Tax savings for the retiree

By Mike George | November 1, 2010 | Last updated on September 15, 2023
8 min read

Your client just finished his or her last day of work and tomorrow begins the new adventure of planning out the retirement years. He or she is now thinking about winter vacations, golf-course memberships, summer trips with grandchildren and possibly even a winter home down south.

But then he or she begins to wonder: “Do I have enough money to do everything I want? I just received my last paycheque; where do I get money from now (RRSP, government benefits, non-registered savings)?” And finally, the big question, “Am I set up to pay as little tax as possible throughout my life—and beyond?”

Below are a number of tax-planning strategies advisors should discuss with their clients to help them maximize their after-tax retirement income and increase their net estate.

Attribution rules

During retirement, there are a number of opportunities to minimize taxes. One of the primary strategies is income splitting (see also “Income splitting” in the High-net-worth families tab, page 8), or structuring the family’s income in such a way as to utilize low tax rates and provide for the most efficient use of tax deductions and personal tax credits to decrease the overall tax burden of the family.

But income splitting, in most instances, is not as easy as it sounds. There are various income attribution rules in the Income Tax Act that restrict income splitting and attribute the income back to the higher-income individual, to be included on their tax return.

For instance, where an individual has transferred or loaned property for the benefit of their spouse, any income and capital gains realized will be attributed back to the transferor. An exception to this rule is where spouses provide funds to take advantage of investing in a tax-free savings account (TFSA).

Income realized on property transferred or loaned to a related minor child, niece, or nephew is also attributed back to the transferor if the transferee is under 18 at the end of the year. Note that attribution doesn’t apply to capital gains for minors and the attribution rules no longer apply once the child has reached the age of majority.

Another tax rule that limits the amount of income splitting available to a family is the kiddie tax (see also “Kiddie taxes” in the High-net-worth families tab, page 10). These provisions state that dividends paid on shares of private companies to certain minors will be subject to tax at the highest marginal tax rate and can’t be reduced by any tax deductions or credits such as personal tax credits, other than the dividend and foreign tax credits.

Maximizing Pension Income

Generally, there are two main types of pensions available throughout retirement: Government pensions, which include the Canada Pension Plan and Old Age Security benefits; and Employment-based pensions, which include defined benefit pension plans, registered retirement savings plans (RRSPs) and locked-in retirement accounts (LIRAs).

One of the longest-standing income-splitting measures is the ability for spouses to apply to the government to share their CPP pension benefit. Since each spouse pays tax only on the amount they receive, this can be an effective income-splitting technique.

While the OAS benefit can’t be split, there are some tax strategies that may eliminate or minimize the OAS clawback.

This clawback applies where a client’s net income is more than a certain threshold ($66,733 in 2010). After income reaches this amount, OAS payments are reduced, and may be eliminated altogether when income reaches a certain level ($108,090 in 2010).

The trick to avoiding the OAS clawback is reducing the client’s net income—either by lowering income or by increasing deductible expenses.

One major area that affects the clawback is the amount of investment income reported for tax purposes. An advisor should always consider the tax attributes of various investment income and, wherever possible, structure clients’ investments to minimize taxable income.

Note, however, that while eligible Canadian dividends are generally the lowest-taxed investment income, for OAS clawback purposes, they can be less efficient because they’re taxable at 144% of the actual amount received. Compare this to taxable capital gains: Only 50% of the gain is taxable.

Another way to minimize the OAS clawback is to consider investing in flow-through shares. These shares allow the investor to obtain a tax deduction in the year he or she invests, while realizing only capital gains when the shares are eventually sold.

Finally, clients should consider the appropriate timing of discretionary income such as when and how much income to receive from their pensions, dividends from family corporations, or allocations from family trusts. The decision of when to take this income should not be made lightly, as tax rates and rules are constantly changing.

Some clients would be better served by melting down their RRSP early (for income splitting and utilizing pension credits), while others should defer converting their RRSP to a RRIF as long as possible (the end of the year in which a person turns 71).

Pension income splitting

Probably the single largest income-splitting measure for Canadians is the introduction of the new pension-income-splitting rules, whereby a recipient of eligible pension income can transfer up to one-half of their pension income to their spouse.

Where the pension recipient is in a higher tax bracket than the transferee, this splitting of pension income can result in significant tax savings. Generally, income eligible for the pension credit is also eligible for the pension-income-splitting rules.

Spousal loans

Retired clients may also want to consider a spousal loan because of the current low interest rate environment.

This is especially true for those pensioners who are required to take out more income than is necessary to fund their retirement. The higher-income spouse can loan excess funds to their lower-income spouse, allowing the lower-income spouse to generate investment income as opposed to the higher-income spouse.

It’s important to note as well that the attribution rules don’t apply where the loan is made at the prescribed rate (currently 1%), so long as the interest is paid on an annual basis, on or before January 30 of the following year.

Capital gains exemption

Many clients heading into retirement intend to use the proceeds from the sale of their business to help fund their retirement. To help maximize these proceeds, though, proper planning should be implemented well before the eventual sale.

To maximize the tax efficiency, consider having family members become shareholders. By multiplying the $750,000 personal capital gains exemption among family members, the family unit can realize significant tax savings—in the range of $150,000 per person, in most provinces. Remember, though, that the corporation must meet stringent tests on an ongoing basis to be eligible for this tax provision.

To multiply the capital gains exemption among family members, you generally perform an estate freeze. This involves exchanging common shares of the company for preferred shares, which are redeemable and valued at the current market value. New shareholders, either directly or through a family trust, are able to subscribe for new shares at a nominal cost, and future growth (up to $750,000 per person) can be sheltered using the capital gains exemption.

Principal residence exemption

With increased wealth and modern medicine, individuals are living healthier and longer lives. This also means they’re more mobile than generations before them, and often have multiple homes (the city house, the cottage, a U.S. residence, etc.).

To ensure clients don’t miss out on opportunities to reduce taxes, they should be made aware of the principal residence exemption. This exemption shelters any gain from tax realized on the disposition of a housing unit that’s designated as the principal residence.

In some instances, a vacation property should be given this designation. From a planning perspective, advisors need to ensure the property with the largest gain is designated as the principal residence so taxes are minimized.

Tax-efficient investing

At retirement, a client’s investments typically generate a significant portion of their income. So, while it’s important to construct a portfolio that provides proper asset allocation, diversification and liquidity, it’s also important to structure the portfolio to generate tax-efficient after-tax rates of return.

From this perspective, registered accounts (except TFSAs, which earn income tax-free) are taxed at the client’s marginal tax rate when he or she withdraws the funds, regardless of the type of income generated. However, investments in any non-registered accounts are taxed according to the type of income the client has generated.

Dividends paid by Canadian companies are generally tax-efficient because they’re eligible for the dividend tax credit and attract less tax than other types of investments. This is especially true for clients who have little or no income during the year. Capital gains are also very tax-efficient, as only 50% of the gain is added to income.

Dividends from foreign companies, though, don’t qualify for the dividend tax credit, and are therefore 100% taxable (like interest).

Tax-deferral opportunities

For many retirees beginning to dispose of assets during retirement (typically to the next generation), capital gains begin to accumulate. While there may be limited opportunities to reduce the capital gain, in certain instances clients may be able to defer the gain to future years.

Generally, this strategy allows the capital gain to be deferred where a portion of the proceeds are payable after the end of the year. The CRA has administratively used a formula that essentially allows a person to reduce the taxable capital gain by the ratio of the total proceeds outstanding at year-end by the total proceeds, to a maximum of 20% per year.

Clients may want to consider selling the capital property and taking back a promissory note, using the market value interest rate, payable over a five-year period, thereby allocating the tax on disposition over that time period.

To take full advantage of the tax deferrals offered by registered accounts, clients should generally wait until the end of the year in which they turn 71 to purchase an annuity or convert to a registered retirement income fund (RRIF). They may also want to use the younger spouse’s age to calculate the minimum withdrawal amount so the income can stay tax-deferred for a longer period of time.

That said, there are certain situations where the tax savings may be more significant than the benefits of tax deferral. So it may make sense for a client to purchase an annuity or transfer some of his or her RRSP funds to a RRIF when he or she turns 65 (as opposed to waiting until age 71). This will create income that’s considered eligible for the pension-income-splitting rules, as well as the $2,000 federal pension credit.


Planning for today’s retiree is complex. There are ever-changing tax and pension rules, complex corporate and trust structures, and innovative products. Always remember that one size doesn’t fit all, nor does any particular tax strategy result in the same benefit in all situations.

  • Mike George, director of the wealth and estate planning group at Richardson GMP.
  • Mike George