Tax Issues in Retirement

It’s always important to consider the tax issues of any financial decision. But it’s especially important in retirement planning where every choice—and every dollar—can make a difference to your ability to enjoy everything you’ve worked so hard for.

So what kinds of tax issues are there in retirement? For starters, many people forget that virtually all income is taxed.  Regardless of whether you earn the income by working 40 hours a week or from returns on your investments, it’s taxable income. And don’t forget other forms of taxable income like benefits from pensions, OAS, and CPP.

Smart Tip

After the age of 71, you need to withdraw a minimum annual amount from your RRIF, which you must pay taxes on. However, you do not need to spend it. You can deposit that money into an account such as a tax free savings account (TFSA) so that you can benefit from tax-free growth in the future.

Lower Income. Lower Taxes.

The good news is that there are some special circumstances in retirement that tend to lead to lower overall tax bills. For one, by the time you retire, your expenses tend to be lower. Bills like mortgages, children’s activities and education are (hopefully) reduced or eliminated.  And you no longer need to set aside money for retirement savings. So, generally speaking, you find yourself able to enjoy a quality of life that you’re used to, but with a slightly lower income. And that usually equates to a lower tax bill.

Tax Issues With Various Forms Of Income

In retirement, it’s likely that you will receive income from your RRIF (the investment vehicle that your RRSP converts to when you turn 71), CPP and OAS, and perhaps company pension benefits. You may also have non-registered investments. Each has its own tax implications and guidelines for keeping taxes to a minimum.


Starting at age 71, there is a minimum withdrawal that must be made each subsequent year. This amount is calculated based on your age and the amount of savings you have. The withdrawals are considered taxable income. If one spouse is younger than the other, a potential tax-saving approach is to base the RRIF minimum withdrawal on the age of younger spouse. This means the savings have to last longer, requiring a smaller annual withdrawal amount, which will be taxed accordingly.


Another strategy to help reduce overall income taxes is to split pension income between two spouses where one income is significantly larger than the other. For example, if John’s overall pension income in retirement is $80,000, while his wife’s is $40,000, they would be wise to consider pension income-splitting. This conceptually separates the overall household income into two, more tax-efficient sums of $60,000 each. The end result is that less tax is paid on the same overall amount of household income.

Withholding Tax

This is a tax that is paid on withdrawals from your RRIF that are greater than the minimum withdrawal amount. The percentage of withholding tax you will pay is dependent on the amount you withdraw OVER your minimum requirement.

Up to $5,000 10%
Between $5,000 and $15,000 20%
More than $15,000 30%


Both of these government benefits are considered taxable income.

For couples where one partner receives much larger CPP benefits than the other, sharing the benefits between the couple can be a good tax-reducing strategy.

Definition: Capital Gain

You have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the capital property.

Non-registered Investments

Investments that are not in your registered accounts (i.e. RRSP or RRIF) are considered non-registered, and are subject to different rates of tax.

Income from non-registered investments is typically taxable in the year it is earned. The tax treatment depends on whether the investments produce capital gains, dividends or interest income.

  • Interest income is fully taxable at an individual’s personal marginal income tax rate in the year it is received.
  • Only 50 per cent of capital gains are taxable as income at your personal marginal tax rate. The tax can be deferred until sold.
  • Dividends from Canadian sources are taxed at a grossed-up amount and subject to a dividend tax credit. They are more tax-efficient than interest income.

Taxable Benefits

There are also taxable benefits associated with retirement. Like many tax topics, these can be very complicated. You should discuss them with a professional to ensure that your particular financial situation is addressed.

Age-related Tax Credits

You can claim a tax credit if you are over 65 and earn less than $84,597. The amount varies depending on your income, and provides the greatest advantage to those in lower income brackets. There is a set amount of $7,225 for incomes less than $36,430. For incomes between $36,430 and $84,597, the amount is based on income, and is determined by the following formula:

Maximum Claim $7,225 – [(Net income – $36,430) X 15%] = Claim Amount

For example, if your income is $80,000, the calculation would look like this: $7,225 – [($80,000-$36,430) X 15%] = $689.50

Income tax is based on the individual’s income. Many tax-reduction strategies for married or common-law couples aim to redistribute their individual incomes. This reduces their individual tax rates, and decreases the overall amount of taxes paid.

Eligible pension income (government benefits) is divisible at any age. Registered account income cannot be split until the youngest spouse is 65 years of age.

Pension income tax credits

You may be able to claim up to $2,000 if you receive eligible pension, superannuation or annuity payments after you turn 55.

Disability tax credit

Those with debilitating diseases or conditions that prohibit some activity may be eligible for the disability tax credit of $8,113.

Caregiver tax credit

If you attend to someone with a disease or disability who is dependent on you for care and support, you may be eligible for the caregiver tax credit of $2,121.

Tax Issues For Your Spouse

In some cases, a couple may be concerned about the financial situation for a surviving spouse after one has passed away. RRIFs are generally automatically transferred to the surviving spouse (assuming he/she is the named beneficiary). They are eventually taxed according to the annual minimum withdrawal amount. Pension benefits are often reduced after death, which may reduce individual taxes for the surviving spouse.

One additional option is to include a life insurance policy as part of the retirement income plan for a surviving spouse. The payout from a life insurance policy is tax-free. It provides the surviving spouse with a lump sum of money that will not be considered taxable income. That money can be allocated a variety of ways to complement the surviving spouse’s overall financial situation. (See this article for more on tax issues and estate planning.)

The Bottom Line

If you’ve made it this far in the article, it’s probably obvious that there are a lot of tax issues to be aware of in retirement. For this reason, it’s always a good idea to review your retirement plan with an experienced financial planner and an accountant you trust.