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Dale Jackson

Personal Finance Columnist, Payback Time


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Many Canadians spend decades dreaming of the day when they can finally enjoy their retirement nest egg. A lot of saving and planning goes into investing their hard-earned cash, but not a lot of thought goes into the most tax-efficient ways to withdraw it.

The fact is a good tax strategy is required when money flows in both directions and there could be less to enjoy if it is not deployed properly. Each situation is unique to the individual, but think of your retirement savings as several buckets with different tax consequences: registered retirement savings plan (RRSP), spousal RRSP, workplace pension or annuity, part-time work income, tax-free savings account (TFSA), non-registered savings, Canada Pension Plan (CPP) and Old Age Security benefits (OAS), and home equity lines of credit (HELOC). 

The trick is to take money from the buckets with the highest tax implications at the lowest possible tax rate, and top it off with money from the buckets with little or no tax consequences. Individual tax rates vary from province to province but the cut off between the lowest tax rate and higher tax rates is about $45,000 a year, which makes it a good target.   

Here’s a breakdown of the different buckets:

Company pension or annuity: If you are fortunate enough to have had a company-sponsored pension plan – whether it defined contribution of defined benefit – or an annuity, you have the misfortune of being fully taxed on withdrawals in retirement. 

RRSP: Like a company pension plan, RRSP withdrawals are also fully taxed. In both cases, the income can be split between spouses 65 years or older to get more under that $45,000 threshold. 

Spousal RRSP: RRSP withdrawals from anyone under 65 cannot be split and are subject to a withholding tax. If one spouse contributes much more than the other during their working life, they can split their contributions with the lower-income spouse through a spousal RRSP. The contribution can be claimed by the higher-income spouse and gives the spouse under 65 a bucket of money that will be taxed at their lower rate.

CPP and OAS: Government-sponsored benefits – including COVID relief – are also fully taxed. OAS benefits could even be clawed back if RRSP savings grow too much by the time the plan holder turns 71, and it must be converted to a registered retirement income fund (RRIF). At that point, Ottawa imposes minimum withdrawal amounts.   

Part-time work: More seniors are working in retirement than ever. That income is taxable but there are many work-related expenditures that could lower your tax bill. It might be best to speak with a tax professional but expenses relating to a home office, for example, can be subtracted from income relating to the work. If taxable income from other sources is piling up, part-time work is one area where you can lower your overall tax bill by simply working less.  

Non-registered savings: Yields from fixed-income investments like bonds or guaranteed investment certificates (GICs) are fully taxed in the year they are received in a non-registered account (not RRSP, RRIF of TFSA). Dividends are taxed in the year they are received, but eligible dividends can generate a tax credit. Only half of the gains on equity investments, like stocks, are taxed in the year they are sold.   

TFSA: Contributions, and any gains they generate over time, are never taxed when they are withdrawn no matter what they are invested in. As allowable contribution space grows over time, TFSA savings are ideal for topping up retirement income when it rises above the low tax rate threshold.

HELOC: Like a TFSA, money withdrawn from a reverse mortgage or home equity line of credit is never taxed. However, it is important to know a HELOC is a loan against your own home and you will pay interest when the house is sold or the owner dies. Likewise, gains on the sale of a principal residence are never taxed.   

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email