Over the last few years, Canadians have been feeling the pinch on their cashflow brought on by higher inflation and borrowing costs. In the spring of 2022, inflation surged to a four-decade high (eventually peaking at 8.1% in June of 2022). To help tame inflation, the Bank of Canada (BoC) implemented one of the most restrictive monetary policies of the last 40 years to dampen spending. Its primary tool to do so has been interest rates, which it has raised to 5% from their all-time low of 0.25%. The kicker for consumers and businesses has been the long lag effect between the peak of interest rates and when inflation cools enough that the BoC can start cutting interest rates.
As well, rising interest rates are generally negative for bonds and stocks, and particularly dividend- and distribution-paying stocks. That has had a further adverse impact on those who rely on the income generated from their portfolios, such as retirees. And while higher interest rates and bond and dividend yields can be helpful over the longer term, they don’t do much for those who need the cashflow generated by their portfolios to live on today.
Hole in your pocket
Older Canadians, especially retirees, are particularly sensitive to the increase in the cost of living. With many Canadians 65 years of age and older living on fixed incomes, rising costs for essentials such as rent, food and utilities are particularly hard on their cashflow. So, anything they can do to reduce costs is particularly welcome, especially as interest rates and inflation are things that none of us can control.
Fortunately, it appears that the BoC is nearing the point where it will be comfortable in lowering interest rates in light of the inflation rate finally beginning to stabilize within its target range of 1% to 3% (it was 2.8% in February 2024). While speculation as to when those cuts will begin has been hotly debated, the good news is that we are headed in the right direction with a more normal pace of pricing increases returning.
Easing the burden – five tax-smart strategies for retirees
One thing we can do to reduce the pinch of rising costs is to take advantage of ways to plan around and save on taxes. Here are five strategies worth considering:
- Spousal RRSPs: If you have a spouse and you anticipate that your income (and thus tax rate) will be higher than theirs, consider establishing and contributing to a spousal RRSP to help equalize your taxable income. While you are still using your RRSP contribution room when you contribute to a Spousal RRSP, the funds will be held in your spouse’s name. This will help build up your spouse’s registered savings, and when it comes time to withdraw the funds to support your retirement cashflow needs, it will be taxed at their lower tax rate.
- Order of asset withdrawal: The sequence in which you receive funds from your various savings and income sources can have a meaningful impact not only on your after-tax cashflow but also your income flexibility. Private pension income, government pension programs, locked-in registered plans and Registered Retirement Income Funds (RRIFs) are generally the least flexible sources of income, as they are “turn on and can’t turn off” sources with defined and often fixed amounts. In the case of accounts like RRIFs, a minimum amount must be withdrawn after age 71. Depending on your situation, they are often your best sources of income to work down first, followed by the increasingly more flexible sources such as your Tax-Free Savings Account (TFSA) and non-registered investments and the income they create, such as dividends and capital gains.
- Pension income splitting: Another way you can work towards equalizing your higher income with that of your spouse – and in so doing reduce your tax bill – is by splitting your pension income. If the income is eligible, such as that from a private pension plan, you can allot up to 50% of your pension income to a lower-income spouse. This can also have the added benefit of reducing your income and thereby avoiding claw backs on income-tested programs such as Old Age Security (OAS).
- CPP/QPP sharing: If you have a spouse who is at least 60 years of age and who has limited work history/minimal contributions to CPP/QPP, you may be able to benefit by sharing your CPP/QPP payments. The process involves combining the CPP/QPP entitlement you and your spouse earned during the time you lived together, and then allocating 50% to each of that combined amount.
- Tax-Free Savings Accounts (TFSAs): Regardless of income, every Canadian who has attained the age of majority earns TFSA contribution room each new year (the 2024 contribution limit is $7,000), and can benefit from the accumulated amount from 2009 onwards (the lifetime contribution limit is $95,000 as of 2024). While you don’t receive an income tax deduction for contributions the way you do for RRSPs, TFSAs are a great way to shelter investment growth and income from taxes, and you pay no tax on withdrawals. As well, withdrawals do not count as “income” when it comes to income-tested benefits such as OAS, nor do they limit entitlement to plans such as the Guaranteed Income Supplement (GIS) and Age Credit.
These are just some of the more common strategies you can use to reduce taxes and enhance your income. As always, it is important to discuss the above and any other tax-saving strategies with your tax and investment advisors. But taking the time to consider ways that you can save on taxes can go a long way to helping you be penny wise and even enhance your income in retirement – and keep your loonies in your pocket where they belong.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.