Canadian tax-free savings caught in tax net

I just read some of your articles on the various tax issues that exist after working abroad and then returning home which were very informative. I am planning on returning to Ireland from Canada this year to live after spending 10 years away.

I have a Tax-Free Savings Share Trading Account in Canada. This lets you buy and sell shares without paying tax on any gains you make. When I return to Ireland, will I have to start paying Irish tax if I continue to trade with this account on any of the future gains on disposals/dividends received even if has all been funded by after-tax income earned in Canada.

Mr M.C., Canada

Not only are you likely to have to pay tax here, as far as I can see you will also be taxed in Canada.

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The Tax-Free Savings Account (TFSA) is a structure that was first introduced in Canada in 2009. Essentially, it is as the name implies, tax free. As you might expect, you pay no tax on contributions as the money does come, as you say, from earnings that will already have gone through the income tax regime.

However, you also pay no tax on any interest or capital gain made, nor are you taxed on withdrawals. There is an upper limit on annual contributions – currently 5,500 Canadian dollars, I gather – but beyond that it is fairly liberal. A similar scheme has since been introduced in other countries, I gather.

You can accrue unused amounts for subsequent years. The is known as your “contribution room”.

The nearest thing we would have in the Irish context would be An Post Savings, which are similarly free from tax. However, you would not be allowed to use it to trade shares as your Canadian account permits you.

One thing you may have missed from the Canadian point of view is that you must be resident in Canada to reap the benefits of such an account. If you leave Canada, as you propose to do, you will be charged 1 per cent per month – yes, month – tax on any further contributions you make until those contributions are fully withdrawn subsequently from your account, or you return to become tax resident again in Canada.

And even if you withdraw some of the money, as I understand it, the 1 per cent per month tax applies to the full contribution until all of it is withdrawn. It does not apply only to the amount of the non-resident contribution left in the account.

Contribution room

In addition, no contribution room is available to you for any period while you are not tax resident in Canada.

In other words, only contributions made as a Canadian tax resident are tax free. That might, in itself, impact any decision you make on holding on to this account. Of course, there is nothing to stop you maximising your benefit by topping up your TFSA before you leave Canada, utilising any contribution room you have available to that point. As the contribution room does not operate pro-rata, you could use your entire 2018 contribution room even if you were to return home to Ireland in June, say.

Again, my understanding is that, aside from the tax on non-resident contributions, there is no tax payable on ongoing gains or withdrawals from the fund as invested before your departure from Canada – but you might check that locally before making a decision.

That’s the Canadian side of the issue. From the Irish perspective, you also face potential tax issues.

If you are tax resident in Ireland in any given year, you will be taxed here not only on any income you earn in this country but on your worldwide income – including gains from savings or investments. And you are considered to be tax resident if you are in Ireland for 183 days in any one year, or 280 across two years.

There is also a concept of “ordinary” residence. You become ordinarily resident in Ireland if you are tax resident here for three years. The difference is that, while ordinarily resident, you may be taxed only on earnings and gains within Ireland plus any foreign earnings or gains that you bring into Ireland.

The thinking is that someone might be here only temporarily – as with a foreign company posting – before going abroad again within the three years.

There is also a concept called domicile. People with foreign domicile will again avoid tax on income and gains not remitted to Ireland. However, domicile is not something you can pick up or discard. As a rule – though not set in law – your domicile will be the country in which you are born. If you are Irish born and move away to Canada or elsewhere for a number of years before returning home, you will be considered to have Irish domicile unless the circumstances are very particular.

And, of course, these days, co-operation between tax authorities is much more organised and encouraged than previously. Both the Irish and Canadian tax authorities will be passing your details one to the other to ensure tax treatment of your income and assets is in line with current international rules.

The bottom line is that if you are here permanently you are going to be taxed on that Canadian TFSA both here and in Canada.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.