All About Retirement

Saving for Retirement

While there are a number of options for retirement savings, most Canadians use RRSPs and TFSAs.

RRSP

The RRSP (Registered Retirement Savings Plan) is an account that can hold savings and investments and is the most common form of retirement plan for Canadians. There are two reasons for this popularity:

  1. Contributions to an RRSP are deductible against your income the year in which the contribution is made, meaning tax savings right now. These amounts will not be taxed until withdrawn during retirement, hopefully at a lower tax rate.
  2. Income that is accumulated within the RRSP account is not taxed until withdrawn, creating a tax deferral benefit.

There is a limit to the amount that you are allowed to contribute to your RRSP each year, which is 18% of your earned income in the prior year, up to a limit of $26,010 in 2017. This amount accumulates each year that you report earned income and is reduced when you make a contribution.

Contributions may be made until the end of February of the following tax year, which gives you time for some last minute tax planning before you bring your return in to your preparer!

Tip: Talk to your accountant in November or December to get an estimate of your income tax and then check to see how much you save when you contribute to your RRSP or take other actions.

TFSA

The Tax Free Savings Account (TFSA) is another type of account with special tax privileges. Unlike the RRSP, contributions to a TFSA are not deductible from income. However, earnings and withdrawals are not taxable.

Like an RRSP, the TFSA does have a contribution limit each year, but it is not based on earned income. The contribution room begins to accumulate for each Canadian beginning in the year that they turn 18 and grows at a prescribed amount for each year they are eligible. The current annual contribution limit is $5,500 per year. Contribution room is reduced as contributions are made, but is returned the year following a withdrawal. Some people use an RRSP contribution to create a larger tax refund and then put the refund into their TFSA.

Non-Registered Accounts

Non-registered accounts do not have any special tax treatment, and income earned within them is taxed in the year it is earned. You will receive a T3, T5, T5008, or T5013 slip to be included on your tax return for these amounts. If you receive these slips and have not maximized use of your TFSA, consider contacting your investment advisor, and moving some of your non-registered investments into a TFSA to reduce your tax burden.

Before opening any investment account (registered or not) you should speak to a financial advisor to make sure that your investment dollars are earning to their full potential (within your risk tolerance level) and fees are known and reasonable.

There are three main types of income commonly earned in private investing, and each is taxed differently:

Interest Income is taxed much like employment income -the entire amount in subject to tax. Usually your financial institution will report this type of income on a T3 or T5 slip.

Capital gains or losses occur when your investments have increased or decreased in value over the period that you have owned them. They do not take effect until you trigger a gain or a loss, usually by selling the investment. Only half of any capital gains that you incur are taxable; the same applies to capital losses, but these can only be used to reduce capital gains. Your financial institutions will issue either a T5008 or send a summary or your sales transactions. Please remember to forward this to your accountant!

Dividends are taxed in a more complicated way wherein the government increases their value for the purposes of calculating taxes, and then allows the taxpayer a dividend tax credit.  You will likely receive a T5, or T3 slip for this type of income.

Retirement

Once you have reached retirement, tax planning can become more complicated as retirees earn income from multiple sources, each of which may have different tax treatments.

OAS

Old Age Security (OAS) is a monthly payment available to Canadians who are 65 and older, with individual income of less than $121,314. The monthly payments of $585.49 (for Oct-Dec 2017) are taxable and taxes are only withheld when requested.

OAS begins to be clawed back when your 2017 income reaches $74,788. Those receiving OAS payments will want to try to keep their earned income numbers below this amount while maintaining their quality of life. The claw back works by reducing your payments by 15% of the amount by which you income exceeds the limit. OAS disappears completely around $121,314 of individual income.

We suggest meeting with your accountant and financial advisor to plan your retirement income and keep any claw back as low as possible.

CPP

All Canadians over 18 years old contribute to the Canada Pension Plan (CPP) from their earnings as employees and self-employed individuals throughout their lives. Your employer also matches what you contribute.  This provides a basic retirement pension.  The amount you receive depends on how much and how long you have contributed up to a maximum monthly pension of $1,114 starting at age 65.

If you take the CPP retirement pension early, it is reduced by 0.6% for each month you receive it before age 65 (7.2% per year). This means that if you start receiving your CPP at age 60 then you will receive 36% less than if you waited until age 65.

If you take your pension late, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it up to age 70 (8.4% per year). Waiting until age 70 will give you 42% more pension income.  You can similarly delay receiving your OAS.  Talk to your tax advisor about the right mix for you.

RRSP

At age 71 you are no longer allowed to contribute to your RRSP and are required to begin withdrawing your savings as income, at which point it will be taxed. You can transfer to a RRIF or annuity, or take it all out in one lump sum.  Taking your RRSP out in one lump sum is very expensive tax wise and not recommended.

RRIFs (Registered Retirement Income Funds) are tax deferred RRSP retirement planning tools.  A RRIF allows you to gradually draw out the investment made through your RRSP and you only pay tax on the amount that you withdraw.  An annual tax slip will be sent out to you.

There are minimum withdrawals required, which begin at 4% and increase each year by a factor of 1/(90-your current age). There is no maximum withdrawal, and you are free to take the money on a monthly, quarterly, or annual basis as you please, including lump sums for large purchases. The amount that you choose to take out should be considered carefully in concert with your other sources of income.  If you take too much out you may have some of your OAS clawed back.  Ask your tax advisor about the best amount to withdraw annually in your situation.

Annuities are accounts that allow for periodic payments to you from your RRSP savings, their main advantage being that you have some guarantee of the amounts you will receive. Like a RRIF, the amounts are taxed as they are received, but it is much less flexible than a RRIF as you may be locked into the plan. Further, any income earned within the annuity is subject to tax each year instead of when you withdraw it.

Succession Planning

Whether you plan to wind up your business, have your children take it over or sell to an outside party, there are a number of important questions to consider.

Do you see the business continuing after you leave?

If so, you will need to ensure that your successor has the training they need to be ready to take over.

What are your post business ownership goals?

Do you plan to retire completely as soon as you sell the business, or would you like to continue working for a while?  Succession plans can be structured so that the transfer of control happens over time, allowing you to ease your way out instead of stopping entirely. Similarly, you could transition to an employee role for as long as you’d like before leaving, as long as you’re ready to let others manage the business.

How much will you be relying on the income from the sale of the property?

This could amount to a large capital gain for you, and proper tax planning can help to reduce your tax burden, ensuring that you keep as much of your nest egg as possible.

Who do you see taking over your business?

If you envision transferring your company to your children some day at little or no cost to them, you need to make sure that you will have enough income to live on once you’ve retired. This transfer will have tax implications not only to you, but also to them, so group succession planning sessions with your financial team will be essential.

What kind of business are you getting out of?

Some business sectors have special tax circumstances to be taken advantage of, especially in Fishing and Agriculture. Make sure you talk to someone who is knowledgeable in this area to ensure maximum tax savings when you retire.

Tips & Tricks

Here are some other things to keep in mind when considering your retirement:

Pension income splitting

The Income Tax Act allows for the transfer of up to 50% of eligible pension income from the higher earning spouse to the lower earning spouse, which can allow for the higher income spouse to drop down a tax bracket, reducing overall taxes and allowing the higher income spouse to avoid penalties.

Make sure your withdrawal plan is sound

With the right plan you can receive regular income through different investments, balancing your registered and non-registered investments with your pension income to keep taxes low.

Maximize your RRSP contributions while you’re working

Get the tax deductions from your contributions now, and give your money more time to grow!

Delay, delay, delay

Leave your RRSP investments untouched as long as possible, start with other sources of income and allow this account to continue to grow tax free. Similarly, delay the conversion of your RRSP to a RRIF until it’s required at age 71.

Make spousal RRSP Contributions

Another way to balance out income between spouses is for the higher earner to contribute to a spousal RRSP –they get to use the contribution deduction now, and when it’s time to withdraw from a RRIF, each spouse’s income will be closer to the same, spreading out the tax burden.