3 Tips for Retirees in 2023 Tax Season
9 Mar 2023.
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 1, since April 30 falls on a weekend. So 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.
Here are three ways to give you more peace of mind when it comes to paying, saving, and avoiding future taxes.
1. Don’t Waste Your Tax Credits
If you have a spouse with little to no income, you can generate tax-free income by taking advantage of their unused tax credits. This strategy is applicable for 2023 tax filing. Some of the more common federal tax credits include the basic personal amount ($15,000), age amount ($8,396), and pension income amount ($2,000).
Medical expense tax credits are often overlooked, but they 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 $2,635. Think of out-of-pocket expenses (not covered by your medical plan), including your medical coverage premiums. Check out the CRA’s website to see which medical expenses you can claim.
A new tax credit began this year as well. January 1 marked the beginning of the Multigenerational Home Renovation Tax credit. This new credit is equal to 15% of eligible expenses (up to $50,000) incurred for a qualifying renovation that creates a secondary dwelling for an eligible person (such as a senior or someone with a disability) to live with a relative.
Another tax credit to support the older generation is Home Accessibility Tax Credit (HATC). If you’re 65 or older, are eligible for the disability tax credit, and have remodelled your home for safer access, you can claim up to $20,000 of your related HATC expenses
To take advantage of these tax credits, you may consider generating income through an 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 2023, so speak with your tax professional about optimizing your tax return this year.
2. Use Your TFSA
Who doesn’t love tax-free income? This account was first available in 2009, and still, many people are not using it to their fullest or at all. The annual contribution limit between 2019 and 2022 was $6,000 but has increased to $6,500 in 2023. For individuals over 18 in 2009 but did not have a TFSA, the lifetime accumulated contribution room is $88,000. 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 the 2019 tax year (the most recent CRA stats), there were around 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 around 6.6 million,² meaning about 2.5 million people had 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, CPP, OAS, or GIS, consider saving a little of this and putting 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 or financial planner about alternative options.
3. 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 an 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.
In a recent poll,³ nearly 40% of Canadians said that money was their biggest concern, outranking personal health (21%), work (19%), and relationships (18%). 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.
The Bottom Line
Tax season can be stressful for anyone – even more so when you’ve retired. But with the proper planning, you can navigate these stresses easier; there may be tax credits or options like a TFSA that you didn’t consider before. No matter your planning, it’s always important to consult with a professional for anything that is unclear to you.
*This article updates a previous version that was originally published on February 17, 2022.
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
Canada’s Population, Statistics Canada: https://www150.statcan.gc.ca/n1/pub/11-627-m/11-627-m2019061-eng.htm
FP Canada™ 2022 Financial Stress Index : https://www.fpcanada.ca/planners/2022-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 its affiliates will be held liable for inaccuracies in the information presented.