Retire Abroad: Where Do You Pay Income Tax?

Many Canadians imagine retirement that includes spending long stretches abroad. Some move overseas part of the year, others settle permanently and change their country of residence. Tax obligations depend on where you are considered a resident for tax purposes.

Under Mexican rules, you are generally a Mexican resident for tax purposes if a permanent home is available to you in Mexico. If you keep homes in both Mexico and Canada, the determining factor becomes where your centre of vital interests lies — in other words, where your personal and economic ties are strongest. This approach mirrors the residence provisions in the Canada–Mexico Income Tax Convention, a bilateral tax treaty that coordinates tax rules between the two countries.

Courts often rely on the residence article of the OECD Model Tax Convention when assessing the centre of vital interests. The guidance explains that, when a person has a permanent home in both countries, authorities must weigh facts such as family and social relationships, occupations and activities, the location of business interests, and where the person administers property. If someone maintains their original home and routine in one country while opening a second home abroad, the retained ties — family, employment, possessions and daily life — can demonstrate that the centre of vital interests remains in the original country.

Tax implications for assets when you leave Canada

If you decide to move to Mexico and establish stronger ties there — for example by selling or renting your Canadian residence and spending most of your time in Mexico — you will likely become a non‑resident of Canada for tax purposes. That change can trigger tax consequences on assets you hold when you depart (or are deemed to have departed) from Canada.

Non‑registered investments are subject to a deemed disposition when you leave: the Canada Revenue Agency treats them as if sold at fair market value on the date you cease residency, which can create a capital gain and a potential Canadian tax liability. Pensions and registered plans face different treatment: periodic pension payments and certain registered income streams are generally subject to Canadian withholding taxes after you become a non‑resident.

Specifically for monthly pensions, registered pension plan (RPP) periodic payments such as a monthly defined benefit pension are subject to a 15% Canadian withholding tax for Mexican residents. The same 15% withholding rate applies to Canada Pension Plan (CPP) benefits, Old Age Security (OAS), and periodic withdrawals from an RRSP or RRIF. A lump‑sum withdrawal from an RRSP or RRIF typically incurs a higher 25% withholding tax.

For non‑registered investments, Canadian withholding tax is generally applied to dividends and trust distributions (including mutual funds or ETFs) at a 15% rate for Mexican residents. Most Canadian interest paid to a Mexican resident is not subject to Canadian withholding tax. Capital gains realized on non‑registered investments after you become a non‑resident are also normally outside Canadian withholding tax.

Do non‑residents need to file a Canadian tax return?

Even as a non‑resident, you may choose to file a Canadian return under section 217 of the Income Tax Act. Electing under section 217 lets you be taxed in Canada on your qualifying Canadian income (CPP, OAS, pensions, RRSP/RRIF withdrawals and select other sources) rather than having the statutory withholding be the only tax charged. If your actual tax liability is less than the amount withheld at source, you may be eligible for a refund.

Keep in mind that Canadian tax is only part of the picture. Mexican residents are taxed on their worldwide income, so you will also have Mexican filing and payment obligations. Mexican tax rates on low and moderate incomes are similar to Canadian rates; however, the top Mexican marginal rate on very high incomes is much lower than the combined top rates in most Canadian provinces. Withholding and Canadian tax you pay may be claimed as a foreign tax credit in Mexico to avoid double taxation, but you should seek local Mexican tax advice to confirm how credits and reporting rules apply to your situation.

For context on living costs, sources such as International Living suggest that a comfortable retirement in Mexico — including housing, utilities, a car and household help — can cost under USD$2,500 per month, though individual needs vary widely.

Wishing you the best as you plan your retirement in Mexico, Marianna. Get professional advice from both Canadian and Mexican tax advisors before you change your residency to ensure you understand the full tax and reporting consequences.

Read more on financial planning:

• How to prepare your finances for coming to Canada
• How much should I have in my RRSP?
• Know your TFSA contribution limit