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Understanding Taxation of Retirement Income

understanding taxes on retirement income

Like employment income, retirement income is generally taxable.

For most people, retirement means a decrease in income resulting in a lower income tax bill. Even so, it is still advisable to carry on with your financial plan, including tax planning, adjusted accordingly for retirement.

Which Retirement Income is Taxable

While not all retirement income is taxable, such as Guaranteed Income Supplement (GIS), most retirement income is taxable, including the Canada Pension Plan (CPP), Old Age Security (OAS), and company pension plans. Below is a list of commonly available retirement income and how it is taxed. The effective rate of tax you pay on your retirement income depends your tax bracket, which, due to your likely reduction in overall income, should be lower than pre-retirement.

As always, you should consult a tax expert for all of your tax planning needs.

Canada Pension Plan (CPP)

The CPP is a retirement income program administered by the federal government that is funded by employees and their employers. If you were employed, CPP contributions would have been deducted from your salary payments. If you were self-employed then you would have had to make contributions directly yourself. CPP pension payments count as income and are taxable.

Old Age Security (OAS)

OAS is a federal retirement benefit for those over 65 years of age. OAS payments are also taxable as income.

Guaranteed Income Supplement (GIS)

The GIS is a federal benefit you receive only if your income does not reach specific minimum thresholds. Unlike most other forms of retirement income, the GIS is not taxable.

Registered Retirement Savings Plan (RRSP)

An RRSP is a tax-deferred retirement savings plan registered specifically to you. You can contribute to your RRSP up to the annual government pre-determined amounts and receive an annual tax deduction for your contribution in the year you contribute. Your employer may provide some additional matching contributions to your RRSP.

You do not pay any tax on income earned or increases in value within your RRSP and you should resist withdrawing funds from your RRSP for as long as possible to minimize taxes and allow your investments to grow. When you do withdraw money from your RRSP it is taxable at your current effective tax rate,

Note that in the calendar year that you turn 71 you must decide how you will convert your RRSP to income. You can withdraw the funds (and pay tax on the amount withdrawn), convert the RRSP to a RRIF (see below), or purchase an annuity (and pay tax on the annuity payments you receive).

Registered Retirement Income Fund (RRIF)

A RRIF is the most common way of withdrawing income through conversion from your RRSP. Once you convert your RRSP to a RRIF you will need to withdraw a minimum amount each year as specified by the Canadian Government.

You cannot make contributions to a RRIF. All withdrawals from your RRIF are taxable as income. As with an RRSP, it is best to withdraw as little as possible from your RRIF for as long as possible to minimize taxes and allow your investments to grow.

Company Pension Plan        

If you have been employed, you may have joined a company pension plan. As with RRSPs, your contributions to the plan are tax deductible, your employer may make additional matching contributions on your behalf, and income earned and increases in value within the plan are tax free.

Company pension plans can be defined contribution or defined benefit. In either case, pension payments are taxable income. Like employment income, they may be taxed at source by your pension plan.

Minimizing Taxes on Retirement Income

There are strategies you may employ to manage and minimize the taxes you pay on your retirement income. Consultation with a retirement planning expert or tax planner is highly recommended.

Some of the strategies that may help you minimize taxes on retirement income include:

  • Tax Bracket Management: manage your income so that you do not move into the next highest tax bracket for income tax calculation.
  • Withdrawal Management: Withdrawing income from specific sources in a predetermined order to lessen your tax bill.
  • Pension Income Splitting: Transfer pension income from a higher income earning spouse to a lower income earner.
  • Use TFSAs (Tax-Free Savings Accounts): Money earned in a TFSA is not taxable, even when you withdraw it (although, unlike an RRSP, the contributions are not deductible for tax purposes). TSFAs are a good place to park income that you don’t need, even RRIF income that you are required to withdraw but do not have a current use for.

As with any wealth planning, planning for the minimal taxation of your retirement income can be best achieved if started early and with the help of a qualified professional.

Invest With Bloom

Looking for a personal investment management service that can help you generate income, if needed, and growth? – Let’s talk. Call us at +1-416-861-9941 or email us at info@bloominvestmentcounsel.com. We would be pleased to work with you and/or your other financial partners to help achieve your retirement planning goals.


This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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