Agony Aunt: Juggling tax across borders
Dear Janine,
I am a New Zealand resident but I maintain links (family, a house and some investments) overseas. I have some modest investment in my home country including an RSP, which is a retirement savings vehicle, and two trust funds for my children, gifts from their grandfather. Appreciating the fact that markets are still recovering from the crash, I am wondering whether their performance is what it could be and also whether it makes sense to keep the investments abroad.
The trust funds were set up in 2006, with an initial investment of $15,000, and are now worth $14,670. The RSP was worth $11,110 in 2008 and is now valued at $12,120.
The investments are managed by a financial planner. Is it best to leave them be and see if they improve or cash them out (capitalising on the currency exchange) and invest them here in New Zealand?
ANSWER:
So you are a Canadian? I'm guessing that from the reference to your "RSP"; the Registered Retirement Savings Plan in Canada. Unfortunately, Canadian tax laws are stickier than your national tin of maple syrup and I have a feeling there will be more to your situation than just the transfer of a few investments, due to the links you refer to.
It's quite an exercise to be considered a non-tax-resident in Canada. They are fastidious on details - it's a case of closing bank accounts and credit cards, don't store personal items in Canada and burn your hockey stick on the way to the airport! Regardless, New Zealand does have a Double Tax Agreement (DTA) with Canada. Provided your "permanent home" is in New Zealand, you will have to declare all your worldwide income here, but you will get a credit for tax paid in Canada. You need to be certain of your tax status in each country, so your returns are being filled out correctly. You mention a house; be aware that any rent from Canada has to go on your NZ tax return but may ultimately be taxed in Canada.
The returns on your kids' investments seem to have travelled sideways. Assuming it's a basic sharemarket fund, the returns are in line. If we look at MSCI iShares for Canada, they're trading in about the same range as they were in 2006. In between there were big gains and a spectacular crash, thanks to the global crisis. Remember, the Canadian sharemarket is highly exposed to commodities and they have had a rollercoaster ride. Don't get put off by the bland-looking returns as you and the kids have funds which have survived the crash and recovered.
Staying with a mix of shares, bonds and cash for any long-term holding is generally sensible. If you do convert to New Zealand investments, there are currency timing considerations, but you wouldn't be doing too badly.
Your decision on keeping your pension in Canada or transferring it to New Zealand is going to require detailed analysis by a specialist adviser and you need to understand the tax consequences of each. Some immigrants create a mess by putting their heads in the sand and not declaring these investments.
If you keep your Canadian pension, it may be considered a Foreign Investment Fund (FIF) in New Zealand. The legal structure of the pension will determine this more clearly. Similarly, with the Trust Funds for the kids, the legal structure needs uncovering to determine if there is a tax liability here. Your accountant will look at whether any exemptions apply to you. There is also an exemption known as the "Non-residents Pension or Annuity Exemption" and tax isn't payable until you take benefits from the pension, if this applies. If you have been in the country less than four years and have not previously been tax resident in New Zealand, there is a "Transitional Residents Exemption". Immigrants with more than $50,000 invested offshore will generally pay tax each year on 5 per cent of their market value. People who have less than $50,000 offshore, fall under different rules.
Canadian pensions are well loved, because of their tax advantages. They make KiwiSaver look like a flightless wonder in a few respects. Canadians can invest 18 per cent of their gross salary with no tax deducted (up to a maximum of $22,000 in 2010). Then their investment can grow tax-free. They benefit from the miracle of deferred tax. Unfortunately, once you retire, your pension is taxed as income at your marginal rate. By comparison, KiwiSaver gains are taxed along the way, but when you retire there is no more tax to pay. You need to look into whether you can still contribute in Canada - your residency status will be important.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.