Navigating Tax-Efficient Retirement Income: Key Strategies for Canadians
High school debate teams often tackle improbable topics, like arguing the earth is flat. While such arguments may end with dramatic exits, real-world debates about retirement income require careful, reasoned planning. Last week, I explored one individual's approach to drawing retirement income, sparking significant online discussion and some confusion. Given the interest, it's valuable to expand on several key points over the next two weeks to provide clarity and deeper insight.
Planning for Singles and Couples
In my previous example, I detailed the case of William, a man in his mid-sixties. Married or common-law partners might assume this example doesn't apply to them, but remember: Canadians file tax returns separately. If each spouse aims to minimize tax on their retirement income, as William did, couples can achieve favorable outcomes. However, joint planning becomes crucial when income-splitting opportunities arise. For instance, up to half of eligible pension income—such as benefits from registered pension plans, withdrawals from registered retirement income funds, and certain other plans—can be taxed in your spouse's hands. This strategy can influence which tax bracket you fall into, directly impacting your overall tax liability.
The Role of Corporations in Retirement
Is establishing a corporation solely for earning consulting income in later years worthwhile to control personal income? It depends on your financial situation. If you can generate sufficient income over several years to leave $30,000 to $40,000 annually in the corporation without withdrawing it, the tax deferral on those retained funds can be beneficial. The administrative and tax filing costs may be offset by the deferred taxes. Consulting a tax professional is essential to crunch the numbers. A corporation makes even more sense if used for additional purposes, such as completing an estate freeze, minimizing U.S. estate taxes, or providing liability protection. If you already have a corporation, the decision becomes straightforward.
Additionally, an incorporated business can deduct reasonable income-earning expenses, including home office and vehicle costs, unless it's classified as a personal services business. This status is typically avoidable if you work for multiple clients.
Estate Planning Considerations
When planning for tax-efficient retirement income, it's vital to consider the impact on your estate. Goals vary: some prioritize maximizing inheritances for their children, while others focus on enjoying life now with less concern for the next generation. To leave more to heirs, consider early withdrawals from registered retirement savings plans or registered retirement income funds if you're in a lower tax bracket now than at death. Gradually transferring these funds to a Tax-Free Savings Account can optimize savings.
If you use a corporation for retirement income, be aware of potential double-taxation issues upon death. Solutions exist, but proactive planning is key to avoid complications.
Evolving Needs in Retirement
Last week's article didn't address how needs change with age. As one reader noted, women generally live longer than men, affecting both investment longevity and long-term care expenses. Psychologically, transitioning from saving to spending can be challenging for many. Embracing a balanced approach—enjoying life while spending wisely—is crucial. I'll delve deeper into this topic next time.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
