3 Tips for Retirees in Tax Season

Clayton Brown

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17 Feb 2022

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4 mins

It’s that time of the year, when you start receiving emails and slips in the mail reminding you that tax filing is around the corner. This year’s deadline is Monday, May 2, since April 30th falls on a weekend. If you dread even thinking about it, try to take a different approach this year and make changes that could have a lasting impact on your tax season anxiety.

As many retirees discover, managing income taxes post-retirement can be more complicated than pre-retirement. You no longer have an employer withholding and remitting taxes to Canada Revenue Agency (CRA) —that’s now on you or your tax professional to figure out.

I’ve helped numerous clients, family, and friends navigate this shift. As a CFP® professional, I have found that reviewing someone’s income tax return usually uncovers an area that can save them money, and I’ve yet to meet someone who doesn’t want to pay less tax!

Here are 3 ways to give you more peace of mind when it comes to paying, saving and avoiding future taxes.

1. Avoid the big tax bill

Paying thousands of dollars to CRA may be challenging when your retirement budget is based on a set monthly income so consider using your RRIF or LIF account to help pre-pay your taxes owing. The mandatory minimum annual withdrawals from these accounts are fully taxable, but you aren’t required to have any taxes withheld. The same can be said about Canada Pension Plan (CPP) and Old Age Security (OAS) income. Consider withholding taxes at source from one or several of these income sources to cover your expected tax bill.

For example, someone in Ontario receiving $40,000 from a RRIF, LIF, CPP or OAS may owe nearly $6,000 in federal and provincial taxes. Simply speak to your advisor or Service Canada to have that tax withheld at source, so you don’t need to find that $6,000 when you file your taxes and possibly avoid the need for tax installments.

CRA notes that for returns processed from February 10, 2021, to January 29, 2022, there were nearly 19 million refunds issued. If you are in this group, you essentially gave CRA an interest-free loan, but on average these were under $2,000. Of the ~8.2 million Canadians who owed money, they were on hook for nearly $6,000 on average.

Average tax refunds in CanadaNote: Total income tax return numbers are rounded to the nearest 100,000. Source: CRA.

2. Don’t waste your tax credits

If you have a spouse with little to no income, generate some tax-free income by taking advantage of their unused tax credits. This strategy is applicable for 2022 tax filing. Some of the more common federal tax credits include the basic personal amount ($14,398), age amount ($7,898), and pension income amount ($2,000).

Another overlooked credit is medical expenses, which can really add up when you no longer have coverage through your employer. The amount you can claim is the lesser of 3% of your net income or just under $2,500. Think of out-of-pocket expenses (not covered by your medical plan) including your medical coverage premiums. You can go search on the CRA website here to see which medical expenses you can claim.

To take advantage of these tax credits, you may consider generating income through a RRSP withdrawal, converting a Locked In Retirement Account (LIRA) to a Life Income Fund (LIF), or realizing capital gains. There is time to plan for this in 2022, so speak with your tax professional about optimizing your tax return this year.

3. Use your TFSA

Tax-free income, who doesn’t love that? This account was first available in 2009 and still, many people are not using them at all or not to their fullest. For those without one who were 18 or older in 2009, your lifetime accumulated contribution room is $81,500. That is enough to make a real difference in people’s lives. Shielding investment income today and generating tax-free income in the future can allow you to access your money in retirement, without worrying about paying the tax man.

As of 2019 (the most-recent CRA stats), there were ~4.1 million TFSA holders aged 65 or older¹ with an average account balance of between $35,260 and $43,424. At that time, the total Canadian population over 65 age was ~6.6 million,² meaning about 2.5 million people have not funded a TFSA account and could likely benefit from this tax advantaged account.

If you have non-registered investments, ask yourself why that money is not inside a TFSA. If you only have RRSPs/RRIFs or LIRAs/LIFs, consider withdrawing extra to start or top up your TFSA. If you only have work pension income, or CPP, OAS or GIS, consider trying to save a little of this and put that into your TFSA to create an emergency fund. If you have a TFSA sitting in savings investment paying you very little interest, ask yourself is this really saving me much in the way of taxes? Speak with your advisor about alternative options or contact us if you’d like speak with a planner.

In a recent poll,³ nearly 40% of Canadians said money was their biggest concern, outranking personal health (26%), work (20%), and relationships (15%). Use this tax season to set yourself up for mental relief when it comes to taxes and think about friends and family who might benefit from acting on this advice. If it’s too much to take on yourself, speak with your advisor (tax, investment, or financial planner) to see how they can help.


References

Tax estimate: https://www.wealthsimple.com/en-ca/tool/tax-calculator/ontario

(1) Tax-Free Savings Account statistics, CRA: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/income-statistics-gst-hst-statistics/tax-free-savings-account-statistics/tax-free-savings-account-statistics-2019-tax-year.html

(2) Canada’s Population, Statistics Canada : https://www150.statcan.gc.ca/n1/pub/11-627-m/11-627-m2019061-eng.htm

(3) Individual income tax return statistics for the 2021 tax-filing season, Government of Canada: https://fpcanada.ca/planners/2021-financial-stress-index

 

The information provided on this article is intended for informational purposes only and is not intended to constitute financial, accounting, legal or tax advice. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Always reach out to professional advisors to consider your unique circumstances.

Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.

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