Taxation in Retirement
Courtesy of Invesco, Posted 06 Oct 2014
We all know the over-worn adage about the inevitability of death and taxes, but just because we recite it doesn't mean we have to stand by idly and simply let it happen.
In fact, for those who take the time to understand and manage their income sources as they age, tax burdens may be reduced or delayed.
For those who take further advantage of options when planning their estate, surviving spouses and other beneficiaries may be delivered a gift of ongoing tax relief - all at the expense of the tax collector.
Income in Retirement
The tax treatment of non-registered savings will depend on investment choices and the type of income derived from each. Non-registered savings income includes:
- fully taxable interest income;
- fully taxable foreign income;
- capital gains, 50% of which is taxable as income;
- dividend income which has a net tax cost higher than capital gains at the top tax bracket, but can be significantly less at lower levels;
- non-taxable return on capital or drawdown of capital.
Canada/Québec Pension Plan
The Canada/Québec Pension Plan provides monthly retirement benefits to pensioners based on credits accumulated during their working years.
A pensioner may draw his or her full pension entitlement at 65, elect to receive an earlier, reduced base pension or delay payments to obtain a higher monthly income later in life. Clients who elect to commence their CPP pension as early as age 60 will incur a discount for each month prior to age 65 the pension begins. Conversely, a premium is added for each month the pension is delayed at age 65, but no later than age 70.
OAS entitlement is based on years of residence in Canada after age 18. It becomes payable upon reaching 65 (it will be 67 if you were born after February 1962), but is subject to a 15% clawback for those earning income above a minimum threshold.
There are a number of non-taxable benefit programs related to OAS. Some of these include:
- Guaranteed Income Supplement (GIS) for low-income OAS recipients;
- allowance for low-income seniors (age 60 to 64) whose spouse or common-law partner is eligible for, or receiving, OAS and GIS;
- allowance for the survivor, which is a payment to low-income widowed spouses (age 60-64) who are not yet eligible for OAS.
A person may claim the age amount beginning in the year he or she turns 65. The federal credit is determined by applying the lowest-bracket federal tax rate to a prescribed amount. Similar calculations are used to determine provincial credits which range from $200 - $400 in value. There is a 15% clawback of the federal credit for income over a prescribed threshold that applies until the credit is fully clawed back. Similar clawbacks apply for provincial credits, but the thresholds and clawback rate vary. In Nova Scotia, for example, if your net income is above $30,828 in 2013, you will begin to have clawbacks applied.
Pension Income Amount
This pension credit is determined by applying the lowest-bracket federal tax rate of 15% to the actual eligible pension income received, up to $2,000, resulting in a maximum possible credit of $300. Similar calculations are used for provincial credits.
For someone 65 or older, common income types that qualify for this credit include:
- Life annuity from and RPP (Registered Pension Plan)
- Annuity payment from an RRSP or DPSP (if under 65, the income must come from the death of a spouse)
- Payment from a RRIF
Diability amount and Medical expenses
While not age-specific, it is more likely these credits can be claimed as you age.
Transferring tax credits
If a taxpayer has reduced taxable income to $0 but still has unused tax credits, those may be transferable to a spouse or common-law partner.
At tax reporting time, a qualified pensioner and his or her spouse can report up to 50% of eligible pension income received on a spousal return. There are four principal benefits:
- Bracket Management. Shifting Income from a high-tax-bracket pensioner to a lower-tax-brack pensioner can reduce net taxes paid;
- OAS. Shifting reduces income for pensioners who are in the clawback range;
- Age amount. Like OAS, the shift reduces income for pensioners over 65 who are in the clawback range;
- Pension Amount. Where the spouse does not otherwise have eligible pension income, this tax credit may be accessed.
Other Income & Credits
There are other sources of income that can affect your payable taxes (or not). The Tax-Free Savings Account (TFSA) could have great value for those past their income-earning years. No tax is paid within the account (on the growth of value or dividends) and withdrawals are 100% tax free. Testamentary Trusts can be created for your spouse for any other beneficiary using your Will. The key tax benefit of this type of trust is that it is a separate taxabel entity from your personal return.