Your Biggest Canadian Retirement Tax Questions Answered

A tax expert answers the most Googled retirement tax questions Canadians are asking right now. In this episode of Heart of Your Money, Zena Amundsen CFP and Nicole Putz CFP sit down with tax expert Rick Soparlo to break down real retirement tax strategies for Canadians, including how to structure your income for tax efficiency, how pension income splitting works between spouses, why Canada’s graduated tax brackets mean a raise never hurts you, what happens to your RIF when you pass away (and why it could cost your family nearly half your savings) and practical draw-down strategies to keep more of your money in the family.

Whether you’re already retired or getting close, this conversation covers the tax planning fundamentals every Canadian should understand before filing their next return.

Show Notes: Your Biggest Canadian Retirement Tax Questions Answered

Nicole: Welcome back to the podcast. Today we’re going to switch things up a little bit. Zena and I have invited Rick Soparlo to the podcast today. He’s been in the industry for years and years. We kind of say he’s our resident tax expert, and we figured this podcast is coming at a great time because this is right in the middle of tax season right now.

The way we’ve structured this podcast for you today is we actually took the most Googled tax questions that retirees and close-to-retirement people are asking, and this is what we came up with. So I think we’re just going to do rapid-fire style. We’re going to let Rick answer in the way he would answer and we’ll go from there.

Zena: Sounds good.

Nicole: Alright. Okay. Welcome to the podcast.

Rick: Oh, thank you for inviting me.

Nicole: You’re so welcome.

Rick: How much am I getting paid?

Nicole: We’ll discuss later.

Zena: We’re looking for sponsors.

Nicole: We’re looking for sponsors at this point. Yeah, so the first question, and this is a little bit down in the weeds, so you can answer however you want, but one of the biggest Google questions is just how do I reduce my taxes in retirement?

I think what people are pointing to is that once my paycheck is no longer coming from my employer and it’s coming from whatever I’ve saved, that’s when people start to get a little confused. Like, now I guess I’m in charge of how taxes are structured or not. That’s probably where people’s heads go. So what would you say in terms of how do I reduce my taxes in retirement?

Rick: Well, I think from that perspective, reducing your taxes when you were working, you had various ways to reduce your taxes. For example, an RSP contribution, which would reduce your taxable income for the year. And in most cases you would get a refund.

However, when you’re retired, for the most part, you’re not contributing to an RSP anymore. And in reality, there’s not a lot of ways for the majority of Canadians to reduce their tax bill during retirement, unless of course they want to take a little more risk. There are some investments that give you tax credits. However, the reason why the government gives tax credits to these things is that they are riskier. So you have to weigh the fact that if this is a riskier thing, does it make sense for me to invest in that particular investment to get a tax credit? Which means I might get X amount of dollars back in income tax, but the investment might go to zero.

So I think for the majority of Canadians, first of all, there’s really no way to actually reduce your tax bill. But there’s ways to structure your income in ways that are going to be more tax efficient to start bringing money out of, for instance, registered retirement income funds. How do you set that up with regards to the most efficient way to start pulling out of that, and things like that?

Nicole: Okay, so what I’m hearing is it’s not so much about how do I get rid of tax, but it’s how do I structure my money so I’m taking from the right buckets. Because I think that’s a thing too. There’s different buckets in retirement. So like you’re saying, there’s RSPs that then turn into these things called registered retirement income funds, or RIFs. But there’s also Canada Pension. There’s Old Age Security. There’s our folks who are still doing self-employment stuff. So to your point, it’s probably timing of which buckets to pull from and when.

Rick: Yeah, that’s correct. And one of the points I tell people, and especially in the financial planning world, financial planners want you to have a tax problem at retirement. Because if you don’t have a tax problem at retirement, that means you’re potentially living possibly below what you were used to when you were working.

Nicole: Right.

Rick: So if you’re paying tax, it means that either yourself did it or your planner did it to say, look, you’ve got lots of income now that you have to start bringing into your own income to get taxed on. But bottom line is that once you start drawing on your various income sources, like for instance, Canada Pension, Old Age Security, that’s a government program. You can take Canada Pension as early as age 60, but you could delay it till age 70. Old Age Security you can take as early as age 65, but you could delay it till age 70.

And that’s regarding should you start taking either OAS or CPP at those ages, because those are both taxable incomes. For some people it might be beneficial to delay till age 70, which means you’re delaying the taxation of that income. Other people it might make sense to take Canada Pension at age 60. But again, you have to look at all your incomes to make a decision one way or the other on where you’re going to start taking that.

And again, people are going to get a registered pension plan, a company pension plan. Essentially that’s similar to Canada Pension and Old Age Security. It’s a monthly amount that you get every month based on your years of service and things like that. So from that perspective, you’ve got to include that in your income, and that’s going to be added to your income from Canada Pension and Old Age Security.

Zena: Do you think it’s more simple in retirement, your taxes, or before retirement while you’re still working?

Rick: I think in retirement, I’m not going to say more complicated, but you have to again consider, when you started talking about how do I reduce my tax bill in retirement, that’s going to be an indication of how do you start drawing on these various investments that you made during your working years.

Because during your working years, you’ve really, in most cases, got one income, like your T4 income. The employer takes taxes off and you file your tax return and it’s done. Whereas in retirement, especially if you have things like RSPs that, as Nicole had mentioned, you can turn into a RIF, when’s the best time to start pulling that money? And other types of investments that might not be registered as a registered retirement savings plan or RIF.

So yeah, I think you’ve got to put a little more time into deciding, for the majority of people, what do I start pulling on first to make sure you’re pulling out at the most efficient rate that you can be.

Zena: So then there’s income splitting. It’s a term that everybody has asked us about, or they think they understand but not quite. That’s something that people throw around a lot. Isn’t there a benefit of, okay, A, what is income splitting? And B, isn’t there a benefit in retirement that helps a bit?

Rick: Yeah. Income splitting. It’s not often that the Government of Canada comes out with a program that saves Canadians taxes. When they brought this out a number of years ago, what it allows, and it’s not that you split your… and again, it’s pension income. There’s a couple of types of pension income that qualify for what they call this pension income split.

It does not include things like Old Age Security or Canada Pension. However, it does include if you have income from a registered retirement fund or a company pension plan and you start receiving money from that. That’s included in this. If you have an RSP and you switch it into a RIF, that income also will benefit from, or you can split that income. Also annuity income. If you turn something into an annuity, you can actually split that income because that qualifies as pension income.

And the thing about it, the benefit of it is that when you’re looking at two individuals, and in Canada, we’re on a graduated tax system. And this is something people sometimes aren’t quite sure about. What I mean by that is if a person says, oh, my employer wants to give me a raise and right now I am earning $55,000 and I know if I’m going to get a raise, I’m going to go into the next tax bracket.

Rick: And you might say, well, what’s your raise? Well, it’s going to be an extra $2,000 per year. Immediately people think that everything is going to get taxed at the same rate. But in Canada, like I say, we have a graduated rate. Right now the tax rates are approximately on the first $55,000 to $56,000, your tax rate in Saskatchewan is about 25%. From about $55,000 to about $110,000 or $111,000, the tax rate is 33%. And from $110,000 to around $165,000 or $166,000, it’s currently around 40%.

So again, an individual that might be making $55,000, their marginal tax bracket at that time is 25%. That means for every dollar they earn, they’re paying 25 cents. And if they get their raise of $2,000, it doesn’t mean that everything now is going to get taxed at the higher rate. The first $55,000 gets taxed at the lower rate and then everything from $55,000 to $110,000 gets taxed at the graduated rate.

Nicole: So I think that’s important too. In working years, sometimes we’ve had conversations with clients saying, oh my gosh, I don’t think I want to make more. I don’t think I want to get a raise. And we’re like, no, you do. You do. Because you do theoretically have more in your pocket. Yes, you get up to that next bracket, but like Rick is saying here, it’s not like everything is taxed at that next bracket. It’s just whatever’s above that next threshold.

And so that kind of brings me to this next question here, and it’s a little bit of a shift to…

Rick: However, this is getting back to the pension income split, and that’s why I was setting the groundwork. So for instance, let’s say a couple, one person might be earning, or in retirement they’ve got an income of $70,000 and maybe they have pension income in that of say $20,000. So their tax rate on that $20,000 of pension income is approximately 33%.

What the rule, the thing they brought out with the pension income split, and this is only done on the tax return. It’s not like one individual will say, well, I don’t want to give my spouse half of my money. You’re not handing over money. You don’t have to worry. It’s something that’s done right on the tax return.

So in a situation like that, an individual would say, well, if I’m earning $70,000 and $20,000 of that was pension, they can theoretically transfer up to $10,000 and their spouse might be in the lower bracket, like the 25% bracket. So what that means is, if I can transfer money that’s right now getting taxed at 33% or 34% and I can take at least half of that and flip it to my spouse who’s only getting taxed at 25%, it’s a win situation.

And again, for some couples, if they’re in the same tax bracket, there’s really not going to be any benefit. But in a situation where you have one spouse that’s in a higher marginal tax bracket than the other spouse, it makes sense to look at that and it’s probably going to save the couple taxes.

Zena: Right? Yeah. Any penny is good.

Nicole: And that’s important to say too, because we’ve seen a couple times, you save as a couple. And we tell people you have to think of yourselves as a unit because sometimes when this pension splitting happens, one spouse’s refund might go down or they might owe, and the other spouse now gets a refund. And so there’s a lot of confusion sometimes being like, wait a minute, now I owe money.

Zena: But the partner gets it back. And so it’s really about thinking about it as a unit. Yeah, as a unit.

Rick: Yeah, absolutely.

Zena: I think also we can mention that you can split CPP, but you have to do it at the time of application with Service Canada. So there’s some thought process there. You can’t do it on your income tax. You have to have decided ahead of time in your application with Service Canada. So the only time you would think about that is in a huge disparity where a partner doesn’t have CPP at all, or it’s very, very low. Then at the time of the one partner receiving, they can do that income split at that point.

And then on the income splitting part, you’ve probably seen where unfortunately on the death of a spouse, now all of a sudden we see where the surviving spouse can’t income split anymore.

Rick: That’s right.

Zena: And that’s where you need your planner and you need Rick to help you do the taxes. Because all of a sudden the shock comes after where, what do you mean now I owe taxes or I’m going to be in this higher income bracket? And I think that’s something that we try and work through. And like you said, there’s just some things you can’t, I mean, we’re not going to find some magical thing that’s going to stop taxes.

Nicole: Nope. For sure. Taxes will always be there, but it’s just a matter of building and structuring things correctly and doing some planning in the background.

So I guess another question, and we can kind of end on this one, maybe one more, we’ll see. But just how do I leave money to my kids from a tax-efficient perspective? And I know this is a big can of worms, but this is something that we’re seeing a lot in conversations these days. You know, we want to make sure we leave our kids something, but we don’t want this massive tax bill when we die. So how do we navigate this? What do you do, Rick? How do you navigate?

Rick: I think one of the biggest things is that the taxation when a person passes away, and just to note that if you inherit money in Canada, the person that inherits that money is not taxed on that income. The inheritance and the tax on the inheritance comes from the person that passed away. All those taxes are taken care of when a person passes away, and any inheritance that is passed on to children or whoever, there’s no taxation in that.

So in essence, when things like that occur, I think the biggest thing for what I’ve seen for most Canadians is that first of all, you’re encouraged to put money into RSPs. And the way it works from the standpoint of what happens to an RSP when a person passes away, or in a situation where a person has converted their RRSP (registered retirement savings plan) to a registered retirement income fund, what are the tax consequences?

The tax consequences are that in the CRA’s eyes (Canada Revenue Agency), a person literally sells off everything on the day they pass away. So for instance, if an individual’s income has been going along and they’ve reported say $60,000 on their tax return, and part of that is RIF income, and that person passes away and say they had $500,000 in their RIF, what happens is in the eyes of CRA, when that person passes away, that $500,000 that was left in the RIF comes into their final return. So their income theoretically goes from $60,000 to $560,000. They all of a sudden go from the second lowest bracket in Canada to the highest.

And I’ve told people, in a situation like that, guess where approximately half of that money’s going?

Zena: Our friends?

Rick: Our friends at CRA. Yeah. And so in looking at that, let’s put it this way. The government’s going to get their chunk of the pie. The way to try and reduce the amount that they’re getting is, from a standpoint, a lot of people have RSPs. And right now in Canada, you can no longer have an RSP past the age of 71. You have to convert it to something. And for the most part, most Canadians convert it to a registered retirement income fund and start drawing income from it.

Nicole: So what would one good strategy be then?

Rick: Well, one good strategy is, a person might say, look, I’ve got this income, I’m living quite comfortably, and I’ve got all this money in this RIF. A good strategy might be, well, maybe what you should potentially start doing now, if you want to leave some for the kids, is pull a bit more out of the RIF when you’re in a lower tax bracket. Which means they’re going to get more, rather than you getting run over by the bus tomorrow and all of a sudden, sure, they’re still going to get money, but the tax man’s going to get a bigger chunk of that pie than if you would’ve done it gradually over the years.

Zena: Yeah.

Rick: So again, a person should work with, if they’ve got a financial planner or a person in the tax field, they should be able to tell them, look, this is potentially what you should maybe start pulling extra out of your RIF to try and reduce that RIF value so that when that ultimate time comes, instead of that money getting taxed at the highest rate because of the income, you’ve spread that over a number of years.

Zena: Right. And that’s what our financial plans do. That’s why everyone needs a plan, because then we can see, oh look, at age 83 you still have a million dollars in your registered account. What do we do now to help? Well, you turn up the tap a little bit.

So that’s a strategy that we’re actually looking at quite a bit now.

Nicole: Yeah.

Zena: Putting a little bit more in your pocket and it builds in your bank account. And what a beautiful gift. Once you get above your sweet spot and you can gift as you need.

Rick: Yeah. And the thing about that too is a lot of individuals say, well, what am I going to do with this extra money? Well, there’s a couple of things you can do. Like say, either give it to, I don’t need that money, give it to your kids now if you’ve got children. Rather than, as I’ve usually told people, give it away now because you can see the smile on their faces when they receive it, rather than when you’re pushing up daisies.

So yeah, it’s one of those things where starting to pull it out now, and again, some people say, well, I don’t want to really let go of it yet. Again, there’s a situation, as I mentioned before, it’s not often that the Government of Canada and the CRA come out with actual tax strategies for Canadians to save tax. But a couple years back they came out with the Tax-Free Savings Account, which has been a real boon. Because the Tax-Free Savings Account, you put money into it, the investment inside it can grow, it’s not taxed while it grows, and when it’s pulled out, there’s no taxation. Which is great.

But again, if a person’s saying, well, I still want to maintain a little bit of control, then what they can do is if they haven’t maxed out their Tax-Free Savings Account, throw it in there and still let it grow tax-free. So there’s different strategies to do with that extra income that you pull from a registered retirement income fund. But again, if you’re not quite sure what you should be doing, if you’ve got a planner, that planner should help you decide that.

Nicole: Figure this all out. Yeah.

Zena: Absolutely. I’ll throw in there too, charitable giving.

Nicole: Yeah.

Rick: Yeah. Oh yeah, exactly.

Zena: That’s another strategy. Yeah, I was just chatting and had coffee yesterday with a fellow who doesn’t have any living family left. No children. And it’s all about, we were talking about what excites you and where are you going to donate. So that’s another avenue.

Rick: Just on that note, we just had Telemiracle here in Saskatchewan and one of the, I think they made something like $10 million this year. And one of it was a bequest from an individual that had passed away of I think $2.5 million. And you know what that does, I mean, they’ve passed away and they wanted this bequest into that. It means that the government kind of got screwed out of some tax dollars.

Nicole: Which we all love. Yeah. Oh man. So this is good. I think those were some of the bigger questions for sure. You’ve done a great job explaining both examples and just the ins and outs or the inner workings of things that we’re thinking about for sure when we’re helping clients trying to mitigate tax and do tax-efficient planning and stuff like that.

So I think the only thing we’ll leave it off with, and it has to be a one-sentence answer, what is a write-off, Richard?

Rick: A write-off? That’s an interesting question. A write-off. Again, you hear this from people all the time. A write-off is something that you spend money on. It’s an expense that, theoretically, I’ll use the term theoretically because some people think everything’s a write-off, that you can use on your tax return to reduce your tax bill.

Nicole: So it’s not just a free truck or a free office?

Rick: No.

Nicole: It’s okay. We are paying for it.

Rick: We are paying for it. You still have to pay the expense in order to deduct it on your tax return, if the rules state that you can deduct it.

Nicole: I just always get a kick. Yeah, everyone’s got a definition of what a write-off is. And it’s just fun to throw it to the tax expert to give us something. Very good.

Anyway, this is good. This was so much great information. We hope you guys got something out of it. Yeah, I think the takeaway here is that there are definitely strategies in place. You can’t avoid tax, but you can definitely do things in terms of what buckets to pull from and when to help mitigate that tax bill a little bit better.

Rick: Yeah. One way you could potentially in retirement is if you’re lucky enough to win a lottery. There’s no taxation on lottery winnings in Canada.

Nicole: So bottom line, buy a lottery ticket. That’s what we learned. Yeah.

Rick: No, go to your planner. Go to your planner.

Nicole: Okay. Alright. Thanks so much and thanks for being here. We really enjoyed it.

Rick: Excellent. Thank you.

Nicole: Good job, Richard.