Retirement Planning in Canada: Tax Tips to Keep More of Your Money

Retirement is one of the most important financial phases of your life. After decades of work, you want your savings to last and your income to be as tax-efficient as possible. The good news is that Canada’s tax system has several tools and strategies that allow retirees to significantly reduce the taxes they pay.

This guide covers the most important tax planning tips for Canadian retirees and those approaching retirement.

Understanding Your Retirement Income Sources

Most Canadian retirees receive income from several sources:

• Old Age Security (OAS): A federal pension available from age 65 (can be deferred to 70)
• Canada Pension Plan (CPP): A contributory pension, available from age 60 to 70
• Registered Retirement Income Fund (RRIF): Converted from your RRSP, mandatory withdrawals begin by age 72
• Pension income: Employer-sponsored pension plans
• TFSA withdrawals: Tax-free
• Non-registered investments: Taxable interest, dividends, and capital gains
• Rental income or other business income

How you draw from these sources — the timing and amounts — has a major impact on your overall tax bill.

The Power of Tax-Free Accounts in Retirement

The Tax-Free Savings Account (TFSA) is your most powerful tool in retirement. Withdrawals from a TFSA:

• Are completely tax-free
• Do not count toward your net income
• Do not trigger the OAS clawback
• Do not affect income-tested benefits
• Can be re-contributed in future years

If you have not maximized your TFSA contributions during your working years, doing so before you retire — or continuing to contribute in early retirement — can dramatically improve your after-tax income later.

Ideally, you use TFSA withdrawals to supplement income in years where your other income is high, keeping your total net income below key thresholds like the OAS clawback threshold.

Managing RRIF Withdrawals

Once your RRSP converts to a RRIF, you must take minimum annual withdrawals. These withdrawals are fully taxable income. The key tax strategies include:

1. Start drawing down early

If you retire before 65 and have a lower income in those early years, consider making modest voluntary RRSP or RRIF withdrawals. This reduces the size of your RRIF by the time mandatory minimums kick in and can keep you from being pushed into high brackets later.

2. Use your spouse’s younger age for the minimum

If your spouse is younger, electing to base your RRIF minimum on their age results in a lower minimum withdrawal, reducing your annual taxable income.

3. Spread large withdrawals across years

Avoid making very large RRIF withdrawals in a single year unless necessary. Spreading them over multiple years can keep you in a lower tax bracket and below the OAS clawback threshold.

Pension Income Splitting

If you receive eligible pension income (such as RRIF withdrawals at age 65+, defined benefit pension payments, and others), you can allocate up to 50% of that income to your spouse or common-law partner for tax purposes.

This is particularly valuable if one partner has a much higher income. Income splitting can:

• Move income from a high bracket to a lower bracket
• Help the lower-earning spouse access their own pension income credit
• Reduce combined household taxes significantly

To use this strategy, both spouses file their returns together and both include the elected split-pension amount on their returns.

Deferring OAS to Increase Your Benefit

You can start OAS as early as age 65 or defer it up to age 70. For every month you defer, your OAS increases by 0.6%, for a total increase of up to 36% if you wait until age 70.

Deferral makes sense if:

• You have enough other income to cover expenses in your mid-to-late sixties
• Your high income in those years would trigger the OAS clawback anyway
• You expect to live a long life and want to maximize lifetime benefits

If your income is moderate and you need the OAS for living expenses, starting at 65 is often better.

The OAS Clawback and How to Avoid It

If your net income exceeds approximately $90,997 (2024 threshold), you must repay 15 cents for every dollar above that amount. Avoiding the clawback by managing your net income below the threshold can protect thousands of dollars annually.

Strategies to keep your net income down:

• Use TFSA withdrawals instead of RRIF withdrawals when possible
• Split pension income with your spouse
• Harvest capital losses to offset capital gains
• Defer large RRIF withdrawals or use other income sources first

CPP Deferral Strategy

Like OAS, you can take CPP as early as age 60 (at a reduced amount) or defer until age 70 (at an increased amount). Each month you defer after age 65 adds 0.7% to your payment, for a total of 42% more at age 70 versus 65.

Deferring CPP while drawing from lower-tax sources in your early retirement can result in a higher guaranteed lifetime income later, when RRIF assets may be depleted.

Charitable Giving in Retirement

If you are charitably inclined, retirement can be an excellent time to donate strategically. Donating publicly traded securities directly to a charity (instead of selling them and donating cash) eliminates the capital gains tax on those securities and gives you a charitable donation receipt for the full fair market value.

This can be a very tax-efficient way to give, especially for retirees with appreciated non-registered investment portfolios.

Table of Summary

Frequently Asked Questions

At what age should I start drawing from my RRSP?

There is no single right answer. If you retire before 65, drawing down your RRSP in those early, lower-income years can reduce future RRIF minimums and overall lifetime taxes. A tax professional can model different scenarios for your specific situation.

Is it better to spend from my TFSA or my RRIF first in retirement?

Generally, it is better to draw from your RRIF first in years when your income is lower, and save TFSA withdrawals for years when your income would otherwise be high (and trigger the OAS clawback). But this depends on your specific income sources and amounts.

Can both my spouse and I split CPP income?

CPP sharing (not splitting) is possible for couples. Up to 50% of the CPP pension that either or both spouses earned during years of cohabitation can be shared between them. This is different from pension income splitting on your tax return.

Conclusion

Retirement tax planning in Canada is about managing your income thoughtfully to take advantage of lower brackets, avoid clawbacks, and maximize tax-free income. The TFSA, income splitting, CPP and OAS deferral, and strategic RRIF withdrawals are all powerful tools.

The earlier you start planning — even before you retire — the more flexibility you have and the more tax you can save over the course of your retirement.

Get Help With Retirement Tax Planning

Retirement income can come from several sources, each with its own tax rules. Reviewing your savings, withdrawal schedule, pension income, and expected benefits can help you make informed decisions and avoid unexpected tax consequences.

Contact Taxccount Canada to book a free consultation and discuss your retirement tax plan.

This is general information only and not professional advice. Consult a professional before acting.