Portfolio Management

Tax Minimization Strategies for Retirement

There is a federal tax credit of 15.25% of pension income up to $2,000 of pension income for each year. Pension income means the income portion of annuity payouts, payments from deferred profit sharing plans and payments from Registered Retirement Income Funds. Pension income does not include payments from the Canada Pension Plan, Old Age Security or the Guaranteed Income Supplement. To maximize benefit from the pension income tax credit, one should have at least $2,000 of qualifying pension income and, if there is a spouse in the picture, then the spouse should also have at least $2,000 of qualifying pension income.

As the age of 65 approaches - but really at any age one likes - one must look at accumulated wealth within Registered Retirement Savings Plans. The money accumulated within RRSPs by interest, dividends and capital gains is taxed as ordinary income when paid out. By law, one must wind up RRSPs in the year in which one turns 71 and begin a plan for paying out their content. However, if one has a spouse under 72 and contribution room (that is, an amount of money that one would have been entitled to contribute to an RRSP that one did not actually contribute), then one can continue contributing until the spouse reaches his or her 70th year, at which time the spousal plan would have to be terminated.

Special rules nevertheless permit the transfer of funds from the RRSP of a spouse who has died to his or her surviving spouse with no tax consequence regardless of the age of the decedent or the survivor. As well, there is no age limit on the transfer of assets from a registered pension plan to modified RRSPs including locked-in RRSPs, Life Income Funds, and Life Retirement Income Funds, all of which have restrictions on amounts that can be withdrawn each year. See sections 3 and 4 in Maximizing RRSPs for more information on these structures.