Retiring - Planning Lifestyle Choices

You are now making the transition to what may be the most rewarding and satisfying period of your life, retirement.
Over the years you have no doubt had some pleasant daydreams about the pleasures of retiring and the rewarding and relaxing time to be spent. In many cases those daydreams have been of a very general nature; I want to relax, I want to play golf or I want to travel. However, now that retirement is actually here, you should probably spend some time considering what retirement will mean specifically for your time and lifestyle. If you have a spouse, you should approach this pleasant task together to ensure that you both enjoy the coming years as much as possible. Some issues you may want to consider:

Deciding Where to Live

You may be living in the home where you have lived for many years and raised a family, a home to which you have strong emotional ties. Consequently, you may decide to continue living there. But, you should start thinking about the future. Maintaining a home and garden when you are 65 may be quite different from when you are 75. On the other hand, you may want to sell your home and ‘downsize’ or relocate. Should you decide to sell your home, there will generally be two options to consider: buy or rent.
When you sell your home, you will be receiving what is probably a substantial amount of cash. If you purchase a smaller and less expensive home, you will then be able to use the difference to help fund your retirement. In this way you are gaining access to some of the equity in your home. Another factor to be considered is estate planning. If you have children and want to leave an inheritance to them, you will need to consider the implications of selling your home and what it means to your childrens’ inheritances.
If you decide to sell your home and rent, you will receive the home sale proceeds but will now have an ongoing expense which may eat into your savings. Selling and renting also has implications on the eventual estate to be left to your family.
To avoid misunderstandings and hard feelings, it is probably a good idea to bring your children into the discussion about your plans for the family home.

Enjoying Retirement

Leisure activities
You have probably been looking forward to spending time on leisure activities you have not had a chance to enjoy as much as you would like – sailing or golf for example. However you should now spend some time considering exactly what sort of time and financial commitment these activities will require. Joining a golf club can be expensive and you are probably not planning to golf eight hours a day as in most parts of Canada this is a seasonal activity. You should consider how you are going to occupy your time in the winter months.

Working in retirement
It is a growing trend for more retirees to continue to work to some extent. Some people choose to take a part-time job in retirement because they enjoy the social interaction and like to feel that they are still contributing. Others may feel a financial need. A part-time job that you enjoy while earning some extra income can be a very attractive way to spend some of your retirement time. One factor that needs to be considered, however, is how the additional income may affect your Old Age Security benefits.

As with taking a part-time job, volunteering can be a very rewarding activity in retirement. Not only is this a great way to socialize with like-minded people, but volunteering can be a source of real satisfaction by giving back to your community. Look around your community and find an activity where you may be able to use the experience of a lifetime to make a difference. However, consider the time commitment, it might be substantial and volunteering should be a pleasure, not drudgery.

Finally getting the opportunity to do some travelling is often at the top of people’s lists when asked about their retirement plans. Now is the time to consider what exactly your travel plans are and how those plans will affect your time and financial situation. For some people, travel means visiting exotic locations around the world, for others, it is spending an extended time in a southern location such as Florida during the Canadian winters.

Health coverage in the U.S

When contemplating travelling to the U.S., either for a short trip or extended stay, it is very important to understand the type and amount of health insurance coverage required. Your provincial/territorial health plan will cover you for health costs incurred while in the U.S. but only to the extent that you would be covered while in Canada. This can have severe financial consequences since a particular health need may not be covered at all, or the amount of the expense incurred in the U.S. can be dramatically higher than the coverage provided at home. You have to pay the difference. As well, the government coverage typically will not be in place when you are out of Canada for more than 183 days. Consequently, buying private travel health insurance is highly recommended. There are many providers of private health insurance and it will pay off to ‘shop around’ to find the plan that best suits your budget and requirements. Some of the questions to ask when assessing travel health coverage are:

  • Does your employer group plan provide coverage?
  • Does your credit card company provide travel health insurance?
  • Are there age restrictions on coverage?
  • Are there exclusions for ‘previously existing conditions’?
  • Is the policy one of indemnity? (meaning the patient pays up-front and is then reimbursed by the insurance company later)
  • Does the coverage provide transportation back home?
  • Does the coverage allow for family or friends to travel with the patient?

If you are 75 years old or less you can usually obtain coverage through a simple application. However, if you are over 75 your coverage will probably be subject to some medical underwriting so, depending on your health and medical background, travel insurance may be difficult to obtain. As mentioned above, your provincial/territorial plan will cover you to some extent in the U.S. but different provinces/territories do provide different levels of coverage and you should take a look at your particular coverage to determine its adequacy. Following is a list of links that will detail the specific coverage provided by your jurisdiction:

Tax impact of spending time outside Canada
Not surprisingly, there are serious tax consequences relating to residency. For example, the U.S. authorities will apply what is known as the ‘Substantial Residence’ test. The test says that the number of days that you spend in the U.S. in the current year, plus 1/3 of the days you spent in the U.S. last year, plus 1/6 of the days you spent in the U.S. two years ago cannot add up to more than 182 days. If you exceed that limit, you will be subject to U.S. taxation on your worldwide income. Looked at another way, you can consistently spend up to 121 days (about four months) in the U.S. annually before accumulating the 182 days that will make you subject to U.S. tax:
121 days (Yr1) + 40 days (1/3 of Yr2) + 20 days (1/6 of Yr3) = 181 days, just under the limit.
If your primary residential ties are with Canada, paying U.S. tax may be avoided by filing Internal Revenue Service form 8840, The Closer Connection Exception Statement for Aliens. To get more information in detail, please speak with your financial advisor.
To maintain your Canadian residency status, the same 182-day rule applies for any other country. However, the tax situation is different in other countries and is affected by whether Canada has a tax treaty with the country. When considering taking up partial residency and/or buying property in a different country you should be speaking to a qualified tax and/or legal advisor.

Purchasing real estate in the United States
There should not be any immediate implications of purchasing another property in the United States. However, for estate planning purposes, there can be issues. If you die and at the time of your death you own assets in the United States, these will be subject to U.S. tax. The tax may be offset through tax credits but, again, this is an area where you should definitely seek professional advice.

Renting Out Real Estate in the United States
If you have purchased a U.S. property it is likely that you will only be there for a few months of the year and may want to rent it out in your absence. This can certainly be done but there are tax consequences. On the U.S side, the renter has the choice of either paying a 30% withholding tax or else filing tax form 1040NR with the IRS. As far as Canadian tax, the rental income earned in the U.S. must be included in income but there are usually offsetting tax credits available. Professional advice should definitely be consulted to determine your tax status.

Selling a Property in the United States
If you sell a U.S. property you will be subject to tax in the U.S. on the gain on the property. Several factors can come into play but generally, if the property has been held for less than 12 months the tax rate will be
at the U.S. graduated rates and if held longer than 12 months, at 15%. The gain on the sale of a U.S property must also be reported for Canadian tax purposes and adjusted for foreign exchange. However, this potential double taxation can usually be offset by the foreign tax credit.

Foreign Exchange Issues
When you exchange Canadian dollars for U.S. dollars you will be subject to the ‘spot’ rate at the time or the rate determined by the foreign exchange markets on a given day. However, ‘forward’ transactions can be made where you can lock in a specific rate for a specified time period. This can be beneficial in situations where a property is bought or sold but there will not be an actual exchange of cash until some time in the future, perhaps three months. A forward currency contract will ensure that the amount of cash to be paid or received can be guaranteed. I can help you decide if this is a strategy suitable to your personal circumstances.

Bank Accounts in the United States
Many ‘Snowbirds’ prefer to have a U.S. bank account and these can certainly be established. A few of the major Canadian banks have established a presence in the U.S. through the purchase of U.S. banking institutions and they will provide a variety of account options for Canadians. It is important to appreciate that U.S. securities regulations will prevent you from opening an investment account. However, U.S. laws have been relaxed to some extent and ‘Snowbirds’ can now make transactions in their Canadian registered accounts such as RRSPs and RRIFs while in the U.S. I can help you ensure that your dealings will conform with U.S. law.

Estate Planning and the United States
U.S. tax law will levy tax on death on the fair market value of certain assets held in the U.S. by Canadians. These taxable assets will include real estate, certain personal assets such as vehicles and shares of U.S. corporations among others. Canadian tax law will also tax these assets on death but there are tax credits available that will reduce the chance of double taxation. Professional tax advice should certainly be sought where there are U.S. assets involved. There are also strategies available while you are alive to plan for and reduce the effect of U.S. taxation.

Immunizations when travelling
Your risk of contracting disease depends on where you are travelling. Some countries will require proof of immunization to be allowed to visit. As with visas, you should be contacting the embassy or consulate of the country of interest to find out what immunizations are required. There may also be the risk of diseases for which immunization documentation is not required but it is still prudent to get the immunization. The following website provides a guide by country of which diseases to guard against: MD Travel Health

Travelling to risky locations
The Foreign Affairs and International Trade Canada website provides updates on situations in countries around the world and whether it is deemed safe to travel there.

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information contained herein is provided for information purposes only and should not be relied upon exclusively as estate, tax planning or investment advice, nor should it be construed as being specific to an individual’s investment objectives, financial situation or particular needs. you should always obtain professional advice before acting on the basis of material contained herein. While Dynamic funds® will endeavour to update this information from time to time as needed, information can change without notice and Dynamic funds® does not guarantee the accuracy or completeness of this information, including information provided by third parties, at any particular time, nor does it accept any responsibility for any loss or damage that results from any information contained herein.
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