Navigating Canada’s tax system

It’s not easy to figure out how to draw down your portfolio in the most tax-efficient way

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by

From the September/October 2011 issue of the magazine.

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Getting familiar with these rules and programs can help you save money.

Old Age Security
This federal benefit pays $6,400 a year to long-time residents of Canada starting at age 65. It gets gradually clawed back at an income of $67,700, until it is eliminated at $109,600.

Guaranteed Income Supplement
This federal program for low-income seniors pays up to $8,700 a year for singles, and up to $11,500 for most couples. Roughly 50 cents is clawed back for each dollar of income (not counting OAS). GIS is fully clawed back at $16,200 for singles, and $21,400 for couples.

Pension Income Credit
This is a 15% federal tax credit on up to $2,000 in eligible pension income, which can save up to $300 in taxes for those 65 and older. Eligible income must come from a defined benefit pension from your former employer, a Registered Retirement Income Fund (RRIF), an annuity purchased with funds from an RRSP, and a few other sources. Withdrawals from an RRSP don’t count, so if you don’t have an employer pension, convert some of your RRSP money to a RRIF or annuity when you turn 65 to get the credit.

Age Credit
Once you reach 65, you’re entitled to a 15% federal tax credit on income of $6,537, for total tax savings up to $980. But the credit is gradually clawed back when your income reaches about $33,000, until it is eliminated at $76,500.

RRSP withdrawals
If you take money from an RRSP, you’re subject to a with-holding tax that starts at 10% for a withdrawal up to $5,000, with higher rates on larger amounts. Note this isn’t an additional tax, but rather a prepayment on the taxes you’ll eventually pay when you file your return.

RRIF conversions
Before age 71, you have the option of taking money directly from an RRSP or converting to a RRIF and taking the withdrawals from there. At age 71, you must convert your RRSPs into a RRIF or annuity. RRIFs are subject to mandatory minimum withdrawals every year.

Pension splitting
If you’re 65, up to 50% of pension income (including RRIF withdrawals) can be split with your spouse. This can help couples even out their incomes and save on tax. You might want to convert part of your money to a RRIF after 65 to generate regular income, earn the Pension Income Credit, and help with pension splitting.

Annuities
When you convert your RRSP to an annuity (a type of insurance product that guarantees you a fixed income for life), the payments are taxable, just like withdrawals from a RRIF. However, an annuity can provide a smoother and more predictable flow of income than a RRIF.

If you buy an annuity with non-registered funds, generally only a portion of the payments are taxable.

3 comments on “Navigating Canada’s tax system

  1. Thanks you! I'm going to print this and put it in my tax file for future reference.

    Reply

  2. I believe pension splitting is available at any age, not just after 65.

    Reply

  3. Convert RRSP to RRIF before the age 65. The RRSP will be tax as income before it make it into RRIF account. If the RRIF withdrawal is below a threshold of say $8700 there is NO tax what so ever. Can someone please explain this. I thought every penny withdrawal from RRIF IS TAX AS AN INCOME.

    Reply

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