Retirees’ Tax Planning Checklist

Written by Jack Lumsden, MBA, CFP®, Financial Advisor, Assante Financial Management Ltd. 

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In the 2023 Fidelity Retirement Report, retirees’ # 1 concern was minimizing taxes. This is unsurprising since taxes are the majority of retirees’ most significant unwanted expenses.

If retirees can reduce the taxes they are paying, they can increase their current spending and help preserve their assets for themselves or the next generation. Also, reducing your taxable income can help maintain income tested tax credits and benefits.   

With tax planning, there are two main time frames to review: 

1. One-Time Tax Decisions
2. Annual Tax Strategies to review.

One-Time Decisions

These tax strategies often involve making a one-time decision when planning for retirement and transitioning to retirement. 

CPP: Split CPP Payments

When applying for the Canada Pension Plan (CPP), you can elect to split your CPP payments with your spouse/CLP partner for the periods you have been living together.  This can be an advantage if one spouse/CLP has a forecasted higher income, and splitting  CPP can allow you to have some of that income taxed on the lower-income spouse/CLP partner.

RRIF: Base the Minimum Annual Payment on the Younger

Spouse/CLP when Setting Up

When you convert your RRSPs to an RRIF, you must take out a Minimum Annual Payment (MAP) each year. The % you must take out is based on your age at the end of the year or your spouse’s/CLP’s age.  If your spouse/CLP is younger than you, the amount you must take out each year is less, potentially lowering your taxable income and taxes.

OAS: Review the Start Date

If you have employment income the year you retire or other sources of income, such as significant capital gains, you may wish to delay OAS to the following year due to the OAS recovery tax.  

The recovery tax means that once your income reaches a specific threshold, you must start paying back OAS.  For 2023, this income threshold was $86,912, so for each dollar above, you must pay back 15% of that amount.

Capital Gains: Trigger Large Capital Gains before Starting OAS.

If you have significant capital gains you plan to realize, you may wish to trigger them, if possible, before starting OAS due to the recovery tax.

RRSPs: One Last Contribution

If you are still working at age 71, you could make an RRSP contribution before converting to a RRIF.  If this is done one month before the year’s end, you will pay a penalty of 1% for the overcontribution for that period, but most likely the penalty will be far less than the tax deduction.

Spousal RRSPs: For Income Splitting

While working, consider using Spousal RRSPs to split the income at retirement.  With a spousal RRSP, the contributor (higher income spouse/CLP) would get the tax deduction, and your spouse/CLP becomes the owner.   

At retirement, this is a way to shift income from the higher-income spouse/CLP to the lower-income spouse/CLP.

The main advantage is if you start RRIF payments before age 65, they do not qualify for income splitting, so  a spousal RRSP can benefit.

Spousal RRSPs: When working past age 71

If you are working past the age of 71 and your spouse/CLP is younger, you can contribute to a spousal RRSP until your spouse/CLP is age 71 as well.

Spousal Loans: Use Spousal Loans to Income Split.

You can use a spousal loan to shift investment income from a higher taxed spouse/CLP to a lower taxed spouse/CLP to take advantage of their lower marginal tax rate. This is best used for significant, non-registered investments. The interest that must be paid on the loan is based on the CRA’s prescribed rate.

An example of when this may benefit is when one spouse/CLP at retirement receives a lump sum in cash due to selling company shares or a private business. 

However, since interest has to be paid on the loan based on the CRA’s prescribed rate, the rise in interest rates over the last 24 months has made this strategy less beneficial. You will want to include your accountant in this type of planning to ensure all the rules and regulations are followed.

Annual Planning Items

Once you have transitioned to retirement annually, you will want to review your tax strategy to ensure you maximize your after-tax income. Also, reducing your taxable income can better preserve any income-tested tax credits and benefits.  

INCOME SPLITTING WITH YOUR SPOUSE/CLP

Income splitting involves transferring income from one spouse/CLP in the higher tax bracket to the other in a lower tax bracket to pay less tax as a couple. Upon the transition to retirement, you can decide if you wish to income split your CPP payments as described above, and the following are two tactics to review annually:

Pension Splitting: If you have pension income at any age, you can split up to 50% of the income with your spouse/CLP. This is done when you complete your income taxes, and your accountant will be able to optimize the pension splitting to pay less tax as a couple.

Split RRIF Income: Once you reach age 65, your RRIF income can be split with your spouse/CLP. Again, this is done when you file your income tax returns.

TAX LOSS HARVESTING 

When owning non-registered investments,  in the last few months of the year you should review if you have any investments that have a cost base for tax that is greater than the market value.

If so,  you can sell them to trigger a capital loss before the end of any year. This loss can be used in the current tax year, carried backward for up to three years, or used on future income tax returns.

It would be best to watch out for the superficial loss rules, which means you can’t own the same investment for 31 days after selling it. However, you can hold similar investments.  

REVIEW KEY TAX CREDITS

Medical Expense Tax Credit:  You may be able to claim some of the money you spend on medical expenses on your income tax return, and this should be reviewed annually. Some everyday medical expenses include prescription drugs, personal health plans, care facilities, expenses for attendant care in a nursing home or retirement home, medical treatments not covered by provincial plans, hearing and vision aids, mobility aids, and other expenses. You will want to check the CRA website and bring all medical expenses to your accountant.

You can claim medical expenses for you and your spouse/CLP for any 12-month period that ends in that tax year. 

Disability Tax Credit: If you or your spouse/CLP have a severe and prolonged impairment and meet certain conditions, you may be eligible for the Disability Tax Credit (DTC). For example, Alzheimer’s would qualify for the Disability Tax Credit.

To determine eligibility, you must complete Form T2201, Disability Tax Credit Certificate, and have it certified by a medical practitioner.

Carrying Charges: If you have a fee-based investment account, the fees to manage your non-registered investments may be tax deductible. 

TAX INSTALLMENTS:  REVIEW IF REQUIRED.

In the first few years of retirement, an often overlooked item is not planning for income tax, and this can affect your cash flow with an unplanned tax bill in April or a penalty for not paying your installments.

In retirement, there are two ways to pay income tax: 

• You can elect to have income tax withheld on sources of income, such as OAS, CPP, Pension Plans, RRIFs, and annuities. 
• Paying your income tax in installments.

Withholding tax means that part of your income is “withheld” and paid to the CRA. This is like when you were working, and part of your income was deducted and submitted on your behalf as tax to the CRA.   

What happens if you don’t have enough tax withheld on your income during retirement? The CRA may tell you that you must pay tax installments during the year; if you don’t, you may have to pay a penalty.

Depending on your sources of income in retirement, you may have to plan to pay installments, and the amount can vary from year to year. Typically, if you have significant non-registered investments, you may end up having to pay installments.

CRA Link: Taxes when you retire or turn 65 years old

NON REGISTERED INVESTMENTS: USE TAX EFFECTIVE INVESTMENTS

Capital gains and dividend income are always more tax-effective than interest income for non-registered investments, and should be considered with investments and your cash-flow planning.

TAX BRACKET MANAGEMENT – Partial RRIF Conversions.

In Canada we have a marginal tax rate system, which means as you earn more income, the tax you pay on each additional dollar increases. Part of what you should examine annually are the marginal tax rates over time to determine if you can withdraw some extra income in a year at a lower tax rate than in future years.  

Before age 72, you may be better off doing a partial RRIF conversion to create income, and this is often called income layering, where you take out additional income and pay a lower tax rate than in the future. 

For example, if you are in the OAS clawback zone at age 65 or 71, you may want an income layer so you can take out additional taxable income when you have lower income years.

RRIF EXIT PLAN: The Maintenance Years 

As retirees enter their maintenance years (their last decade) and know they will not outlive their income and money, they can begin to look at an RRIF exit plan.

The reason to do this is  in the year of death of the last spouse/CLP, any money remaining in an RRIF is 100% taxable as income, and it can be easy to pay tax at a 50% rate.  

In your last decade, you could take additional income out of your RRIF, which may be at a lower tax rate than on the terminal tax return. The extra income taken out can either be reinvested in a non-registered investment, a TFSA, or perhaps gifted.

GUARANTEED INCOME SUPPLEMENT (GIS)  REVIEW

The Guaranteed Income Supplement is designed to help low-income seniors who receive Old Age Security. It is a non-taxable income, and the amount you may receive is based on your family income (spouse/CLP).

For example:

• If you are single, collecting OAS and your income is under $21,456 you could collect up to $1,057 per month.
• If you and your spouse/CLP both receive full OAS, and your family annual income is less than $28,320, you could collect up to $636 per month.

 

One strategy to review would be to stop RRIF payments between the ages of 65 to 71, and with the reduction of income you might be able to collect GIS.
LINK:  GIS

TRANSFER FROM LIF TO RRIF

If you do not take out the allowable LIF maximum payment each year, you can transfer the difference between the LIF maximum and minimum to your RRIF.  

While this does not save any tax, it does create more flexibility for taking income out,  income layering, and an existing RRIF strategy.

USE TFSAs

Before and during retirement, any excess cash flow should be redirected into a Tax-Free Savings Account (TFSA). The reasons are:

• You can give your spouse/CLP money to invest in their TFSA without the attribution rules applying.
• There is no tax paid on the income earned in the TFSA or upon  withdrawal.
• Since there is no tax on the income earned in a TFSA or upon withdrawal, income-tested benefits are preserved.
• TFSAs are great as an estate asset because you can name a beneficiary to avoid probate, and no taxes are paid on its transfer. 

 

CHARITABLE DONATIONS

Donating to a charity is a great way to reduce your taxable income. There are two main ways to contribute cash and donate in-kind investments with a significant capital gain.

With a cash gift, you receive a tax credit of 29% on amounts over $200 (up to 75% of your net income), and if you donate an appreciated investment, you don’t have to pay the capital gain tax, and you receive the tax credit as well.

TAX PROJECTIONS 

You will want to create a 5-10 year tax projection annually in retirement to see if any opportunities may be available, particularly at the ages you start CPP/OAS, and convert your RRSPs to RRIFs. 

Cash flow based financial planning software is essential to help with this process.

STAY INFORMED ABOUT TAX CHANGES.

It would be best if you kept current about potential tax changes to ensure you take advantage of opportunities as they arise. If you use a CFP® planning professional specializing in retirement income planning, they should be able to plan over time.

You will want to review your tax strategies with your accountant and CFP® planning professional (if you use one) to ensure that you follow the rules and regulations and to look out for any unintended consequences.

For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP®.

For your FREE Copy of Preserving Wealth, CLICK HERE

For your free retirement review, CLICK HERE.