How Taxes Work for Canadian Retirement Benefits?

The average retirement age is 65 years, but many Canadians work past this age as they don’t have adequate savings. According to the CIBC Retirement Poll, 21% of respondents don’t know how much annual income they might have in retirement. In fact, 27% of respondents are hoping for a windfall income (lottery, gift, inheritance) to fund a portion of their retirement. If you are having cold feet about your retirement and believe you may never retire, this article is for you.

Letting go of active income can be tough. But you can still do some gig work to stay active and have some financial assurance. Before you jump into working post-retirement, chart out the various sources of retirement income and the taxes that come with it.

Government Sources of Retirement Income

Even if you haven’t saved for retirement, the Canada Revenue Agency (CRA) has been saving for you. The government offers retirees two sources of taxable retirement income they can avail of after they turn 65. The CRA determines the benefit amount based on certain criteria and increases it annually to adjust for inflation.  

• Old Age Security (OAS): It is a government-funded benefit given to Canadian residents based on the length of time they lived in Canada after turning 18. In October 2024, individuals aged 65 to 74 received up to $718.33 per month, and those aged 75 and older received up to $790.16 per month in OAS. The amount of OAS you receive depends on your annual income. If your 2024 annual income is $90,997, you will receive the full OAS amount. And if your income is above that threshold, the CRA will claw back OAS by 15% of the surplus income. If your annual income is $110,000, the CRA will claw back $2,850.45 in OAS (15% of the $19,003 surplus income).
• Canada Pension Plan (CPP): It is an employer and self-funded benefit. Every Canadian has to contribute a small portion of their monthly income towards CPP. The self-employed contribute to the employer and employee portion of CPP. When you turn 65, you can claim a CPP payout. The amount will depend on contributions made and average monthly income. In 2024, the average monthly CPP payout for a new retirement pension at age 65 was $815. Even the CPP payout increases with inflation. You have the option to start CPP payout early at age 60, and take a 36% cut in the benefit, or delay it till 70 and get 42% more payout.

Employment and Self-Funded Sources of Retirement Income

If you still have a few years to retire, you can build your retirement pool and check with your employer if they offer some retirement benefits.

• Retiring Allowance: Many employers give a significant amount as a retiring allowance, also known as severance pay, upon employees’ retirement or termination. It is taxable, but you can invest in RRSP, and reduce your taxable income.
• Private Pension Plans: You can also buy private pension plans. There are two types of plans: defined benefit plans that promise a certain payout based on salary and years of service and defined contribution plans in which payout depends on the amount contributed and the returns on those contributions.
• Registered Retirement Savings Plans (RRSPs): The CRA allows you to contribute up to 18% of your salary annually in the RRSP till age 71 and grow your money by investing in stocks, bonds, and other securities. Your RRSP withdrawals are taxable.
• Registered Retirement Income Funds (RRIFs): You can transfer the RRSP money tax-free in RRIF after age 71 and let your money grow tax-free until withdrawal. A year after opening RRIF, you must make minimum withdrawals and add them to your taxable income.
• Annuities: You can also use your RRSP money or retirement allowance to buy an annuity and get regular payments (principal and interest) for life or a fixed period. While the principal is tax-free, the interest portion is taxable.

Tax-Free Retirement Income

• Tax-Free Savings Account (TFSA): The CRA allows you to invest your taxable income in TFSA and let your money grow tax-free. And the best part is the withdrawals are tax-free. You can allocate most of your retirement savings in TFSA to reduce taxes.
• Guaranteed Income Supplement (GIS): It is a government-funded benefit available to those receiving an OAS pension who have low annual income. A single person with an annual tax-free income of $22,056 in 2024 can get a maximum GIS of $1086.88 per month.   

Tax Planning for Retirees

• Tax credits: Most of the above sources of income are taxable, making tax planning important for retirees. Some sources like the CPP, OAS, and RRIF have mandatory monthly payouts. Individuals aged 65 and above can consider these three payouts as the minimum taxable income and deduct the age amount of $8,790 for 2024. They can also deduct eligible medical expenses incurred for themselves, their spouse or qualifying family member from their taxable income.
• Timing withdrawals: If your tax liability is 0 or lower, you can estimate how much amount you can withdraw from other sources like private pension plans, RRSPs, and annuities. If you are 65 and still in a high-income bracket, you could consider delaying your CPP payout to age 70. 
• Pension splitting: If you have a spouse in the low-income bracket, you could consider splitting your pension income 50:50 and withdraw a higher amount without footing a higher tax bill.
• Other sources of income: If you have other sources of income like rent from property or dividends on shares of private companies, you could opt for tax-deferred options like family trust.

Contact DNTW Toronto LLP to Help You with Retirement Tax Planning

Talk to a professional accountant or tax expert to help plan your retirement taxes. At DNTW Toronto LLP, our accountants and tax consultants can create a retirement pool that gives you maximum income while minimizing your tax liability. To learn more about how DNTW Toronto LLP can provide you with the best accounting and taxation expertise, contact us online or by telephone at 416.924.4900.