One of the biggest misconceptions about retirement is that income tax will be lower for retired seniors.
While it is true that there are tax benefits available to retirees, the tax brackets are the same for all Canadians. It is a bit of a nuanced topic, but it is important to know the distinction. A retiree’s overall tax bill may be lower than when they were working, but tax brackets do not differ based on age or retirement status. So, how does a retiree reduce their taxes into their golden years?
Raymond and Julie are retiring. Raymond worked the entirety of his career in the public service. He had an executive level position and moved frequently as he had several promotions offered to him, including a few overseas postings. They have done very well financially and have saved money in RSPs and TFSAs. His wife Julie was a stay-at-home parent, and because of the constant relocations, Julie had a few years of working outside the home, but her overall income was much lower.
Raymond’s retirement income will be approximately $80,000, this figure is comprised of his government pension, CPP, and OAS payments. Julie’s income will be closer to $10,000, including a small CPP benefit plus her OAS payments.
Raymond and Julie worked with a financial planner early on and were advised to make contributions a spousal RSP vs an RSP in Raymond’s name. Julie was the account owner and Raymond received the tax deduction. This will benefit them at retirement as the contributions were deducted from Raymond's high-income years and will be removed and taxed in Julie’s lower-income bracket.
Raymond can also split up to 50% of his pension income with Julie. This will move him out of the higher tax bracket and raise Julie’s tax bracket.
Raymond will receive the Pension Income Amount tax credit as he receives income from an eligible pension. The tax credit is $2000 and this will result in $2000 of Raymond’s income being paid to him tax-free. If he allocates part of his pension income to Julie, she is eligible for this credit as well.
Raymond and Julie can also take advantage of CPP splitting, which is done at source with CPP. Raymond receives $1100/mt in CPP benefits, and Julie receives $100/mt. With CPP splitting, they could each potentially receive $600/mt. This will again lower Raymond’s tax bracket and increase Julie’s taxable income. When used correctly, income splitting can create the most efficient tax return possible within the household.
The main takeaway is that Raymond and Julie planned for retirement early and worked with trusted professionals to help them along the way. They wanted to ensure they retired with the maximum income and minimal taxes payable. Every situation is unique, and good planning can help you reach your retirement goals.
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Canadian Investment Regulatory Organization.
The case study mentioned in this presentation is provided for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of our process and methodology. The results portrayed is not representative of all of our clients’ experience.
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Emily Rae, Senior Financial Planning Advisor with Assante Capital Management Ltd., is joined by Mark Hurley, Mortgage Broker with Mortgage Intelligence, to discuss how current interest rates are affecting mortgages for new homebuyers and existing home owners. Financing a cottage purchase and downsizing are also covered In this 13 minute audio cast,
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