Retirement Planning – Racing Against the Taxman

As the complexity of our taxation system continues to increase, so, too, do the benefits of using a qualified accountant.

Of course, the complexity of the financial services industry also continues to increase as it tries to stay one step ahead of the taxman, so it’s also a good idea to make sure your financial advisor consults with your tax accountant.

As each summer approaches, many of us eagerly wait for that little brown envelope from the Canada Revenue Agency. For those lucky enough to receive a tax refund, the cheque is immediately deposited into our bank accounts or put against the line of credit we used to make the last-minute RRSP contribution on March 2. As a reminder, the limit for 2008 was 18 per cent of a taxpayer’s earned income to a maximum of $20,000. For 2009, it is $21,000. You can continue to make contributions until December 31 in the year in which you turn 71. At that point, you have three options: convert to a registered retirement income fund (RRIF) and maintain the portfolio; cash the RRSP and pay tax on the entire sum in the year of disposition; or convert the RRSP to a registered annuity.

Suppose, like many Canadians who have turned 65, you were not fortunate enough to belong to a government or corporate pension plan, and the cost of raising a family and paying a mortgage for 20-plus years left little financial room for RRSP contributions. Maybe you managed to build a nest egg in GICs and Canada Savings Bonds but never had the time to invest in mutual funds or the stock market. You might be smiling at the thought that you managed to escape the worst financial crisis since the Great Depression. But that might be little comfort if your retirement income consists of Canada Pension Plan benefits, Old Age Security, Guaranteed Income Supplement, GIC income, and whatever funds you have managed to squirrel away in an RRSP.


In the case of the CPP, according to Service Canada, the average monthly benefit as of October 2008 was $489.72 and the maximum monthly benefit for 2009 is $908.75. Benefits are, of course, taxable and can start as early as age 60 or be delayed until age 70. There is an adjustment calculation and this information is available at where you can also find information on common law and spousal pension-income splitting as well as disability benefits. Again, I would recommend that you consult with a tax accountant to maximize your benefits.

Old Age Security will also provide a maximum monthly benefit of $516.96. It’s very important to note that you must apply for Old Age Security and there are conditions that must be met to be eligible. Ideally, the individual should apply approximately six months before turning 65. The benefit is taxable and, if your net income is more than $62,144, you will be required to repay a portion of the benefit. In a future article, I may describe certain tax-assisted investments that some investors use to reduce their income to keep their Old Age Security benefits, but there are risks involved which make it unsuitable for many retirees.

The government of Canada likes to support its retirees, so there is an additional retirement benefit called the Guaranteed Income Supplement. Unlike CPP and OAP, this is a non-taxable benefit for low-income Old Age Security recipients. To qualify for the GIS, you must first be eligible for OAS. Formulas are somewhat complicated, so it’s best to contact Service Canada.

If you are about to turn 65 or have recently turned 65, review the website at because it offers a wealth of information. If you don’t have access to the Internet (I still have clients who do not have a computer), most major cities have an office or directory assistance can direct you to the nearest one.

Last but not least, there is a tax credit that many Canadians over 65 don’t realize they have access to. For those Canadians over 65 who belong to a pension plan or have converted their RRSPs to an RRIF or life annuity or term-certain annuity, the payments received already qualify for the annual pension-income tax credit on the first $2,000. CPP and OAP do not qualify for this credit, but you may be able to qualify from partial RRSP withdrawals. Check with the Canada Revenue Agency (CRA) or consult with your accountant.

For those Canadians who do not have the resources of RRSPs or a pension plan, there is a way to convert term deposits, mutual funds, and GICs into non-registered annuities. Annuities are financial instruments offered by insurance companies and are designed to provide the annuitant with a fixed sum of money over the life of the contract. While there are two basic types of annuities — immediate and deferred — I will only discuss the former.

Immediate annuities are purchased from a life insurance company and are used to provide a stream of income usually until the annuitant dies. The income stream is a combination of the annuitant’s original principal and income earned over the life of the contract. If the funds used to purchase the annuity come from non-registered assets, then the taxable-income portion of the payment qualifies for the pension-income tax credit.

Insurance companies have become very innovative and annuities can be structured to pay funds for a fixed term, such as 10 years or for the duration of the annuitant’s life. There are many advantages to annuities, including ease of management (once established, the income is guaranteed for the life of the contract) and higher after-tax income than other traditional fixed-income vehicles such as GICs. In addition, annuities provide built-in safety options, such as guaranteed payment periods and income splitting (joint life annuity first or last to die).

As a financial professional, I am qualified to provide individuals with financial products including RRSPs, RRIFs, life insurance, and annuities, and because I also manage investment assets for my clients, I endeavour to consult with their accountants. Your investment advisor should do the same.