Ten Strategies to Pay Less Tax in Retirement

March 07, 2019 | Thomas De Mello


Are you approaching retirement or have you recently retired? Here are several approaches you may want to consider to maximize your after-tax retirement income.

Are you approaching retirement or have you recently retired? Maximizing your retirement income may be an important aspect of enjoying and making the most of this new phase of your life. However, a large portion of your major sources of retirement income may be taxed at the top marginal tax rate with no preferential tax treatment. This is likely to be the case if you depend on sources of retirement income such as employer pensions, Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Canada/Quebec Pension Plan (CPP/QPP) and interest income. Fortunately, there are several approaches you may want to consider to maximize your after-tax retirement income. Although not exhaustive, this article discusses ten common tax-saving retirement strategies.


The Ten Strategies: 

1: Spousal RRSPs Strategy

2: Order of asset withdrawal Strategy

3: Tax-preferred investment income Strategy

4: Pension income splitting Strategy

5: CPP/QPP sharing Strategy

6: Spousal loan Strategy

7: Effective use of surplus assets Strategy

8: Prescribed life annuity Strategy

9: Tax-Free Savings Account (TFSA) Strategy

10: Minimum RRIF/LIF/LRIF/PRIF withdrawal planning


The following information is derived from RBC Wealth Management's article, Ten Strategies to Pay Less Tax in Retirement, which provides greater details on the topics discussed below. 

Please contact us directly if you have any questions or would like to discuss these strategies in greater detail. 



Spousal RRSPs

Canada has a progressive tax system. The progressive nature of the system means that tax rates in Canada increase as your income increases. As a result, you could save significant amounts of tax, annually, if you and your spouse each earn $50,000 in taxable income as opposed to one of you earning $100,000, for example. In other words, a spouse with a higher income of $100,000 may end up paying more tax than if each spouse earned $50,000. If you project your retirement income to be higher than that of your spouse, one of the simplest ways to equalize your future retirement income is by making contributions to a spousal RRSP.


Order of asset withdrawal

In order to optimize your after-tax retirement income, it’s important to determine where to withdraw assets from first to cover any income shortfalls you may have after receiving government and employer pensions. The appropriateness of each withdrawal source will be dependent on your asset types and mix during retirement. Here, it’s important to keep in mind that the tax implications resulting from redeeming different asset types may vary significantly. Generally, if you’re in a high tax bracket, it makes sense to withdraw assets that attract the least amount of tax first. If your spouse is in a significantly lower tax bracket, consider withdrawing their taxable assets before yours (and your non-taxable assets before your spouse’s).


Tax-preferred investment income

Since the preferential tax treatment of Canadian dividends, capital gains and return of capital is lost when earned in and withdrawn from an RRSP/RRIF or locked-in account, the following can be considered when determining your ideal investment allocation with respect to tax characteristics between accounts. Consider holding your fixed-income or interest-bearing investments, such as bonds and GICs, in your registered accounts (RRSP/RRIF and locked-in) and holding your equity investments, such as common stocks, preferred shares and equity mutual funds, in your non-registered account. Further, foreign dividends are not subject to the preferential tax treatment available to dividends received from Canadian corporations. Instead, this income is taxed as ordinary income, like interest. For this reason, high dividend-paying foreign stocks where capital appreciation is expected to be minimal may be better off held in a registered account.


Pension income splitting

If you’re in a higher tax bracket than your spouse, you may be able to reduce your family’s total tax bill by allocating up to 50% of eligible pension income to your spouse. Keep in mind, however, that only certain income is eligible to be split with your spouse. The age of the primary recipient of the income is a factor in determining whether income is eligible for splitting.


CPP/QPP sharing

Although the CPP/QPP pension is not considered eligible pension income for the purpose of pension income splitting (described in Strategy 4), you may achieve tax savings by sharing your CPP/QPP with your lower-income spouse. This may be a particularly viable strategy if you have a spouse with a limited working history and thus made limited contributions to the CPP/ QPP. This may lower your family tax bill and help to increase your age credit, as well as reduce OAS claw back where applicable


Spousal loan

Generally, you achieve no tax advantage when you simply give funds to your lower-income spouse to invest — this is because of “attribution”. The Canada Revenue Agency (CRA) attributes any investment income earned on these gifted funds back to you, as if you had earned it yourself. This is where the spousal loan strategy may help you reduce your taxes payable. By making a bona fide loan to your lower-income spouse at the CRA prescribed interest rate, you can avoid triggering the CRA’s income attribution rules. Your spouse must make the annual interest payments. The prescribed rate in effect at the time your loan is established remains in effect for the lifetime of the loan. Your spouse can then invest the loan proceeds, and the investment income and capital gains earned will be taxed at your spouse’s lower rate.


Effective use of surplus assets

With a growing senior population in Canada and generally longer life expectancies, many Canadians may be facing potentially escalating healthcare and long-term care costs. With this in mind, it’s imperative that you’re prepared for these contingencies before redirecting your surplus assets. Preparing a financial plan may help you determine your cash flow needs and identify any surplus assets. If your financial plan determines that you have surplus non-registered assets that you’ll likely not need during your lifetime, even under very conservative assumptions, then consider directing these excess assets to other more effective uses. Below are three options which may be of interest.

- Tax-exempt life insurance

- Lifetime gifts

- Establish a family trust for adult children or grandchildren beneficiaries


Prescribed life annuity

If you’re retired, a conservative investor and not satisfied with your fully taxable cash flow from traditional non-registered fixed income assets (e.g. GICs and government bonds), consider using some of these fixed-income assets to purchase a prescribed life annuity. The prescribed life annuity will provide a guaranteed income stream for your lifetime with the advantage of partial tax deferral.


Tax-Free Savings Account (TFSA)

In retirement, you continue to be able to contribute money to a TFSA, up to your contribution limit. Although TFSA contributions are not tax deductible, remember that the income and gains generated in the TFSA grow tax-free. Additionally, any money withdrawn from a TFSA is not taxable. To the extent you have excess cash flow, contributing to your TFSA annually will help you to maximize your tax-free growth. 


Minimum RRIF/LIF/ LRIF/PRIF withdrawal planning

If your pension income and non-registered assets sufficiently meet most of your retirement expenses, then you’ll likely need to withdraw only the mandatory minimum amount from your RRIF or from your locked-in plans each year. Below are some strategies to maximize the tax-deferral within your RRIF/LIF/ LRIF/PRIF in order to maximize your after-tax retirement income:

  • If your spouse is younger than you, you may be able to base your minimum annual RRIF/LIF/LRIF/ PRIF withdrawal on your spouse’s age in order to minimize the amount of the annual withdrawal, thereby keeping more assets in the registered environment to grow on a tax-deferred basis. 

  • Convert your RRSP/LIRA/Locked-in RRSP to a RRIF/LIF/LRIF/PRIF as required by the end of the year in which you turn age 71, but don’t make your first withdrawal until the end of the year in which you turn age 72; this may allow for increased tax-deferred growth. 


Although the majority of retirement income sources are taxed at a high rate with no preferential tax treatment, there are some common strategies that may help you to maximize your after-tax income in retirement. Speak with a qualified tax advisor to see if any of the strategies discussed in this article can help you.


You can read the full article here, and please feel free to contact us directly if you have any questions or would like to discuss any of these strategies in further detail.