Saving for retirement begins with your very first salary or business income. The Canada Revenue Agency (CRA) requires you to contribute 5.95% percentage of your salary towards the Canada Pension Plan (CPP). Your employer contributes a similar amount. This needs no planning as the CRA has already planned it for you. When you retire, you get CPP, Old Age Security (OAS), and Guaranteed Income Supplement (GIS). These are government benefits on which you have no control. While they may cover necessities like food and utilities, they may not be enough to maintain your lifestyle.
The CRA offers Canadians various tax-savings instruments, such as the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), and pension splitting, to help Canadians earn more in retirement and preserve life savings from taxes. Each instrument has unique tax benefits that vary by financial situation and investment instrument.
Just investing in stocks, bonds, insurance, and real estate is not enough. Investing in the right security through the right instrument, and timing your investment and withdrawals in accordance with your taxable income, can bring significant tax savings and even compound your returns. Let us understand how.
How to Plan Government Retirement Benefits
As we said before, you have no control over how much you can contribute to CPP or withdraw from it. The contribution is mandatory on any employment or business income above $3,500. Even withdrawals: it’s the CRA that determines the payout based on your contributions and when you collect it. The ideal retirement age, according to the CRA, is 65, as all your retirement benefits from CPP, OAS, and GIS begin at that time.
What you can control is when to take the payout. Both of these incomes are taxable, so you can calculate whether you need it now. The OAS and GIS payout are also dependent on what your taxable income was in the previous year. It is better to collect government payouts first before using your savings and investments. You can control withdrawals of your other investments, but not of government benefits.
In CPP, you can collect a payout at 60, but you must take a 0.6% cut each month, up to a maximum of 36% over five years. You may opt for it if you have not been earning for five years. You can also defer payout to age 70 and increase the amount by 42%. You can also defer OAS to age 70 and increase the payout by 36%.
Sometimes, deferring may not be a good option as the five years of the payout (65 to 70) make up for the higher amount you get at $70. But sometimes it may make sense to defer the payout. A tax consultant can work out the math and tell you if it makes financial and tax sense to take the payouts at age 65 or delay them to 70.
Optimizing RRSP and TFSA Contributions
Now for the investing part of retirement planning. The CRA allows you to deduct contributions to RRSP from your taxable income on the condition that your withdrawals will be subject to withholding tax.
- 10% on withdrawals up to $5,000.
- 20% on withdrawals over $5,000 up to $15,000.
- 30% on withdrawals over $15,000.
- For non-residents of Canada, a flat 25% withholding tax generally applies.
In a TFSA, you contribute from after-tax income, and withdrawals are tax-free.
Both accounts have contribution limits, and any surplus contribution will incur a 1% tax per month. They also allow you to increase your investments tax-free.
Retirement planning is aligning your tax liabilities with the tax benefits of the above accounts. Those having lower tax bills might want to use up their TFSA contribution room. Those with higher tax bills might prefer an RRSP over a TFSA.
For instance, Amanda and Richard both start their first job with an annual taxable income of $55,000. Both have low tax liability. They both invest $5,000 in stock A, which increases to $7,000 in three years. Amanda invested through a TFSA and Richard through an RRSP. Amanda can sell the stocks and collect the full $7,000 tax-free, whereas Richard will have to pay a $900 withholding tax on the RRSP withdrawal.
Now, if Richard earned $120,000 and contributed $5,250 in RRSP, he can reduce his tax bracket from 26% to 20.5% (taxable income over $57,375 up to $114,750) and save $1,365 in tax in 2025. Choosing the right account for contribution can save you a good amount in taxes.
Optimizing RRSP and TFSA Withdrawals
Regarding withdrawals, consider transferring the RRSP balance to a Registered Retirement Income Fund or annuity, as that can be done tax-free. The withdrawals can be small monthly amounts as they will be added to your taxable income and affect your OAS.
You could consider withdrawing only the amount that hits the OAS income threshold from your RRSP to ensure you get maximum OAS. If you need more, TFSA withdrawals are a good option as they are not added to taxable income and do not affect your OAS payout.
If you track your withdrawals, you can maximize your earnings and minimize your tax liability.
Pension Income Splitting
The pension income-splitting strategy is only beneficial for couples in which one person is a high-income earner and the other is a low-income earner. The high-income earner can split up to 50% of eligible pension income (Registered Pension Plan and RRIF payments after age 65) with the low-income earner, thereby reducing the tax bill.
For instance, Elliot and Maya have taxable incomes of $45,000 and $65,000, respectively. Maya earns a pension income of $20,000. She can split 50% of her income with her spouse, Elliot, which will bring both their taxable incomes to $55,000 each and reduce Maya’s tax bracket.
How to Use the Capital Gains Threshold of $250,000
Another strategy up your sleeve is to use the capital gain inclusion rate. Only 50% of the capital gain up to $250,000 will be added to your taxable income. Beyond this, the inclusion rate is 66% effective January 1, 2026. And if you have had a capital loss in the past, you can also reduce it from your capital gain.
You can invest in a non-registered account and sell assets like stocks, gold, and ETFs in small quantities and enjoy the 50% tax-free gain. If you withdraw $50,000 from an RRSP, the entire amount will be taxed. But if you sell a stock in a non-registered account and your capital gain from the sale is $25,000, you will be taxed on only $12,500.
This is just an example. The actual pension and tax calculations are complex, as multiple factors alter the tax benefits. Seeking professional help can prevent you from eroding your life savings to costly tax mistakes.
Contact Ford Keast LLP in London to Help You with Tax-Efficient Retirement Planning
Talk to a professional accountant to understand various retirement savings options and plan your investments and withdrawals in a tax-efficient manner. Whether you are a retiree or a salaried employee, accountants and tax advisors at Ford Keast LLP can provide services such as tax and estate planning. To learn more about how Ford Keast LLP can provide you with the best accounting and tax expertise, contact us online or call us at 519-679-9330.
