How To Pay Less Tax in Retirement

Ten Sound strategies

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.  Note: Any reference to a “spouse” in this article also refers to a common-law partner.

Strategy 1: 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.

Strategy 2: 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.

Strategy 3: 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the preferential tax treatment of Canadian dividends, capital gains and return of capital is lost when earned in and withdrawn from an RRSP/RRIF or locked-in account, the following can be considered when determining your ideal investment allocation with respect to tax characteristics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.

Strategy 4: 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.

Strategy 5: CPP sharing Although the CPP pension is not considered eligible pension income for the purpose of pension income splitting, you may achieve tax savings by sharing your CPP with your lower-income spouse. This may lower your family tax bill and help to increase your age credit, as well as reduce OAS clawback where applicable.

Strategy 6: 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.

Strategy 7: 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.

Strategy 8: 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.

Strategy 9: 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.

Strategy 10: 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.

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.


Susan Gottlieb is VP, Wealth Advisor & Associate Portfolio Manager with RBC Dominion Securities Inc. Due to space limitation, we are unable to reproduce the entire 8-page report, which describes in greater detail, each of the 10 strategies. Feel free to request an e-copy from me at


This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc. (RBC DS)*, RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC), RBC Global Asset Management Inc. (RBC GAM), Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliates, RBC Direct Investing Inc. (RBC DI) *, RBC Wealth Management Financial Services Inc. (RBC WMFS) and Royal Mutual Funds Inc. (RMFI). *Member-Canadian Investor Protection Fund. Each of the Companies, their affiliates and the Royal Bank of Canada are separate corporate entities which are affiliated. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and mutual fund representatives of RMFI, Investment Counsellors who are employees of RBC PH&N IC, Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC DS. In Quebec, financial planning services are provided by RMFI or RBC WMFS and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC DS. Estate & Trust Services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies or RMFI, clients may request a referral to another RBC partner. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC Wealth Management Financial Services Inc. RBC Wealth Management Financial Services Inc. is licensed as a financial services firm in the province of Quebec. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, RBC WMFS, RBC DI, Royal Bank of Canada or any of its affiliates or any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. ® Registered trademarks of Royal Bank of Canada. Used under licence. © 2018 Royal Bank of Canada. All rights reserved. NAV0068 (12/18)

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