What seniors need to know about taxes

Dear Money Lady,

We heard one of your radio shows and you said that people who made less than $75,000 in 2020 don’t have to pay any taxes in 2021. Can you explain this and let me know if there are any other tax benefits for seniors? What should I be talking to my accountant about?

Thanks, George

You are partly correct.

If a Canadian has made less than $75,000 income in 2020 and also received either employment insurance or one or more COVID benefits, they do not have to pay any taxes owing until April 30, 2022 but will still have to file on time (April 30, 2021).

This would include the Canadian Emergency Response Benefit, the Emergency Student Benefit, the Recovery Benefit, the Recovery Caregiving Benefit and the Canada Recovery Sickness Benefit or EI in 2020.

Managing your taxes during your working years is relatively generic. You maximize your RRSP contributions, purchase investments that attract the least tax possible on investment income or buy real estate to increase your net worth. Some even invest in rental properties to build additional wealth and use the ongoing expenses as a tax write-off to lower their marginal tax rate.

However, as you transition into retirement, the tax planning process shifts to withdrawing assets and doing so in the most tax-efficient manner.

To succeed in achieving tax efficiency in retirement, many retirees may need to make a minor mind shift. Most are preoccupied with minimizing current taxes each year; however, this cannot be at the expense of your long-term objective for maximizing after-tax income for your entire retirement (often estimated at 25-40 years).

Retirees need to have a good understanding of how various income sources are taxed. Decisions need to be made on how to properly allocate investments with a keen awareness of tax brackets and thresholds for future tax credits. Rising life expectancies, market volatilities, progressive inflation and, of course, unplanned expenses all pose serious threats on the ability of a retiree to manage their finances to last their lifetime.

Let’s look at a few ways we can increase your after-tax income in retirement. There are three main types of taxation to consider: interest income, dividend income and capital gains. All are taxed differently, so this makes it easier to structure your portfolio more efficiently when you are creating your plan with your adviser.

As a general rule, you want to place income that is going to be unfavourably taxed (interest income) into taxsheltered products such as TFSAs or RRSPs. Investment income that generates returns that receive more favourable tax treatments (dividends or capital gains) should be placed in non-registered accounts.

The next rule is to take advantage of government pensions and count them in first when estimating annual withdrawals for your yearly income. We want to avoid clawbacks as much as possible, so it is imperative that you have a good understanding of your company pension, government pensions and/ or anticipated investment income withdrawals for each year to be clear on taxation. Individuals 65 or older can also take advantage of the age tax credit and the pension income credit.

Other ways to initiate good tax planning opportunities would be to utilize CPP/

QPP pension sharing with a spouse or common-law partner, if possible. You can also split employer pension plans and registered plans with a lower-income spouse or common-law partner to reduce marginal tax rates.

Remember that with any registered plans (RRSP, LIRA or LIFs) you should try to hold them to their latest maturity. Once registered funds are converted into a RRIF or LRIF, the prescribed annual minimum withdrawal requirement will ensure that you have income to report every year.

Tax efficiency in retirement should not be overlooked and should be something you regularly discuss with your adviser. Simply put, paying less tax translates into keeping more money in your pocket, allowing you to enjoy a better quality of life with less overall investment and lifestyle risk.

Good luck and best wishes.

Christine Ibbotson is author of How to Retire Debt Free & Wealthy and Don’t Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus. If you have a money question, visit askthemoneylady.ca.