Strategies to Pay Less Tax in Retirement

 7 Smart Strategies to Pay Less Tax in Retirement

Retirement is when you want to spend more time enjoying life than worrying about taxes. That’s why it is important to have the right tax strategy during your retirement years. By understanding how you can lower your tax burden in retirement, you can keep more of what you have earned throughout a lifetime of saving and investing. Here’s a look at seven proven strategies that can help reduce your taxes in retirement in Canada.

The following are seven proven tax retirement strategies that are available for Canadians:


●      Withdraw from Your Least Tax Efficient Sources First
●      Contribute to Your Spouse’s RRSP
●      Employ a Pension Plan Sharing Strategy
●      Make Investments that Pay Tax-Preferred Investment Income
●      Withdraw the Minimum from Your Registered RetirementIncome Fund
●      Loan Money to Your Spouse
●      Use Surplus Wealth for Tax Exempt Strategies


1. Withdraw from Your Least Tax Efficient Sources First


One of the simplest ways to be tax efficient in retirement is to make your withdrawals from the least tax efficient sources first. That allows your more favourable and tax efficient sources to continue to appreciate and give you a lower overall tax burden.


Here’s a look at the current “withdrawal hierarchy” from the least tax efficiency to the most tax efficient.

●     Guaranteed income sources (i.e. employment income, CPP, OAS, employer pensions)

●     Investment income earned from investment holding companies

●     Higher-income spouse’s non-registered account

●     Lower-income spouse’s non-registered account

●     Lower-income spouse’s Life Income Fund (LIF)

●     Lower-income spouse’s Registered RetirementSavings Plan (RRSP) or Registered Retirement Income Fund (RRIF)

●     Higher-income spouse’s LIF

●     Higher-income spouse’s RRSP or RRIF


It can be complicated to figure out which one of your income sources is the most tax efficient. Therefore, it is highly recommended that you talk to your tax advisor to structure your withdrawals in the best way possible.

2. Contribute to Your Spouse’s RRSPs


When you think about contributing to a Registered Retirement Savings Plan (RRSP), you may only be thinking about your own accounts. The fact is, RRSPs can have some rather tight limits for each individual account. However, if you are married, then there is nothing stopping you from maxing out your spouse’s RRSP. This allows you to essentially double the amount of contributions that you are putting into an RRSP. If your spouse doesn’t currently have an RRSP, be sure to open one up as soon as possible.

The contributing spouse can be any age (even over age 71) however the annuitant spouse must be turning age 71 or less in the year of contribution. Be careful of the spousal RRSP attribution rules when withdrawals are made from the spousal RRSP/RRIF.

3. Employ a Pension Plan Sharing Strategy

Another way to reduce your tax burden is to share up to 50% of each Canada Pension Plan (CPP). Now, this strategy will only work if the higher-income spouse is in retirement and earns a higher CPP retirement benefit.

Also, CPP sharing will only work if the younger spouse is eligible to collect CPP. Therefore, both spouses should be at least 60 years old to qualify for CPP sharing. To implement this plan, you will have to complete an application for the pension to be shared.

Overall, this is going to be an optimal strategy for people at retirement age. However, if you and your spouse are approaching retirement, then you should plan ahead and consider this strategy when setting your retirement budget.

4. Make Investments that Pay Tax-Preferred Investment Income


Did you know that Canadian dividend, capital gains and return of capital are taxed lower than interest income in non-registered investment accounts? Over time, this can lead to some significant tax savings. Therefore, you should consider adding investments in dividend paying stocks as well as stocks that have a good chance of capital appreciation over time.

Here’s an example of each time of tax-preferred investment income source:

●     Canadian dividend stocks - These would be Canadian based publicly traded companies that currently pay a dividend. Be sure to research the company’s dividend history before considering an investment.

●     Capital gains - Capital gains will apply for any investment that offers a gain on your investment. This can apply to investments in stocks, commodities, and real estate.

●     Return of capital - Return of capital refers to any investment in where you receive a portion of the original investment that is not considered income or capital gains from the investment.Unlike other types of distributions ROC is not taxable when received because it’s your own money coming back to you.


Note that investing in stocks can have a higher level of risk than investing in conservative fixed income investments. Therefore, this strategy is a good idea for those who are younger or those who have a risk tolerance.


5. Withdraw the Minimum from Your Registered Retirement Income Fund

Let’s suppose that you have an adequate pension and non-registered assets to meet your retirement expenses. In this case, you will only want to make the minimum mandatory withdrawals from your registered retirement income fund or RRIF each year. This will allow you to pay less tax and it gives your fund’s assets the opportunity to appreciate. Other strategies to maximize the tax-deferral within a RRIF to maximize after-tax retirement income are as follows:

  • Base the minimum RRIF withdrawal on the younger spouse to minimize the amount of the annual withdrawal, thereby keeping more assets in the RRIF to grow tax deferred
  • Convert the RRSP to a RRIF by the end of the year they turn age 71 but don’t make the first RRIF withdrawal until the end of the year they turn age 71

The minimum withdrawal percentage will depend on your age. The higher your age, the higher percentage you will have to withdraw. You can check this table to see the withdrawal rate by age for the current year.


6. Loan Money to Your Spouse

One of the more common strategies that most people do not think about is the prescribed rate loan. A high-income earning spouse can loan money to a lower income earning spouse at the CRA prescribed interest rate (currently 1% per year). The low-income spouse can use the loaned money to make investment without income attribution rules applying toward their tax rate.


7. Use Surplus Wealth for Tax Exempt Strategies

If you have more money that you will need for your retirement, then you may wonder what you can do with those funds. You may be interested in passing on your legacy to other members of your family. The good news is that there are two tax-exempt strategies that allow you to pass on your wealth.


●     Tax-exempt life insurance - You can purchase tax-exempt life insurance that will allow your investment to grow without having to pay capital gains tax. This will allow your surplus growth to continue to grow before it is passed on to your beneficiaries.


●     Lifetime gifts - You may have children or family members who are looking to go to university, get married or purchase their own home. If you wish to provide financial support now, you can provide a tax-exempt gift. If you wish to pass on a gift to minor children, you can do so through an irrevocable trust. This type of trust will restrict access to the fund while the beneficiary is a minor.

It should be said that retirement life can be unpredictable. There are escalating health care costs plus the possibility that either you or your spouse may require long-term, 24-hour care. Therefore, carefully consider if you truly have surplus wealth that you will not need in your lifetime.

Enjoying Your Retirement with a Smaller Tax Bill

As you can see, there are a number of ways to radically lower your tax bill during your retirement. These strategies can allow you to enjoy more of what you have earned throughout your lifetime. Be sure to consult your financial consultant or accountant before implementing any tax plan.


Investments are provided through Worldsource Securities Inc. Access to insurance products and services can be facilitated upon request.

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