pension, which is calculated based on the number of years of residency after age 18. This amount is divided by 40 years and multiplied by the maximum pension amount. For instance, an immigrant who has lived in Canada for 25 years after age 18 would receive 25/40ths, or 62.5%, of the full OAS pension. Conversely, suppose you have lived in Canada for at least 20 years after age 18 and decide to leave. In that case, you may indefinitely qualify for an OAS pension, subject to non-resident tax, if there are no social security agreements.
The International Connection: Social Security Agreements
A lesser-known gem for immigrants is Canada’s social security agreements with over 50 countries! If you've contributed to your home country's pension system, these agreements might help you qualify for benefits from both countries. It's like maintaining financial citizenship in multiple worlds.
You may qualify for OAS, pensions from another country, or potentially for pensions from both countries. These agreements can be especially beneficial for immigrants who have contributed to pension systems in multiple countries.
CPP
Another branch of the Canadian government pension system is the CPP. I have already written an extensive guide on understanding the CPP, which you can read here.
The CPP helps replace some of your income with a monthly taxable benefit after retirement. Every working person in Canada over 18 who earns over $3,500 annually must contribute to this basic retirement security program. Your employment status determines your contributions to the CPP. Employees share their contributions equally with their employers. On the other hand, self-employed individuals make the full contribution of 11.9% of their salary earnings. " Salary earnings " is the key phrase here. In part 2 of retirement planning, we will discuss the impact of retirement on salary versus dividend earnings for self-employed immigrants.
Like OAS, living and working in different countries introduces unique complexities to your retirement planning. CPP benefits from Social Security agreements with over 50 countries. These agreements serve two essential purposes: they protect you from paying taxes twice and assist you in qualifying for benefits by combining your work history from various countries. Time spent contributing to social security systems abroad may count toward your CPP qualification. For instance, 5 years of CPP contributions could help you satisfy the 10-year minimum requirement by adding contributions from other countries' pension systems.
Another great feature of CPP is that benefits remain payable regardless of location. You'll receive payments in the local currency. However, non-resident tax implications may apply. The tax amount is determined by your country's tax treaty status with Canada. Alternatively, Form NR5 allows you to apply for reduced tax withholding if your home country does not have a tax treaty with Canada.
Considering the complexity of these rules and their financial implications, if you are an immigrant nearing retirement age, it’s beneficial to consult a Financial Planner specializing in retirement planning for newcomers to Canada to optimize your benefits according to your unique circumstances.
Retirement Savings Tools – TFSA & RRSP
Government pensions provide a foundation, but for most immigrant professionals, they won't be enough for the retirement lifestyle you envision. This is where personal savings vehicles, like the TFSA and RRSP, come in.
The TFSA Advantage for New Canadians
The Canadian Revenue Agency (CRA) tracks the TFSA contribution room for each eligible individual, which accumulates annually whether or not you open an account. For immigrants arriving in Canada as adults, be aware that this means you begin accumulating TFSA room from the year you become residents for tax purposes, not from the inception of the TFSA program in 2009.
For example, if you immigrated five years ago and never contributed to your TFSA, the maximum you can contribute is $38,500 this year. Alternatively, if you were 18 years old and a tax resident since 2009, you may contribute up to $102,000 if you’ve never put money into a TFSA. Additionally, if you become a non-resident for tax purposes- leaving Canada to care for your family or study- you are not eligible to accumulate TFSA room during those years.
Since TFSA growth and withdrawals are tax-free, they provide another crucial advantage for newcomers: withdrawals do not impact eligibility for federal income-tested benefits like the Canada Child Benefit, Old Age Security (OAS), or the Guaranteed Income Supplement (GIS).
Leveraging RRSPs for Tax-Deferred Growth
One of the primary benefits of RRSPs is the tax-deferred growth they provide. All investment earnings within an RRSP—including interest, dividends, and capital gains—compound without immediate taxation. The contribution limit for RRSPs is set at the lesser of 18% of the earned income reported on the previous year's tax return, up to an annual maximum of $32,490 for 2025. For example, if your earned income for 2024 were more than $180,500, $32,490 would be the max you can contribute for 2025, pending pension adjustments, which further reduce your contribution limit. Strategic contributions during peak earning years will significantly reduce current tax burdens while building tax-deferred retirement savings. This is where the tax bracket arbitrage comes in.
Tax Bracket Arbitrage
The magic of RRSPs lies in tax bracket arbitrage – utilizing Canada's progressive tax system to reduce your lifetime tax liability by contributing during high-income years and withdrawing funds in low-income years. Let's see how this works with a simple example:
Scenario for High-Income Years
- You earn $255,000 annually, placing you in the highest federal tax bracket. This income is subject to the 33% marginal tax rate (2025) for amounts over $253,414.
- Tax Strategy: Contribute the lesser of 18% or the maximum RRSP limit, in this case, $32,490, to your RRSP. This will reduce your taxable income to $222,510, moving you down to the next tax bracket of 29% for incomes between $177,882 and $253,414.
- Tax savings is $19,622. At $255,000, your tax payable would have been $84,150. However, after the contribution, your net taxable income ($222,510) would have generated a tax liability of $64,528.
Scenario for Low-Income Retirement Years
- You retire at age 65 with no employment income but receive a pension of $50,000 annually. This leaves you in the lowest tax bracket of 15%, which is applied to your income up to $57,375.
- Tax Strategy: you now withdraw $32,490 from your RRSP annually to supplement your lifestyle. Your total taxable income becomes $82,490 ($50,000 pension + $32,490 RRSP withdrawal), moving you to the second tax bracket of 20.5%.
- Taxes paid on RRSP withdrawal: $6,660.45 ($32,490 * 0.205)
Outcome of Tax Savings
- Tax Saved During High-Income Years: $19,622.
- Tax Paid During Low-Income Years: $6,660.45.
- Net Savings: $12,961.55
I hope this helps you see the benefit of understanding, maximizing, and implementing retirement strategies applicable to your current needs and future lifestyle.
Building Your Canadian Retirement Blueprint
Retirement planning as an immigrant professional requires balancing Canadian tax strategies with international considerations. Remember, retirement planning isn't just about reaching a magic number – it's about creating the freedom to live your ideal lifestyle, wherever in the world that might be. As Canadian immigrants, we are privileged to build retirement plans that are as diverse and international as our life experiences.
Stay tuned for Part 2, where we'll explore retirement planning strategies specifically for immigrant business owners and self-employed professionals.
