The 4 Most Underlooked Retirement Tax Saving Tips For Canadians

In this episode of Heart of Your Retirement, CFPs Zena Amundsen and Nicole Putz break down 4 Canadian retirement tax tips that can lower your tax bill. They cover the disability tax credit, pension income splitting, charitable donations and medical expenses, including who qualifies, how to apply and the small details that trip up most Canadians at tax time.

Show Notes: 4 Canadian Retirement Tax Tips Most People Miss

Nicole: Hey, this is Zena and Nicole from Astra Financial, and today we’re going to be talking about some tax credits and tax tips that come up in retirement: the disability tax credit, pension income splitting, charitable donations, and medical expenses.

Nicole: There are a lot of great things about being retired, but some things we want to talk to you about today are tax breaks that come up in these retirement years. So today, Zena and I are going to walk through a few tax tips that include four major tax topics that come up in retirement.

Those things are the disability tax credit, pension income splitting, charitable donations, and medical expenses. We promise to keep everything high level and in plain English. We’re not going to get too far into the definitions, but we’re going to tell you what people don’t know and give you some tips.

So that’s what we’re talking about today.

Zena: I’m Zena, this is Nicole. We’re certified financial planners here at Astra Financial, and our specialty is getting people ready for retirement and dealing with the tax side of it as well. We also want to make sure your money lasts your lifetime, and a lot of that has to do with dancing around the taxman.

So today we’re going to talk about that. These are the four most common retirement tax tips that we can give you, and that you should be using.

Nicole: Definitely. I think we’ll start with the disability tax credit. I had written down the amounts and how they actually work, but I think what’s going to be more tangible for you as clients is not so much the details around the credit, but understanding when you should apply for it and how to apply for it.

Zena, when should someone be applying for this?

Zena: I pulled up the tax site here. It’s available to individuals who have a severe, prolonged physical or mental impairment, and the condition has to have lasted at least 12 months.

And what it does is lower your income tax owing. This is a huge one. This is the biggest tax break of all the ones we’ll talk about today, and it gives you the biggest return.

Nicole: Definitely.

Zena: You can apply through your CRA, but first you have to get a doctor to sign off. One of the things is if it significantly restricts daily activities like walking, speaking, hearing, or mental functions. I think those are the big things to think about.

Nicole: Definitely.

Zena: If any of those are impaired, or there’s an issue there, it’s so worth trying to get this credit.

Nicole: Yes. And I’ll say too, we’ve had clients… that makes it sound very grave, but even people with type 1 diabetes qualify for this credit.

Nicole: There are a lot of high-functioning type 1 diabetes people out there, my brother-in-law included. He’s had this disability tax credit for years now. So it’s important to say, and I think that’s something we want to reiterate here: if life is difficult in any way due to any kind of disability, apply, and we’ll go through a little bit of the metrics of applying. But just apply, because what we always tell clients is the worst the CRA can say is no.

Nicole: And if you don’t get qualified, you don’t get qualified, and that’s okay.

Zena: Yeah, there’s no penalty. There’s no penalizing. When we think of applying for a credit or a credit card, if you apply too much, it affects your credit rating because it shows applications.

Nicole: That’s such a good point.

Zena: That was on a different tangent, but using it as an example: if you apply for this CRA disability tax credit, there’s no consequence saying, “You’ve applied before,” or “We’re going to put this ding against your score.” None. So you have nothing to lose if you think this might be for you.

Nicole: Yep. And one thing we’ll note too, because we’ve seen it with so many clients: when you’re actually applying, you do have to get this paperwork filled out, and your general practitioner or doctor is usually the person you take it to. But what we’ve seen is there’s actually been quite a bit of pushback with GPs, for whatever reason. So what we actually advise clients to do is take it to their specialist.

If there’s a specialist in the medical mix for you, take it to them, because nine times out of 10, specialists have no problem getting that paperwork done.

Zena: I love this. This is a Nicole tip that I’ve heard you say in the office, and it’s worked: take it elsewhere.

Nicole: It’s just so important, because I think sometimes specialists are so in tune with whatever diagnosis or condition you’re dealing with, whereas your general practitioner is more the project manager of your medical information. They might not understand the nuances of your specific disability, but the specialists do, and they usually have no problem filling out that paperwork for you.

So that’s the disability tax credit. Again, if you do have a CRA My Account, if you don’t, you should get one. That also makes this process a lot quicker, because we know when it comes to CRA, things can be slow. If you do have that CRA My Account, you can apply using the form online, and usually the response time is a lot faster.

Zena: Good tip.

Nicole: So that’s something to note too.

Zena: Like it.

Nicole: All right, next up on the agenda, we’ve got pension and income splitting.

Zena: Mm-hmm.

Nicole: So just talk to me high level, plain English. What does that even mean?

Zena: When you’re a unit, you can start to use your income as a unit. If you’re over the age of 65, and let’s say you’ve got your registered income that you’re starting to draw in, or your pension, your defined benefit pension, you can now split that with your partner if they’re at a lower income bracket.

The whole idea is on paper. You’re going to come together as a unit on paper, and you’re going to work and decide who you want to throw some numbers of your registered income over to, to try and lower taxes overall as a unit.

Nicole: And this is important to say, because I think you and I talk about it so much, but there’s a reason you just said “on paper.”

Sometimes when we talk about pension splitting, sharing your pension with your partner, people are like, “So am I actually giving a check?”

Zena: No, you’re not writing a check.

Nicole: “To my partner?”

Zena: You’re not giving money. It doesn’t have to go into their bank account. This is literally at tax time, when tax filing, we have some maneuvering that we can do.

And you can be 65 and over to use registered money. So that’s your RSP turning into a RRIF.

Nicole: Yep.

Zena: Or your pension, which is defined contribution. Actually, if you have a defined benefit, I’ll use the example of a teacher pension.

Nicole: That’s a good one.

Zena: A fireman pension. You can do that before age 65, but it has to be a defined benefit pension.

Zena: So for most people, just think by age 65, you can start splitting and maneuvering, and you want to try to keep each other in the best tax bracket that gives you the best return as a couple.

Nicole: Overall, which is actually an important note as well, and this is sometimes what we’ll see with clients. If we’re doing your taxes and we do this pension split for you, sometimes you might have been getting a refund before, and then we do the pension split, and now you actually owe money. Some people will come to us saying, “Why did we do the pension split? Now I owe money to CRA. What’s going on?” And what we always tell clients is, you have to remember it’s a household. You guys are a unit. It’s overall. So the tax bill between the two of you has come down overall, but that might mean one person now owes who would have had a refund before.

Zena: So I’ll share a story.

Nicole: Please do.

Zena: Mom, Dad, if you’re listening, I’m so sorry. It took a lot of convincing to get my parents to file their taxes together. They’re common law. That’s a whole other fun episode in there.

Nicole: Whole other can of worms.

Zena: It’s a whole other thing. What finally convinced them was that the overall tax bill was lower together. But my dad got, for the first time ever, a nice refund, and my mom, for the first time ever, owed money. Overall, the big picture was they saved taxes together. But the phone calls I had that same day with my mom about it, and then telling my dad he had to e-transfer her money because she owed taxes. That’s where this whole thought came from, trying to explain income splitting.

Zena: Overall, you’re going to pay less taxes as a couple. Just like your tip, you might see one owe and the other get a refund. Remember, you are together in this.

Nicole: You are a unit. Yes. So again, it’s just an awareness thing. If someone does a pension income split and then realizes there’s a bit of a difference in the balance owing versus a refund, just note that this happens all the time, and it’s not something to be alarmed about. It actually means it’s probably working the right way.

Nicole: Okay, so next let’s talk about charitable donations. Again, give us a high level overview of why charitable giving is good for your taxes.

Zena: Giving to charity, alive and dead. In a year, you save up all your charitable donations and keep all the slips, and we can actually put them on your tax return and give you a bit of a refund. However, Nicole, share with me, because that sounds really, really good.

Nicole: It does. Here are a couple of things to note, and again, this is just because we’ve seen it over the years with clients. First thing, you have to make sure the charity is registered with CRA. There’s going to be an actual registration number, and it’s going to show on your charitable donation slip. If that registration number isn’t there, we can’t use it.

Zena: Right.

Nicole: It has to be registered with CRA. One thing that trips people up a lot, and we’ve seen this come through: GoFundMe donations.

Nicole: When you’re doing GoFundMe donations, which is huge now, we actually can’t count that towards charitable donations. So it’s just something to be aware of. Keeping slips is super important, but you also need to make sure they’re registered with CRA as registered charities or foundations.

The next thing is, depending on what phase of your life you’re in, when you’re in your retirement phase, your charitable donations might be bigger. But if you’ve got just a couple of donations every year, what we’ll always advise people, and what we’ll say as a tip, is that we can actually carry these donations forward. We can clump them all together over a five-year span. So you can carry them forward five years, and then we can claim them all together to get you a bigger bang for your buck, essentially. For example, if we did a $100 donation this year, a $100 donation next year, and a $200 donation the year after that, if we were claiming those every year that you made them…

Nicole: You’d get this little baby credit, but it’s not going to do a whole lot. But if we combine them and wait to have a bigger donation amount later down the road, that actual credit gets bigger. So who should use this?

Zena: Who should use the…

Nicole: Another good note, this is kind of this unit thing too. If you’re filing together as a couple, this could be common law or married, you actually have the ability to claim on whoever’s return it makes the most sense on. And when I say makes the most sense, whoever has the higher income, it actually makes more sense for them to use that credit. Again, when we’re talking about reducing the overall family tax bill, we decide which donations go on spouse one or spouse two, depending on whose income is actually higher.

Zena: Right.

Nicole: So…

Zena: Good tip.

Nicole: Yeah. There’s the technical pieces, but then there’s all these things, and we’re constantly advising our clients of this.

Zena: Yeah.

Nicole: Just reminding. That’s what it is. It’s a good reminder.

Zena: Yeah. And I like the idea of saving them up to get a bigger bang for your buck.

Nicole: Definitely.

Zena: So often we just think… we’ve had someone say, “Well, I don’t see it on my tax return,” and you’re like, “You know what? We’re going to save that for next year.”

Nicole: Definitely. Let it carry over. Keep it for next year and bring it to us next year.

Zena: Good.

Nicole: Okay, last one, medical expenses. This one, especially in retirement phases, medical expenses might be a little heftier than when we’re younger. So if you can share with me, what are the main medical expenses?

Zena: Anything that you’re… let’s say if you have a health benefit package, whatever it doesn’t cover above and beyond that, you keep and use for medical expenses. Another note is that your actual monthly premium for your health benefit package, you can actually use as well as a medical deduction. Those are the big ones. Anything that’s not covered by your plan above and beyond. So if you get 80% coverage, then that remaining 20% that was out of your pocket, keep those receipts. Keep those receipts.

Nicole: Definitely.

Zena: Dental.

Nicole: Yep.

Zena: Eyes. What else? Oh, prescriptions, of course.

Nicole: Prescriptions are huge.

Zena: Now talk to me about my favorite, massages.

Nicole: Yes, right. This is something that came up this specific tax year. We’re actually going to drop a link for you guys. There’s a beautiful CRA link where you can click on it and type in all different medical expenses, and it’ll show you which province the medical expense qualifies in. This is something people don’t realize: massage therapy specifically doesn’t count as something you can use as a medical expense for your tax return here in Saskatchewan. Other provinces, yes. Saskatchewan is a no-go.

Nicole: Even if it’s a registered massage therapist, it doesn’t matter. It’s just not recognized here. So that list is great, because there are so many. Acupuncture is a big one for people. There are all these ones that… it’s good. Even as tax preparers, we use that list all the time.

Zena: We’ll send you a link, or send us a note and we’ll give you the link to that, because it’s a great place to go in and check and make sure they’re eligible. One thing to note here on medical expenses is the threshold of income. Tell me about how your actual income plays into your medical expenses and the receipts and using them.

Nicole: Unlike charitable donations, medical expenses work the opposite way. If you’re a unit, we actually try to claim all the medical expenses on the lower income spouse, and here’s why. The medical expense credit basically works like this: there’s a threshold of 3% of your income, and that’s how much in medical expenses you have to have before you can start claiming. Here’s what I mean. Say 3% of your income equals $1,500, and you have medical expenses of $1,501. Because that threshold is based on that income number, you get to claim $1 of that $1,501 in medical expenses you’ve had. So there’s this threshold before you can actually claim. As tax preparers and planners, we’re always trying to put the medical expenses, if it’s available to us, on the person who has the lower income, because you meet that threshold a lot quicker.

Zena: Something I’ve seen with retirees is that sometimes there’s one year with a really large… something happens, and there are a lot of receipts in that year. Before the end of the year, we already know they’ve had, say, travel and some medical issue, and we don’t foresee that for the next year. It was kind of a one-off, and we know it’s really large. This is just kind of a side note, maybe too much information, but this is where we look at the tax planning now. I look at whether there’s a non-registered account, or something where we can actually trigger a bit of extra income in that year, because we know your medical expenses are so big, that we can use to help offset it. So there’s some other planning that happens. If you’re going to have one year that you know is large, and we’ve seen it, that one year of something really big, it’s okay to let your planner know that.

Nicole: Mm-hmm.

Zena: Because now, behind the scenes, there might be some things we’ve wanted to do, or that need to happen, and that might be a good year to trigger a little bit of extra income to you.

Nicole: Definitely.

Zena: Because you’ve got this deduction.

Nicole: Absolutely.

Zena: So that’s just a little side note about why you should be sharing this with your advisor. You don’t have to go into the nitty-gritty of what it is, but if you know you’ve got that extra expense… This is one of the beautiful things, I’m going to plug this right here, Nicole. We’re doing taxes in the office.

Nicole: Yes.

Zena: It’s part of our service. It’s part of our advisor fee for investment management, the tax preparation.

Nicole: Yep.

Zena: And this is why it’s so helpful.

Nicole: Yes.

Zena: Because everything we do in retirement and income planning is about the taxman.

Nicole: Exactly. And how it marries with everything else, which you just so nicely said. The tax piece is one part, but how it connects to your entire picture is a different part. This is also why we love that we have in-house tax services, because it makes it so much easier to make those connections for you.

Nicole: Very good. I love it.

Zena: So I think those are the four.

Nicole: Those are the four big ones that I think would help people the most, that they’re probably coming up against. We just want to make sure they’re on your radar at the very minimum.

Zena: If you want to learn more about everything you need to know in retirement, specifically around the taxes and the timing and tips, check out our website, Astra Financial. We also have our Astra University, which you’ll be able to see there on our website. Inside, you’ll see our retirement course, and it goes in depth, giving you everything you need to know on your own time. We want to try to fill your bucket up with as much information as possible, so check out all of our free resources. Please subscribe and comment, send us a note, and we’ll keep it coming.

Nicole: Perfect. Thanks for tuning in, everybody, and make sure you check out our other videos.