Whether you’re a pensioner, retiree, or pre-retiree, it’s never too early to begin preparing your taxes and take full advantage of the deductions available to you. In addition to contributing to a Registered Retired Savings Plan (RRSP), the following are other means in preparing for retirement.
There may be an opportunity to income-split with your spouse through contributions to a spousal RRSP, or through pension income splitting.
A spousal RRSP is a special RRSP where you make the contributions and get the tax deduction on your tax return, but your spouse is entitled to the future withdrawals from the plan, and hence they pay the tax on future withdrawals.
First introduced in 2007, the pension income splitting rules allows up to one half of pension income received, that qualifies for the pension income tax credit, to be transferred to your spouse or common-law partner (both of which are referred to as "spouse" below).
The OAS program a Government of Canada pension program funded out of general tax revenues. To be eligible for this benefit you must be over the age of 65, and can expect to receive approximately $7,362 per year (indexed quarterly for inflation).
If you are collecting OAS and your net income in 2019 is over $77,580, you are required to repay some or all of your OAS benefits. This “claw back” is the lesser of your OAS benefits received in the year and 15% of your net income that is over $77,580. The OAS claw back is calculated solely on your net income and is not affected by your spouse’s income. Note that if your net income is $126,058 or greater in 2019 you will be required to repay all of your OAS benefits. If you are eligible to receive OAS but would be subject to a full claw back, you may consider deferring receiving OAS until a year in which the claw back is reduced or eliminated. You can delay the receipt of your OAS for up to five years beyond the normal start date of 65. Deferring the receipt of OAS will increase your OAS entitlement when you begin to collect it by 0.6% per month, increasing your overall maximum annual net income by up to 36%.
To defer your OAS pension follow the directions in your My Service Canada Account or send a letter to Service Canada.
If you have started receiving OAS payments but would like to defer them, you must request this cancellation in writing. To be eligible for this deferral you can only have received the pension benefits for less than six months. Please note you will be expected to repay the benefits you have received to date.
There is no financial advantage in deferring your OAS pension after the age of 70, you may in fact be at risk at losing benefits. If you are over the age of 70 apply now.
The Canada Pension Plan retirement pension is a monthly, taxable benefit for individuals 60 years of age or older, who have made at least one valid contribution to the CPP program. Below are some highlights of the pension plan:
The CPP is not automatic; you must apply. The amount you receive each month is based on your average earnings throughout your working life, your contributions to the CPP, and the age you decide to start your CPP retirement pension.
If you are collecting CPP, you may be eligible to pension share this income with your spouse or common-law partner provided you live with them. If a taxpayer’s spouse is in a lower marginal tax bracket, this may be an effective means of income splitting and reducing the couple’s overall tax bill. Individuals must apply through Services Canada.
A $2,000 pension tax credit is available if you earn eligible pension income, which typically includes income from a registered pension plan, income from a registered retirement income fund (RRIF), and annuity payments from an RRSP. If you are eligible to receive pension income from one of these plans and are not currently doing so, you may consider starting to collect some of this pension income in order to claim the pension tax credit. One means of doing this would be converting a portion of your RRSP to a RRIF in order to receive eligible pension income on which the pension tax credit can be claimed.
This article is not intended to be a summary of the technical provisions of the Income Tax Act, and before you undertake any tax planning strategy, it is important to review it thoroughly with your Crowe MacKay tax advisor