Tax Tips for Retirees

Pension Income Credit

  • Determine if you or your spouse/partner qualifies for the pension income credit:
    • If age 65 or older and still working, determine which is to your advantage: transferring registered savings (RRSP/LIRA/LRRSP) assets to a registered income fund (RRIF/LIF) or similar to create eligible pension income or defer the transfer until in a lower tax bracket.

RRSPs

  • If working part-time during retirement, consider RRSP contributions to reduce taxes (your pension adjustment will disappear one year after you leave your company plan).
  • Avoid the spousal RRSP three-year rule—tax attribution back to you:
    • Wait three years before making a withdrawal (LIFO: last in, first out) after making a final contribution to a spousal RRSP; or
    • Convert it to an RRIF and have your spouse/partner only withdraw the minimum amount.

Tax-Efficient Income

  • Understand your marginal and effective tax rates in retirement, especially after age 65. At higher income levels, pension and age credits unique to seniors begin to be clawed back, followed by OAS benefits. Proactive tax planning is advised to maximize income from these government sources.
    • Adjust investment income and payments, where possible, from registered plans (as the minimum withdrawal percentage from RRIFs and LIFs increase with age) to keep income tax as low as possible.
    • Protect your Old Age Security (OAS) payments from being clawed-back. Develop a plan to withdraw registered money to limit the impact.
    • Prioritize drawing income from locked-in pension-sourced funds over RRSP funds to preserve the unlocked money for emergency purposes..
  • To minimize tax, map out a strategy to withdraw funds from the following during retirement:
    • Income received from non-registered investments
    • Capital withdrawals from non-registered investments
    • Income from locked-in pension accounts (such as LRIFs or LIFs)
    • Minimum payments from RRIFs
    • Additional withdrawals from RRSPs/RRIFs

TFSAs

  • Use a Tax-Free Savings Account (TFSA) to:
    • Supplement your income by making a lump sum withdrawal. Withdrawn amounts are considered to be capital, so will not add to your taxable income.
    • Tax-shelter money, as all investment income earned within the account is tax-free. Unused TFSA contribution room from previous years may be carried forward to future years.
    • Re-contribute amounts withdrawn in previous years, especially if you have surplus cash. Money may be withdrawn from the TFSA at any time for any purpose. Assets withdrawn may be put back in the following year or later without penalty.

Withholding Tax

  • Consider the tax implications when you remove lump sum amounts from your RRSP/RRIF or locked-in pension plan accounts. Withholding tax is:

RRSP/RRIF/Locked-in Pension Plan Account Withdrawal

RRSP/RRIF/ Locked-in Pension Plan Account Withholding Tax             

 

Across Canada - except in Quebec

In Quebec – Federal and Quebec combined

 

 

Federal

Quebec

Total

< $5,000

10%

5%

15%

20%

$5,001 - $15,000

20%

10%

15%

25%

> $15,000

30%

15%

15%

30%