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In this article, Cheryl Norton discusses strategies to help clients minimize taxes when they’re planning for retirement.

Showing clients specific and proven strategies to minimize their taxes is a great way to prove the value of your advice and make your professional relationships even stronger. When that advice involves retirement planning, it’s important to include a long-term perspective, rather than looking only at one year’s taxes.

Here are some strategies I recommend to help advisors working on retirement plans with their clients:

1) Low- to mid-income earners

I tend to lean more toward using the Tax-Free Savings Account (TFSA) for this group, especially if they don’t have a TFSA. My reason is that in lower tax brackets, the registered retirement savings plan (RRSP) deduction isn’t worth as much — they’ll get less bang for their buck. Also, at withdrawal time, there’s no tax slip, so if clients are still low-income earners during their retirement years, they’re more likely to receive increased government benefits.

Lower income earners, especially younger clients, like the liquidity of the TFSA. What happens if they need to withdraw money for a purchase such as a vacation, car or home, or for an emergency, such as a big car maintenance payment? They won’t be taxed if they take money out of a TFSA, but any money they withdraw from an RRSP is taxable.

2) High-income earners

RRSPs are definitely beneficial, especially for clients who are earning income in the top tax bracket. It’s especially beneficial if a client is making more than $200,000 and has RRSP contribution room available. We currently have an additional 4% tax at the federal level for income above $200,000.

In the end, the pros and cons of a TFSA versus an RRSP contribution may depend on whether the tax bracket in retirement is lower or higher than it was when the client made the initial contribution. Another consideration is for Canadians working past the age of 65 and even into their 70s. If that’s the case, they could be in a higher tax bracket when withdrawing money from an RRSP — not the ideal situation.

3) Asset allocation

As a client is approaching retirement, it may be beneficial to put assets taxed at a higher level in tax-sheltered accounts. For example, allocate bonds primarily to RRSPs and TFSAs, because interest is fully taxable. Clients having RRSP or TFSA contribution room left after they’ve purchased all their bonds could then consider buying stocks. Care should be taken when allocating foreign stocks that pay dividends inside a registered account. The ability to claim the withholding tax on foreign payments is lost when held inside an RRSP or TFSA. For this reason, it’s sometimes advantageous to hold foreign stocks that pay dividends in non-registered accounts, allowing clients to maintain the ability to claim a foreign tax credit on their Canadian tax returns.

As a general discussion point, it’s a good idea to hold Canadian dividend paying stocks and investments that generate capital gains in a non-registered account, since these have preferential tax treatment.

4) Income splitting tips and traps

Clients in lower income tax brackets will enjoy a lower tax rate than higher income earners. As a result, income splitting — redirecting income within the family unit — can be one of the most powerful tools available to families wishing to reduce their tax burden and keep after-tax dollars in their hands, rather than sending them to the Canada Revenue Agency (CRA).

The federal government has enacted several rules in the Income Tax Act (ITA) to prevent income splitting; however, some income splitting opportunities that clients can still consider under current legislation include, but aren’t limited to:

  • Opening a TFSA for all family members over the age of 18
  • Loaning funds at the prescribed rate of interest to a spouse1
  • Making a gift to an adult family member
  • Having the higher income earner pay family expenses
  • Using the benefits of a registered education savings plan (RESP) or registered disability savings plan (RDSP)
  • Investing the child tax benefit in the child’s name
  • Pension splitting with a spouse
  • Loaning money to a spouse to produce business income.

Your guidance, along with input from a tax planner, will help clients decide if any of these scenarios would reduce tax.

5) Return of capital protection

In the non-registered investment environment, I recommend using annuities and segregated fund contracts with guaranteed income for their return of capital features and protection for longevity risk. They’re tax efficient and offer insurance protection.

6) Tax-loss selling

If a client holds an investment that has lost value at the end of the year, selling it may be advantageous from a tax perspective. The loss can reduce capital gains on other investments. It can also be carried back up to three years, or carried forward indefinitely. Seek assistance from a tax advisor.

7) Incorporation

There are many benefits to incorporating a successful business. If a business can qualify as a small business corporation in Canada, there’s an advantage to incorporating and accessing the small business corporate tax rate. Other advantages of incorporating include:

  • Limited liability
  • Tax deferral and control of personal income payments
  • Income splitting opportunities
  • Access to the small business deduction
  • Access to lifetime capital gains exemption.

8) OAS clawback

In retirement, a popular tax-minimization goal often becomes avoiding clawbacks of Old Age Security (OAS). Because TFSA withdrawals aren’t considered taxable income, they don’t affect clients’ eligibility for OAS. For example, for 2016, if clients aged 65 have income over $73,756, the government will claw back some of their OAS benefit, and the benefit completely disappears at the $118,055 annual income level.

Clients can use non-registered investments — T-series, annuities, segregated fund products — with return of capital features to help with OAS clawbacks. If clients have significant pension income or a lot of money in RRSPs that need to be turned into a registered retirement income funds (RRIF) or annuity, there may not be much they can do to minimize the OAS clawback.

Consistently monitoring clients’ taxable income each year helps to ensure government benefits are not clawed back. I believe this discussion is very important and one of the main reasons clients want to keep flexibility in their retirement income.

Reducing taxes leads to more retirement money

Today, clients need more income-producing assets in retirement than they did decades ago, especially because they’re living longer.2 They need to get an understanding of what their retirement is going to look like, whether they’re 25, 45 or 65. RRSPs are often the first choice, because they provide deferred taxation, but there are other good options available.

Tax planning should be done consistently and reviewed at least on an annual basis. Most of our government benefits in Canada are income-tested, so if clients can plan tax efficiently for retirement, they can maximize their overall retirement income and send less money to the government.

Check out the following resources for your discussions with clients:

To learn more about tax and retirement planning strategies, contact your Sun Life Wealth Sales team.

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1 Spouse also refers to common-law partner.

2 The average Canadian reaching 65 years old in 2013 can expect to live until age 87, which is about five years longer than the life expectancy of the average Canadian reaching age 65 in 1970, meaning many retirees face the challenge of stretching their retirement savings over a longer lifespan than their parents and grandparents did (Financial Consumer Agency of Canada, June 2016).


Cheryl Norton is Director, Tax and Estate Planning – Wealth Distribution for Sun Life Financial.

Cheryl provides specialized consulting to advisors with a focus on: retirement and estate planning, and building tax-efficient solutions. Cheryl has many years’ experience with Canadian corporate and personal taxation, and has held management positions at various organizations. Her knowledge of tax, estate planning and financial services is a valuable asset to the team.

Cheryl is a Chartered Professional Accountant (CPA, CA) and has completed the Certified Financial Planner (CFP)® exam. She previously taught at the School of Accountancy in Toronto on behalf of the Canadian Institute of Chartered Accountants (CICA) and has completed the CICA In-depth Tax course.