Income Taxed on Seniors – From Retirement to Pensions and Old Age Security

As we approach retirement, understanding the various sources of income and their tax implications becomes crucial for effective financial planning. For families with family-owned enterprises in Canada, this knowledge is even more critical. In this blog post, we’ll explore the key sources of retirement income and offer insights into managing the related taxes efficiently.

Retirement Allowance

A Retirement Allowance, often referred to as severance pay, is awarded to employees upon retirement as a token of appreciation for their long service or as compensation for job loss. Employers are required to withhold a 30% tax on amounts exceeding $15,000, which is remitted on the employee’s behalf. However, this may not always cover the total tax liability, potentially leading to additional taxes owed during tax filings.

To mitigate this tax burden, part or all of the Retirement Allowance can be transferred to a Registered Pension Plan (RPP) or a Registered Retirement Savings Plan (RRSP). The transferable portion includes up to $2,000 for each year of service before 1996, plus an additional $1,500 for years before 1989. Any non-eligible portion can also be transferred to your RRSP, subject to available contribution room.

Other Pensions and Superannuation

Pensions from Canadian or foreign sources fall under this category. These can be strategically split with your spouse or common-law partner to minimize taxes through income splitting.

Annuity Payments

Annuities, whether from a general annuity plan, a Registered Retirement Income Fund (RRIF), or variable pension income, provide regular payments that are taxable.

Canada Pension Plan (CPP)

The CPP offers a partial income replacement upon retirement. The maximum monthly benefit at age 65 for 2023 is $1,306.57, though the average payout in 2022 was approximately $717.15. The amount received depends on your CPP contributions and the years contributed. To maximize CPP benefits, one must contribute for 39 years at the maximum pensionable earnings, which is a challenging feat. For a detailed assessment, contact Service Canada for your CPP Statement of Contributions.

Old Age Security (OAS)

OAS provides a minimum pension income to individuals over 65, with eligibility based on net income levels. The program is adjusted quarterly for cost of living, and high earners may face a clawback. To maintain OAS eligibility, consider the impact of different income sources on your net income, as some, like dividend income, can significantly affect your eligibility due to the gross-up rule.

Guaranteed Income Supplement (GIS)

The GIS offers additional non-taxable income to low-income OAS recipients living in Canada. Eligibility and amounts vary based on income levels and marital status, with thresholds updated quarterly.

Conclusion

Understanding the intricacies of retirement income and its tax implications is essential for effective financial planning. For families with family-owned enterprises in Canada, this knowledge is crucial to ensure a smooth transition into retirement. At Shajani CPA Chartered Professional Accountants and Advisors, our team of experts in Calgary, Edmonton, and Red Deer is ready to assist you with your personal tax filings and retirement planning needs.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.