How Retirement Can Affect Your Taxes

Once you’ve retired you receive new sources of income – CPP, OAS, company pension, withdrawals from your RRSPs or RRIFs, and annuity payments – which are all fully taxable.  Tax can easily become one of your biggest expenses. 

Take advantage of strategies and available tax credits to help prevent the taxman from taking too much of your retirement income.

Tax Strategies

The Canadian tax system is progressive.  This means the higher your net income, the more tax you pay.  The goal, therefore, is to move into a lower tax bracket. 

If you receive certain types of eligible pension income (e.g. company pension plan, CPP) you may transfer up to 50% to your spouse. Two smaller incomes will always pay less tax than one larger income.

By splitting income with your spouse, you can take full advantage of certain credits and reduce OAS claw-backs for exceeding the threshold ($75,910)

Related:  Manage the Tax You Pay on Retirement Income

Tax Credits Available to Seniors

Whether you are still working, working part-time, or fully retired there are several tax credits available for seniors depending on age and income type.

For the 2018 tax year they include:

  • The Age Amount is a credit given to those who have reached the age of 65 or older on December 31.  This non-refundable credit is income tested.  It is worth up to $7,333.  You get the full amount if your income is less than $36,976.  If your income falls between $36,976 and $85,863 you get partial credit and nothing at all if your net income exceeds the cap.  There is also a corresponding provincial tax credit you can claim.
  • The Pension Income Amount is a non-refundable tax credit on the first $2,000 of eligible pension income (see above).  If you split this income with your spouse, both of you may qualify for this credit.
  • Medical Expenses can be a significant cost as you get older.  You can claim unreimbursed medical costs up to the lesser of 3% of your net income and $2,302.  The CRA allows you to claim a wide range of medical expenses including prescription medications and physiotherapy.  You can also claim such things as air conditioning and bathroom aids.  Make sure you keep all your receipts.
  • The Disability Tax Credit is for those who have the misfortune of a serious medical impairment.  This tax credit requires a doctor to certify that you have a severe and prolonged impairment and the CRA must approve the Disability Tax Credit Certificate (but claim anyway even if your form hasn’t been submitted yet).  The maximum credit is substantial at $8,235.  You can also claim the credit for prior years.
  • Family caregiver amount – if you have a dependent who is physically or mentally impaired you may be able to claim up to an additional $2,150 in non-refundable tax credits.
  • Home Accessibility Tax Credit is for those aged 65 and over (as well as disabled taxpayers under 65 who have a valid Disability Tax Certificate) who have made renovations to their homes to improve their quality of life.  So, for example, if you installed a walk-in tub, stair lift or non-slip bathroom flooring, up to $10,000 of the expense can be claimed and 15% comes back to you as a tax credit.  Some improvements may also qualify for provincial credits as well.
  • Charitable donation tax credit is for donations you make to a registered charity or other qualifying organization.  Federal tax credits are 15% for the first $200 and 29% for amounts over $200, plus provincial tax credits.  You can combine donations as far back as 5 years as well as combine receipts with your spouse to maximize your claim.

The Bottom Line

Canadian seniors are eligible to receive tax benefits that are not available to younger taxpayers.  Combined with other tax credits, such as the basic personal amount ($11,809) and spousal amount, these credits mean seniors can save more on their taxes.

In addition, once your tax liability is reduced to $0, you can transfer any additional tax credits to your spouse to reduce his or her tax liability.

It’s extremely important to file your taxes every year to keep receiving certain benefit payments.

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