The Cheat Code to Financial Independence

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I first heard about making big bucks overseas from Andrew Hallam, a self-proclaimed “Millionaire Teacher” and author.

That was way before I discovered FIRE, and now that I know about both, combining them to create a “cheat code” to FI makes perfect sense. The trick is to find a job in a country with something called a “territorial taxation” system, enabling you to keep 100% of your earnings, tax-free! Bonus points if your employer also covers your accommodations.

After learning about this strategy from friends who became FI without a STEM degree or 6-figured salary, I realized that it’s a lot more accessible than people think. In fact, the people in real life whom I know that have done it are teachers, marketers, and a librarian. None of them made 6-figure salaries, but they still got to FI by paying little to no taxes, while living an exciting life of adventure abroad (paid for by their overseas employers).

In fact, it’s mainstream enough now that there’s even a Reddit thread with 15K members called ExpatFIRE.

Today, we’re going to meet a friend of mine who fast tracked his time to FI by teaching in Qatar:

1) Your teaching job had excellent pension and job security in Canada, why would you throw it all away to go to teach in Qatar?

I think the primary reason that my wife and I “threw it all away” was that we simply wanted more adventure.  I had taught for ten years in the same rural prairie community – which was quite similar to the one that I’d grown up in.  There are many great things about rural life, but we just felt we were ready to try something new, and there were limited options to “try something new” within the context of small rural schools.  We also have some major philosophical differences with the direction of public education in many Canadian provinces at the moment, to be honest.

But of course that only explains why we wanted to leave – not why we chose Qatar.  The facilities at our new school are absolutely incredible.  They would not be out of place at the most elite universities in the world.  Our living accommodations are provided to us as part of the overall compensation package and are very nice (let’s call it a solid “B”) medium-density housing options.  The primary reason that we considered Qatar (as well as the UAE) was the lucrative compensation packages available.

2) How much can you expect to earn as an expat teacher in Qatar compared to teaching in Canada?

The short answer to this question is: My wife and I saved 4x what we would have saved annually in Canada.

Why the indirect answer?  It’s a bit difficult to compare salaries between North American-style teaching contracts, and the majority of those at international schools.

Most schools in Qatar (and most of the schools in the Middle East or Asia) will not only pay you a salary, but also take care of your housing needs and insurance plans, pay for a round-trip flight home each year, give your children free tuition at excellent schools, and usually some sort of year-end bonus and/or an end-of-contract bonus.  

So overall, depending on the exchange rate (we get paid in Qatari Riyals – which are pegged to the US Dollar) we make roughly the same on paper as we did in Canada: roughly $90,000 CAD.  However, we have no deductions (like… literally $0, our first pay stubs shocked us) on our paycheques AND we pay nothing for housing or utilities.  We don’t have children, but many of our colleagues’ children attend schools where the annual tuition would be $30,000+.  All told, I would think our entire net compensation package would be at least 50% larger than at home.  When you consider expenses like home maintenance, house insurance, land tax – or alternatively, rent payments – you come out pretty far ahead. 

3) Wow, at $90,000 CAD/year combined with no taxes, that is the equivalent of a $120,000 pre-tax salary! Plus, they pay for your rent and utilities, so that’s another $20,000/year. So, with a move to Qatar, you’ve essentially given yourselves a raise to the equivalent of a $140,000 combined pre-tax salary! So, you’re right, it’s like getting a 50%+ raise!

Are you really paying ZERO taxes? How does that work?

When I say there are no deductions on our paycheques – I mean that quite literally.  There is no income tax in places like Qatar, the UAE, Bahrain, Kuwait, Saudi Arabia or Bermuda.  Many other international schools are located in ultra-low tax jurisdictions like Singapore or Hong Kong.  We also don’t pay any union dues (which my wife and I were paying a combined $4,000+ toward each year) and our insurance payments don’t come out of our salary.  Now, we don’t make pension contributions either, but that is a double-edge sword as there is no “pension match” or anything like that either.  (The end-of-contract bonus is often pointed to as the replacement.)

The hidden difference-maker when it comes to FIRE for Canadian expats though, is the fact that your investment portfolio basically becomes one big TFSA if you live in a country with either a territorial tax policy or no investment taxes of any kind.  What does a territorial tax code look like you might ask?  

The basic idea is that a country only taxes the investments made within the country itself.  For example, if you own shares in a local company, you would pay tax on the company’s profits, but you would NOT pay tax on any shares of Canadian, American, or European companies purchased on the usual stock exchanges.  Nor would you owe taxes to your new country’s territorial-taxing government from broad ETFs listed on those same stock exchanges (generally speaking).  Now, you may owe withholding taxes levied by the governments in which your investments are based.  Usually withholding taxes are only applied to dividend payments, but there are some case-specific details involving international tax treaties that you’ll need to look up for each country.

All that to say: In places like Qatar, the UAE, Bermuda, Singapore, etc., your investment portfolio can grow essentially tax free.

4) How do you invest abroad as an expat?

This is where the real beauty of the options available to Canadian expats kicks in.  While Canada taxes dividends paid to non-residents to the tune of a 25% withholding tax, it doesn’t have similar taxes in place when it comes to capital gains.

Consequently, if there was a product available that magically turned dividend payments into tax-free capital gains – that would be pretty sweet for expats, right?

It turns out that the Horizons swap-based family of ETFs does exactly that.  

We use our Canadian discount brokerage account to buy ETFs such as HXT and HXS.  These ETFs are unique in that they don’t actually own the underlying equities in the ETFs.  What they essentially do is extract a promise from a partner to trade them the equivalent of the total gains in that particular market.  So if the TSX 60 index goes up by 7.5% and the average dividend of the component companies is 2.5%, then HXT would trade assets in order to record a 10% capital gain – thus accomplishing a really nice tax reduction for an expat investor.

5) Did you have to pay departure taxes when you gave up your Canadian residency?

My wife and I had to pay a fairly small amount of departure taxes when we chose to become non-residents of Canada.  Basically, departure tax is applied to areas where there would be a capital gain if you were to sell the asset.  (It is a bit more complicated than this, but that’s the idea.)  So, for example, our investments in our RRSP and TFSA, as well as our Teacher pensions, were not taxed upon our departure.  We did not own rental housing, so we didn’t have to worry about a capital gain there either.  We did owe some tax on our non-registered portfolio, but considering that we only earned an income in Canada for six months in the year that we became non-residents (and that capital gains are only taxed at 50% of someone’s marginal tax rate) the tax hit was quite manageable.

Now, clearly if you had a substantial non-registered portfolio and/or rental properties that had escalated in value, this tax hit would have to factor more heavily into your calculations.

6) Do you ever plan to come back to Canada and become a resident again? If so, how does that affect your taxes?

It’s tough to say at this point if we will decide to become residents in Canada again.  We certainly have no immediate plans to do so.  As Canadian Citizens we have the luxury/privileged option to visit Canada whenever we wish, so we can still see friends and family during the beautiful Canadian summer.  We’re keeping a close eye on what tax changes are proposed in the next few years before making any lifelong decisions, for sure.  I have a sneaking suspicion that capital gains taxes are going to go up, and if they make additional changes beyond that it would certainly be a major factor in our decision.

There are always two separate categories to think about when it comes to taxes and changing residency.  The first category is the country you’re moving from, the second category is the country you’re moving to.  The country you’re moving from may wish to charge you some version of a departure tax if they are not a no-tax or territorial tax jurisdiction.  In our personal case, Qatar is not interested in taxing our investments upon leaving.

When it comes to the Canadian tax code, if you failed to sever your residency properly (please check out the free eBook I wrote that goes into detail on topics like this) then you’re going to have problems throughout your time abroad – but they might only realize this when you return home.  (Not a nice welcome back gift to receive!)  As long as you fully severed your residential ties however, you’re in the clear when it comes to moving back home.

You will NOT pay taxes on money earned abroad if you move back to Canada – as long as you declared yourself a non-resident and severed your residential ties correctly.

7) What does your family think about your plan to teach in Qatar?

At first our families had the usual Western reflexive reaction when the Middle East was mentioned, but upon actually learning more about Qatar (and finding out how safe the country is) they were much more relaxed.  By the time we left, I think they were very excited on our behalf about the opportunity to explore an entirely different part of the world.

8) Do you feel any culture shock from moving to Qatar? Anything we should know about in terms of the customs and culture that will take some getting used to?

I think if someone had not done any research at all before moving to the country there might be a few things that would catch them by surprise.  But I mean, if you spend an hour on Google, you’ll learn the basics pretty quick.  If you take a second to consider that you’re moving to a predominantly Muslim country, most of it is common sense.  

Truthfully, I was quite surprised by just how “Western” our new country seemed at times.  When you can go to the Cheesecake Factory for supper and then shop next door at Ikea, it feels pretty familiar! 

9) How long would it have taken you to reach FI by staying in Canada versus teaching abroad?

There are a few variables such as investment returns that make it impossible to know the answer to this with 100% certainty.  To put it in Kristy Shen terms – it makes it difficult to “Math Shit Up”.  I would say it probably shaved 5-8 years off of our quest for “Side FI”.  (My wife and I are probably going to work online 10ish hours per week for the foreseeable future just to stay busy and fund a little more “cherry on top” in life.)

Now, the more relevant question might be, if we had gone international right from Day 1 of our teaching careers, what would our FI quest have looked like?  Again, there are a lot of variables there, but I think it’s safe to say that for the average Canadian teacher – who spends years working part-time contracts or substitute teaching at the beginning of their career (and then pays thousands of dollars per year in union dues, taxes, and long-term disability) – you could reach FI much, much faster in an international setting.  Like 10-15 years faster.  If you embrace extra income opportunities like tutoring and/or are married to another teacher, the difference could be even more drastic than that.  The $0 in housing/utilities costs (which not all international schools offer, but many do) can really add up fast for a young couple.

Most Canadian teachers reach FI by working until 55 and then enjoying a well-earned pension.  If you go the international route, you’ll likely need somewhere in the neighborhood of a $1.25M portfolio to secure the equivalent of an 55-year-old teacher retiree pension – but that portfolio would be a much more flexible asset going forward.

If you can avoid lifestyle inflation, taking an expat gig allows you to stack advantages like little-to-no housing/utilities costs, very little investment taxes, deduction-free paycheques, and generous bonuses, in order to hit FI at a much quicker pace.

10) What advice do you have for others who want to fast track their time to FI with international teaching jobs?

If you happen to be in a profession where expat opportunities exist, such as education, medicine, law, or finance, going the expat route is certainly a fast track to FI.  That said, it’s only a fast track if you can stay away from the free-spending “expat-itis” lifestyle that is so prominent in many of these low-tax countries.  I’ve heard countless accounts of teachers living paycheque to paycheque despite the earnings advantages that I’ve listed.  It doesn’t really matter how investments are taxed if you can’t save any money to begin building your nest egg!

Obviously these opportunities exist at any age, but I really think the advantages compound if you’re a young person just exiting university.

***

Thanks, Kyle, for telling us about your experience using ExpatFIRE as cheat code to FI! If anyone wants to find out more about Kyle and read his e-book on how to use ExpatFIRE to your benefit, download it for free here. Honestly, I read this book before it was published and it’s such a valuable resource I can’t believe Kyle’s giving it away for free! You can’t afford not to get it.

What do you think? Would you ever use this “cheat code” to get to FI faster? Have you ever worked overseas and saved on taxes?


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