Do this to Pay LESS TAXES When You Retire in Canada (Legally)

Do you want to keep more of your money in retirement for travel, hobbies, and loved ones? You’re in the right place. I’ve helped countless clients save tens of thousands in retirement taxes, and today I’ll share 5 proven strategies, from easy tips anyone can try to advanced options for high-net-worth retirees and business owners.

1. Basic Tax Credits: Essential Savings for Every Retiree

Let’s dive into the tax credits that help retirees reduce their tax bill. These credits allow retirees like Marjorie, a 67-year-old earning $40,000 annually from her pensions and RRIFs, to save significantly on taxes. With this income, Marjorie is in about the combined 20% federal and provincial tax bracket in Ontario, so these 3 credits will make a meaningful difference.

Credits Breakdown

1. Basic Personal Amount
   • Every Canadian can earn $15,000 tax-free thanks to the Basic Personal Amount. This credit is automatically applied when filing taxes, which means the first $15,000 of Marjorie’s income is tax-free.
2. Age Amount Credit
   • Once you turn 65, you’re eligible for the Age Amount Credit, which offers extra tax relief for seniors. This credit provides Marjorie with an additional $8,790 tax exemption. (2024 values)
   • When It Stops: The Age Amount Credit begins to phase out for higher-income earners. In 2024, if a retiree’s income exceeds $42,335, the credit starts to reduce, phasing out entirely around $103,000. Since Marjorie’s income is $40,000, she qualifies for the full amount.
3. Pension Income Amount Credit
   • The Pension Income Amount Credit allows Marjorie to claim up to $2,000 of eligible pension income tax-free, such as income from a RRIF or employer pension.
   • Pro Tip: This pension credit doesn’t apply to CPP or OAS, so Marjorie needs to apply it to other pension income, such as from a RRIF or a private pension plan, to benefit.

With these credits, here’s how Marjorie’s tax savings add up, assuming a 20% tax rate:

Tax Credit Summary

Total Tax Savings – Total Credit Amount | $25,790 | $5,158 |

Marjorie can save a significant amount in taxes using three key credits. Here’s how each one works:

• Basic Personal Amount: This credit allows the first $15,000 of Marjorie’s income to be tax-free, which, at her 20% tax rate, saves her $3,000. It’s automatically applied when she files her taxes, with no extra steps needed.
• Age Amount Credit (2024): Once she turns 65, Marjorie qualifies for an additional $8,790 of tax-free income, saving her another $1,758. Like the Basic Personal Amount, this is also applied automatically. Note that this credit begins to phase out for incomes over $44,325, eventually phasing out completely near $100,000.
• Pension Income Credit: This credit allows up to $2,000 of eligible pension income to be tax-free, adding $400 in savings. Marjorie can claim this by reporting eligible pension income on Line 31400 of her tax return (e.g., RRIF or certain private pensions, but not CPP or OAS).

In total, these credits give Marjorie $5,158 in tax savings—extra money to enjoy her retirement!

2. Timing CPP and OAS for Maximum Tax Savings

Deciding when to start your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits can make a big difference to your retirement income and tax bill. Estimating your income and expenses between ages 60 and 69 can help you find the most tax-efficient timing.

How Delaying Benefits Impacts Income and Taxes

Delaying CPP and OAS until age 70 increases your monthly payments significantly—CPP grows by 8.4% per year after 65, and OAS by 7.2% annually. This higher income is often worth the wait, especially if you have other sources of income to cover your expenses early on.

Example: How Delaying CPP and OAS Can Boost Income and Save on Taxes

Take John, who could start CPP and OAS at 65, receiving $1,500 per month ($18,000 per year). However, since he plans to keep working part-time and sell some property between 65 and 69, adding CPP and OAS would push him into a higher marginal tax bracket, and also subject him to the OAS Clawback, which is a 15% recovery tax. Instead, he delays his benefits until 70.

By delaying benefits until age 70, John’s CPP and OAS increase to:

• CPP: $1,420/month
• OAS: $705/month
• Total Income: $2,125/month, or $25,500 per year

Summary: By delaying CPP and OAS, John gains an extra $7,500 annually while using other income sources, keeping his tax bill lower in early retirement. This approach offers both higher guaranteed income and potential tax savings.

When Starting Early May Be Better

Delaying benefits isn’t always best. Consider starting CPP or OAS sooner if:

• Health Concerns: A shorter life expectancy may make early benefits more practical.
• Immediate Income Needs: If other income sources are limited, starting CPP at 60 or 65 provides needed stability.

3. Retirement Income Splitting Strategies 

Here’s an overview of several effective income-splitting strategies to help retirees reduce their overall tax burden, particularly when one spouse is in a higher tax bracket than the other.

1. CPP/QPP Pension Sharing

• Why It Works: By sharing CPP/QPP benefits, higher-income retirees can allocate part of their CPP/QPP payments to a lower-income spouse, reducing the household’s total tax burden.
• Eligibility: Both spouses must be at least 60, live together, and have made contributions to CPP/QPP during their relationship.
• Example: Mark receives $1,200/month in CPP ($14,400 annually) at a 42% tax rate, while his spouse, Linda, has no CPP. By splitting 50% of his CPP with Linda, Mark’s taxable income drops to $7,200 (42% tax), and Linda’s is $7,200 (22% tax), reducing their total tax bill from $6,048 to $4,752—a savings of $1,296 annually.

2. Pension Income Splitting

• How It Works: Retirees aged 65 and older can allocate up to 50% of eligible pension income, such as RRIF payments or annuities, to a lower-income spouse, which can be adjusted annually based on their tax situation.
• Example: Sarah receives $60,000 annually in RRIF income, taxed at a 33% rate, while her spouse, John, earns $40,000 and is taxed at 20%. By allocating 50% of her RRIF income ($30,000) to John, Sarah’s taxable income is reduced, and they both benefit from John’s lower tax rate. This strategy saves them $3,900 annually (0.33 – 0.22)*30000 by lowering their overall tax burden and helps prevent potential OAS clawbacks, allowing them to retain more of their retirement income.

3. Spousal RRSP Contributions

• Why It’s Effective: High-income earners can contribute to a spousal RRSP, allowing income to be shifted to the lower-income spouse when they retire. This equalizes retirement withdrawals and reduces overall taxes.
• Example: Emma, who earns $120,000 per year, contributes $10,000 annually to a spousal RRSP for her husband, Liam, who earns $30,000. By the time they retire, Liam’s spousal RRSP has grown significantly. In retirement, Liam withdraws $20,000 per year from the spousal RRSP, taxed at his lower rate of 15% instead of Emma’s higher rate of 30%. This shift results in a tax savings of $3,000 annually (From 30% – 15% on $20,000), effectively reducing their household tax burden and providing more income at a lower rate.
• Considerations: Withdrawals are taxed in the lower-income spouse’s hands, but keep in mind the attribution rule—contributions made within two years of withdrawal will be taxed back to the contributing spouse.

Here’s a summary of these 3 income splitting retirement tax strategies:

Next, let’s look at:

4. Mastering Your TFSA and RRSP to Control Your Taxable Income

Think of your TFSA as a lever you can pull to help control your taxable income in retirement. By using it strategically alongside your RRSP, you can manage your tax bracket, reduce taxes, and keep your benefits intact. Here’s how to make the most of these accounts together:

1. Use TFSA Withdrawals to Supplement RRSP Income

RRSP withdrawals are fully taxable, and they can quickly push you into a higher tax bracket. By pairing RRSP withdrawals with tax-free TFSA withdrawals, you can meet your income needs without bumping into a higher bracket. This approach is especially useful if you’re also drawing on CPP and OAS, which are taxable.

• Example: John, age 68, receives $20,000 a year from CPP and OAS but needs an additional $30,000. Rather than pulling the entire $30,000 from his RRSP (which would increase his taxable income), John withdraws $10,000 from his RRSP and $20,000 from his TFSA. By “pulling the TFSA lever,” John keeps his taxable income low, stays within his desired bracket, and reduces his overall tax bill.

2. Shift Excess RRSP Funds to Your TFSA to Avoid Higher Taxes Later

When you don’t need all of your RRSP withdrawal for living expenses, transferring excess funds to your TFSA is a smart move. This can help avoid large RRIF minimum withdrawals in the future, which could push you into a higher tax bracket. With funds in your TFSA, you also gain tax-free growth and the flexibility to withdraw at any time without additional tax.

• Example: Sarah, age 65, withdraws $40,000 from her RRSP to cover living expenses but decides to pull an extra $20,000 to contribute to her TFSA. This move keeps her future RRIF minimums smaller and allows her to grow funds tax-free in her TFSA for future needs.

3. Preserve Government Benefits by Avoiding Income Clawbacks

Since TFSA withdrawals don’t count as taxable income, they’re ideal for covering extra expenses without risking things like OAS or GIS clawbacks. This lets you control your taxable income level and keep government benefits intact.

Next, let’s talk about…

5. Advanced Retirement Tax Saving Strategies: IPPs and Family Trusts

For high-net-worth households and business owners, family trusts and Individual Pension Plans (IPPs) offer powerful ways to manage wealth, reduce taxes, and pass assets efficiently to the next generation.

How Family Trusts Help Save on Taxes

A family trust can be a versatile part of your retirement plan, allowing for tax-saving strategies like income splitting, capital gains exemptions, and bypassing probate fees.

• Income Splitting: Income from trust-held assets can be allocated to family members in lower tax brackets, reducing the overall tax burden. For example, if your trust earns investment income, that income can potentially be directed to family members with a lower tax rate, allowing the family to collectively save on taxes.
• Capital Gains Exemption: If you’re a business owner, a trust can help you spread capital gains exemptions among family members. So, when the business is sold, multiple family members can use their capital gains exemptions, significantly reducing the tax impact.
• Estate Freeze: A trust can “freeze” the value of assets at today’s levels, so any future growth benefits your beneficiaries without increasing the taxable amount in your estate. This helps minimize taxes that would otherwise be due upon death.
• Avoiding Probate Fees: In some provinces, assets held in a trust avoid the probate process, which can save on fees. This means more of your wealth passes directly to your beneficiaries without additional costs.

Key Considerations for Family Trusts in Retirement Planning

1. Attribution Rules: Income generated from transferred assets may still be taxed back to the original owner, reducing income-splitting benefits. Proper structuring can potentially help avoid this.
2. 21-Year Rule: Trust assets are “deemed disposed of” every 21 years, triggering capital gains tax. Planning to transfer assets to beneficiaries before this deadline can avoid the tax impact.
3. Setup and Administrative Costs: Trusts require annual tax filings and thorough record-keeping, so expect upfront legal fees and ongoing compliance costs.

Individual Pension Plans (IPPs): A Business Owners Secret Weapon

For business owners, IPPs provide a flexible retirement savings tool, allowing for larger contributions than RRSPs and providing substantial tax deductions for the business. IPPs are also helpful in estate planning, as they avoid the immediate tax burden associated with RRSP inheritance.

IPPs for Legacy Transfer: An IPP allows family members, such as children, to be added as members of the plan, making it a tax-efficient way to pass wealth to heirs.

Example: David, a business owner, transfers $400,000 from his RRSP to an IPP and continues contributing. The IPP grows to $1.2 million, and he adds his children as members. When David passes, his children inherit the IPP without an immediate tax hit, paying taxes only when they withdraw funds, which helps them control their tax impact.

Combining family trusts with IPPs gives high-net-worth families flexible, tax-efficient options for preserving wealth and reducing taxes on future generations. 

Here’s a simplified comparison between IPPs and RRSPs, tailored to highlight the key advantages for business owners:

This table highlights why IPPs can offer greater tax planning and retirement savings potential for business owners compared to RRSPs.

Think of an IPP as a VIP retirement club for business owners; it’s an exclusive retirement savings tool with perks you won’t find in a regular RRSP.

There is a whole lot that goes into implementing family trusts and individual pension plans, and we’ve helped out a lot of our clients to set these up. They are amazing for estate planning and caring for those you leave behind.  As Warren Buffett once famously said: Someone’s sitting in the shade today because someone planted a tree long ago.’ 

Retirement is about enjoying life, not overpaying taxes. For customized strategies that preserve your wealth, we can help. Check out the planning services we offer, and book a free consultation when ready!