Strategies and Solutions

The increasing number of seniors who opt to continue working during their retirement years face the challenge of finding ways to minimize their tax burden on multiple sources of income. This includes income from employment, the Canada Pension Plan, Old Age Security, pensions, registered investments, and non-registered investments. The challenge lies in striking a balance between these various sources of income for individuals in their late 60s and early 70s.


Delaying Government Benefits and Optimizing Tax Deductions 

Many financial planners suggest that workers in their 60s delay taking their Canada Pension Plan (CPP) and Old Age Security (OAS) until they reach the mandatory age of 70. This not only reduces taxable income, but it provides a larger income later in life. Those who delay CPP to 70 from 65 can receive an extra 8.4% per year for five years, which amounts to up to 42% more. Delaying OAS for five years until the age of 70 results in an extra 7.2% per year, equating to up to 36% more.

Older workers should also consider contributing to their Registered Retirement Savings Plans (RRSPs) until they reach 71, if they have the contribution room, as it will help reduce their taxes, according to Mr. Natale. He reminds workers that they can claim RRSP deductions in future tax years and that even if they are over 71 and cannot contribute to their own RRSP, they can still contribute to their spouse’s RRSP as long as it is before the spouse turns 72 and they have RRSP contribution room.


Income Splitting

Couples who are either married or common-law can also take advantage of different income-splitting opportunities, including pension income splitting, spousal RRSPs, and spousal loans to help lower the overall family tax bill.

With pension income splitting, higher-income-earning spouses can transfer up to 50 per cent of their eligible pension income to their lower-income-earning spouses. That includes income from a registered company pension plan. Spouses can also split income from their registered retirement income fund (RRIF) with their partners, but they need to be 65 or older. 

Meanwhile, a spousal RRSP enables couples with varying incomes to save for retirement and split income to reduce taxes. Finally, a spousal loan enables a higher-earning spouse to lend non-registered funds to the lower-earning one at the Canada Revenue Agency’s prescribed rate. The borrower spouse has to pay the interest by Jan. 30 of the following year, each year. The idea is to invest the money loaned and earn a higher return than the prescribed rate, and have the income taxed in the lower-income earner’s hand at a lower rate.

Older couples with a big age difference can also take advantage of rules that enable them to use the younger spouse’s age to determine the older spouse’s minimum RRIF withdrawals. If you don’t need the income, it might be best to take a smaller amount using the younger spouse’s age. Having those lower withdrawals means greater tax deferral, which can lead to less OAS clawback.

Strategies for Investing and Charitable Giving

Investors in their 60s can consider a variety of strategies to reduce taxes on their investment income, such as moving funds to different accounts or making charitable donations. Some planners suggest that investors may want to withdraw from their RRIFs early and transfer the funds to their tax-free savings account (TFSA). Another option is to sell certain assets and realize the capital gains before receiving other retirement income and benefits to avoid a higher tax bill in the future. There is also the possibility of the federal government increasing the tax rate on capital gains, which makes it worth considering for some investors.

In addition, there are tax incentives for those who donate non-registered investments directly to charity, as they do not have to pay taxes on the capital gain and receive a charitable receipt. Contributing to grandchildren’s registered education savings plans or registered disability savings plans may also be an option, as they receive government top-ups, thereby reducing investment income subject to taxes. These strategies can help reduce non-registered assets, as long as the individual is not concerned about outliving their funds.


Once someone or a couple together reach the age of 72, the flexibility to reduce your taxes paid becomes more difficult. At this point you are already collecting CPP and OAS, you are making your minimum withdrawals from your RRSP/RRIF and you no longer have the ability to make contribution to tax-sheltered accounts. Nonetheless, there are tried and true strategies that people can use in retirement to maximize their after-tax retirement income.

  1. Spousal RRSPs

The higher earning spouse can contribute to an RRSP of the lower earning spouse and still receive their full tax deduction. The lower earning spouse can then withdraw the money in retirement and pay tax at their marginal tax rate, lowering the overall effective tax rate for the couple.

  1. Order of Withdrawal

Following a tax efficient withdrawal strategy can lower your taxes payable. General guidelines include making withdrawals in the following order:

  1. Required Minimum from Matured Registered Accounts (RRIFs, LIFs and LRIFs)
  2. Liquidate Losses in Non-Registered Accounts
  • Liquidate Non-Appreciating Investments and Cash Balances
  1. Draw Down TFSAs
  2. Trigger Capital Gains in Non-Registered Accounts
  3. Withdraw from Registered Accounts

Any withdrawal strategy needs to be customized to the client situation and it should not change a client’s overall investment strategy.

  1. Asset Location

Where you hold investment assets matters! For example, if someone has both registered and non-registered accounts, they should consider purchasing investments that earn Canadian dividend, capital gains or return of capital income in a non-registered account. This income is taxed more favourable by the CRA than other investment income.

  • Fixed income
    • Interest-bearing investments have the least favorable tax treatment
    • Should be in tax deferred or tax-free accounts
  • Canadian stocks (and foreign stocks with low or no dividends)
    • Dividends from Canadian stocks and realized capital gains are the most favorably taxed kinds of investment income.
    • Non-registered accounts

Note: Owning individual securities allows for high diversification, lower transaction costs and the ability to control the size and timing of taxable events

  • Preferred Shares
    • Considered a fixed income investment, but payouts are eligible for the dividend tax credit
    • Non-registered accounts
  • REITs
    • They pass along most of their cash flow to investors, making them attractive to income-oriented investors.
    • Mix of capital gains, interest/rental income and return on capital. Income and deductions retain their character as they flow through to the investor
    • Tax deferred or tax-free accounts 
  1. CPP Sharing

You can share up to 50% of your CPP income with your spouse. The amount of the benefit depends on the number of years the spouses have been married and the number of years they have contributed to the CPP. Both spouses must be at least 60 years old and have elected to begin their CPP benefit.

  1. Utilizing Surplus Assets

If you have enough assets to meet your retirement income needs, then consider directing the surplus to either a Tax-Exempt Life Insurance Policy or giving a Gift to family members.

    • Tax Exempt Life Insurance Policy – Investment income can grow tax free and death benefits can flow tax free to beneficiaries.
    • Lifetime Gifts – there is no attribution on income earned on the gifted funds if the family member is 18 years or older
  1. Prescribed Annuity

If you are not satisfied with your income in retirement, you can immediately increase it by purchasing a prescribed annuity. You will pay less tax on the monthly annuity payments because a portion of it will be considered a return of capital.

Note: it is not advisable to invest all savings into an annuity, as the decision is irrevocable, and you cannot access the capital during your lifetime.

  1. Planning Your RRIF Minimum Withdrawals

    • Base your minimum withdrawals on the age of the younger spouse to minimize the annual percentage withdrawals amount
    • Convert your RRSP to a RRIF at 71, but don’t make your first withdrawal until the year you turn 72
    • Withdraw the annual required minimum from the RRIF as a lump sum at the end of each year