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Kevin Greenard: Top 10 tips to maximize your after-tax dollars in retirement

When people think of providing for their retirement, they think of the various types of income they will receive (Canada Pension Plan (CPP), Old Age Security (OAS), pensions, investment income, etc.).
Kevin Greenard

When people think of providing for their retirement, they think of the various types of income they will receive (Canada Pension Plan (CPP), Old Age Security (OAS), pensions, investment income, etc.). In retirement, income levels and expenses may be fixed, and it can be difficult to reduce expenses and/or increase income. One goal for retirees should be to maximize their after-tax cash flows. Below we will discuss the top 10 strategies we employ with our clients to help them retire tax efficiently.

1. Tax-preferred investment income and placement of investments

There are four types of investment income: Canadian dividends, foreign income, capital gains and interest income. Canadian dividends and capital gains are taxed more favourably. Canadian dividend income receives the dividend tax credit and only half of capital gains are subject to income tax. Interest income and foreign income, on the other hand, do not benefit from any preferential tax treatment and are fully taxable.

Keeping the tax treatment of these four types of investment income in mind, our first tip is to put thought into where you place your investments between registered and non-registered accounts. To be tax effective, we recommend our clients place equity holdings that generate capital gains or Canadian source dividends in their non-registered account as they are taxed more favourably than interest income or foreign income. This means that those securities that earn interest income, or foreign source dividends, should be placed in tax-sheltered registered accounts.

Ensuring a tax efficient placement of your investments will not only reduce your annual tax liability, it will also allow for some tax-efficient investment incomes in retirement. We go into more detail on this topic in our previous article: “Placement of investments in registered, non-registered accounts.”

2. Maximize your annual Tax-Free Savings Account contributions

Each year individuals above 18 in British Columbia may contribute to a Tax-Free Savings Account (TFSA) with after-tax dollars. Funds invested in a TFSA grow sheltered from tax and can be withdrawn tax-free at any time. If you do withdraw funds from a TFSA in a given year, you must wait until the next calendar year before replenishing the amount withdrawn.

We encourage all our clients to make annual TFSA contributions and maximize the amount they contribute to their TFSA leading up to, and during, retirement. Preferably, this contribution is done as early in the year as possible. Previously we wrote an article on this: “Strategies help contribute to your TFSA early.”

As of January 1, 2021, the maximum contributions an individual born in 1991 or earlier could have made total $75,500. If you are taking money from a RRIF, then funds can be withdrawn from a RRIF and contributed to the TFSA. While tax is paid on the RRIF withdrawal, any subsequent investment income earned and growth will not be subject to tax.

3. Tax credits

Tax credits are useful in reducing tax liabilities. The major tax credits that are intended for retirees are the age amount and pension income amount. Other common tax credits for our clients include medical expenses and the donation tax credit.

Individuals age 65 or older can claim the age amount up to a maximum amount of $7,713 in 2021 ($7,637 in 2020). The age amount is indexed annually to inflation and is subject to an income threshold. The age amount in 2021 is reduced by $0.15 for every dollar earned over $38,893 ($38,508 in 2020) and is fully eroded when income reaches $90,313 ($89,421 in 2020).

With the pension income amount, individuals receiving an eligible pension, superannuation or annuity payments can claim up to $2,000 annually. Couples can each claim this amount for a total of $4,000 per year. The eligible pension depends on the type of income and/or the age of the pensioner. For example, Registered Pension Plan payments are considered ‘qualifying pension income’, regardless of the recipient’s age.

For additional information on the age amount and pension income amount, refer to our article “Age and pension income amounts can decrease tax bill.”

Eligible medical expenses paid for by the individual, his/her spouse, and their dependent children, can be claimed as a non-refundable tax credit. The credit is beneficial as it becomes available when the total eligible medical expenses exceed the annual threshold. The 2021 threshold is three per cent of net income, or $2,421 ($2,397 in 2020), whichever is less. It is advantageous for the lower-income spouse to claim all the medical expenses as their threshold is lower.

The donation tax credit is another common tax credit our clients have. Donations to charities do not just have to be made in cash and can also be made in-kind with securities. In-kind donations have additional tax advantages. Further detail on these advantages can be found in our recent article “Using your stock portfolio to make donations.”

4. Pension splitting

Splitting pension income between spouses in retirement is another common way to reduce your household’s tax liability. With pension splitting, the higher-income spouse may transfer up to 50 per cent of their eligible pension income to the lower-income spouse. This reduces the household tax bill because the transferred income will be taxed at a lower rate in the lower-income spouse’s hands.

Over age 65

For persons over 65, eligible pension income includes all of the above, except it does not have to be as the result of a spouse’s death. This also reduces the impact of the Old Age Security clawback and the reduction of the age tax credit amount, which will reduce the overall tax payable. As a result, this may also keep the higher-income spouse within the threshold for the government allowance.

Under age 65

For persons under age 65, eligible pension income includes life annuity payments from a superannuation or pension plan, life annuity payments from a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), and retirement compensation arrangement benefits as a result of the death of a spouse.

5. Converting RRSP to RRIF

RRSPs must be closed in the year an individual turns 71. There are several ways to do this, but there is one way we never recommend to our clients, which is withdrawing, or deregistering, the entire RRSP amount in one year (unless the amount is extremely small). We almost always recommend our clients roll their RRSP to a RRIF and begin taking annual RRIF payments in the year they turn 72, or sooner. Rolling an RRSP into a RRIF smooths out the tax burden over retirement. The RRIF payments are taxed annually at a lower marginal rate, as opposed to the 53.5 per cent tax hit (the highest combined federal and provincial marginal tax rate in British Columbia) that would occur from withdrawing the full amount of the RRSP (if taxable income exceeded $222,420 as a result).

In the year the individual turns 72, they must start taking RRIF payments annually, which is how the income tax burden is spread over time, with payments being taxed at a lower marginal tax rate than if the whole RRSP had to be taxed at age 71.

It is important to note that an RRSP can be converted to a RRIF before age 71. If a client is 65 or older and not receiving other pension income, converting a portion, or all, of the RRSP to a RRIF early will allow them to take advantage of the pension income amount to withdraw tax-free up to $2,000 per year. Once the RRSP is converted to a RRIF, the minimum payments will begin in the year after the setup. No contributions can be made to a RRIF.

For individuals with a large RRSP balance, mandatory age RRIF withdrawals can translate into large taxable withdrawals and push the individual to a higher tax bracket.

For additional information on converting your RRSP to a RRIF (tip five), and on pension splitting (tip four), check out this article.

6. Spousal RRSP

Spousal RRSPs may be an effective way to split income between spouses during retirement. The higher-income spouse contributes to a spousal RRSP plan for the lower-income spouse. Withdrawals from this account will be taxed in the hands of the lower-income spouse after a three-year holding period. The higher-income spouse claims the RRSP deduction. The amount contributed to a spousal RRSP will reduce the contributor’s RRSP room. If withdrawn within three years of the contribution, the income will be attributed back to the contributing spouse. If the plan owner’s spouse transfers the spousal RRSP into their own RRIF, RRIF minimum payments will always be taxable in their hands regardless of whether or not the funds were contributed within the three-year period.

If you would like more information on Spousal RRSPs, read our article “Many couples should consider spousal RRSPs.”

7. Spousal loans

A spousal loan strategy is a highly effective way for retirees to maximize their after-tax dollars when couples are in different marginal tax brackets. The higher the marginal tax bracket, the more advantageous this strategy is from a tax savings standpoint.

In this scenario, the higher-income spouse (the lender) will loan the lower-income spouse (the borrower) money to invest. This money is loaned at the rate prescribed by CRA and is documented in a promissory note, to ensure a proper paper trail. The borrower spouse can then invest these funds and claim the related investment income on their tax return. These funds would have otherwise been invested by the higher-income spouse, who would have had to pay tax on the investment income at a higher marginal tax bracket.

In order to ensure there is no income attribution, the borrower spouse must pay interest to the lender spouse annually, by no later than January 30 of the following year.

We have written an article on how spousal loans work which provides detail and examples of how they can be utilized.

8. Knowing your tax history

For all our clients, we send them the T1013 – Authorizing or Cancelling a Representative for signing, and then submit it to the CRA. This form allows us to access important tax information and to be proactive in our approach. With this important tax information, we can have many conversations with our clients, and it helps greatly with the overall tax efficiency of investing.

Granting us CRA access is beneficial for our clients as we can see their RRSP limits, TFSA contribution room and any capital losses we can utilize in the current year or future years. We can also determine whether we have the ability to carry losses back up to three years.

From a tax-efficient investment standpoint, by having CRA access we can see the full picture and ensure your total tax situation is considered in our investment advice and decisions. When necessary, we will also communicate directly with our client’s accountants. For full details on this access and its benefits, please refer to our article “Accessing and sharing your tax information.”

9. Using the superficial loss rules to your advantage

Superficial losses occur when capital property is sold (such as common shares) and triggers a capital loss, and then you, your spouse, or a corporation either of you control, buys back the capital property within 30 days before, or after, the initial sale. In this situation, CRA will deny the loss, which is referred to as a superficial loss. Since the loss is denied, it gets added to the cost of the identical property purchased.

Typically, superficial losses are considered to be a negative consequence; however, by leveraging the superficial loss rules in your favour, it can actually transfer that capital loss to the higher-income spouse which can be beneficial. Clients should consult their own tax adviser before the implementation of any of the discussed strategies.

This may be considered a more complex transaction, but it is a standard transaction that we do with many of our clients. To best describe how to transfer the capital losses from the lower-income spouse to the higher-income spouse, we will use an illustration.

Mr. and Mrs. Williams recently became clients of ours. They transferred their investments to us in-kind (as is). On receiving their investments, we noted that Mr. Williams had a large unrealized loss and Mrs. Williams had realized capital gains of $40,000 in the year. We spoke to Mr. Williams about his unrealized loss. He had purchased 1,000 shares of ABC Ltd. in January 2020 for $52.10 (total purchase price of $52,100). On Sept. 30, Mr. Williams’ ABC Ltd. shares were worth $15,800, which equates to an unrealized loss of $36,300. In our meeting, we explained to Mr. and Mrs. Williams how Mr. Williams’ unrealized capital loss could be transferred to Mrs. Williams, protecting her $40,000 realized capital gain from income tax.

When we help clients do these transactions, we do the following three steps:

In the first transaction, Mr. Williams must sell his 1,000 shares of ABC Ltd. to recognize the capital loss of $36,300.

After Mr. Williams sells his shares, the second transaction occurs. Mrs. Williams immediately buys 1,000 shares of ABC Ltd. (same number of shares and same type of shares). Mrs. Williams purchased them immediately for $15.80 per share, for a cost of $15,800. Technically, Mrs. Williams has 30 days to purchase these shares; however, we buy them immediately to avoid having share prices fluctuate.

From this second transaction, Mr. Williams’ capital loss of $36,300 is deemed to be a superficial loss (because his spouse purchased the same security within 30 days) and is denied. Then, this denied loss is added to the cost base of Mrs. Williams’ ABC Ltd. shares. Mrs. Williams now has an adjusted cost base of $15,800 plus $36,300, or $52,100 (which is what Mr. Williams originally paid for the 1,000 shares of ABC Ltd.).

The result of this is that Mr. Williams’ loss is transferred to Mrs. Williams through a higher adjusted cost base. Capital gains and losses are calculated as the sale price, less the adjusted cost base. Therefore, the higher adjusted cost base will lower the capital gain Mrs. Williams has to pay when she ultimately sells the securities.

The third and final transaction occurs after 30 days. Mrs. Williams must wait until the superficial loss period has elapsed in order to ensure Mr. Williams’ loss is denied. After that, Mrs. Williams can sell the shares in the market. On Oct. 30, Mrs. Williams sells her 1,000 shares of ABC Ltd. for $14.73 each, or total proceeds of $14,730. Mrs. Williams recognizes a capital loss of $37,370 and uses this capital loss to offset her realized capital gains of $40,000. Now, Mrs. Williams only has realized capital gains of $2,630 (taxable capital gains of $1,315).

Assume Mrs. Williams was in the highest federal and provincial tax bracket in British Columbia of 53.5 per cent. If Mr. and Mrs. Williams didn’t use the superficial loss rules to their advantage, they would have paid $10,700 in taxes on these capital gains ($40,000 x 50 per cent inclusion rate x 53.5 per cent income tax rate). Instead, they paid $703 in taxes ($2,630 x 50 per cent inclusion rate x 53.5 per cent income tax rate). This is nearly a $10,000 savings.

10. Utilizing the capital gains reserve

If you are selling capital property, such as a commercial building or medical practice, prior to retirement, there’s a good chance that utilizing the capital gains reserve can help save you money in a tax efficient way.

Through the capital gains reserve, you can defer and spread the tax burden on the sale of capital property for a period of up to five years. This can result in significant savings as the gain can be taxed annually over a longer period of time and at a lower marginal tax bracket.

We recently wrote an article “Utilizing the capital gains reserve can save tax dollars,” which explains the mechanics and provides examples of the tax savings the capital gains reserve can provide.

We do have one last tip; however, the “Top 11 tips to maximize your after-tax dollars in retirement” didn’t have the same ring to it. Tip 11 is to always contribute early and withdraw late. What we mean by this is contribute to your TFSA and RRSP as early in the year as you can and withdraw from your RRIF as late in the year as you can. By contributing early, you benefit from a full year of compounded growth. By withdrawing as late in the year as you can, you allow those funds to continue to grow, sheltered from tax, for as long as possible.

Through a combination of the above tax strategies, retirees can increase their after-tax dollars. All retirees have worked hard to get to where they are today. We work with our clients to employ these strategies so they have as many after-tax dollars as possible to put towards doing what matters most to them in their retirement.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at Call 250-389-2138, email, and visit