Strategic Retirement Income Planning: A Tax and Estate Perspective

Transitioning into retirement requires not just emotional readiness but also a well-thought-out income plan, informed by a deep understanding of taxation in this phase of life. As a tax professional with expertise in trust and estate planning, I emphasize the importance of strategizing for tax efficiency, maximizing government benefits, optimizing tax benefits for couples, and minimizing potential claw-backs, such as those affecting Old Age Security (OAS) and the Age Amount Credit.

Income Splitting Strategies:

• Utilizing Lower Tax Brackets: Effective income splitting with a spouse or common-law partner can leverage lower individual tax brackets, thus reducing the overall family tax burden. This can be implemented with eligible pension amounts and shared Canada Pension Plan (CPP) benefits in retirement.
• Strategic Asset Transfers: Income splitting isn’t limited to pensions. Consider using spousal loans at the prescribed interest rate or transferring assets like real estate for investment purposes to even out income levels between spouses.
• Debt Management: Paying down a spouse’s debt can be advantageous, particularly when the interest isn’t tax-deductible, as it typically doesn’t trigger income attribution rules.
• Dividend Splitting: If both spouses are shareholders in a holding company, dividend splitting is another viable option.

Broadening the Scope Beyond Spouses:

• Educational and Family Support: Consider funding RESPs for grandchildren or gifting to adult children and elderly parents, especially beneficial for family members with lower incomes.
• Family Trusts and Legacy Planning: A family trust can offer flexible access to funds and income splitting with broader family members. It can also serve as a means of creating a lasting legacy, similar to funding life insurance policies for children or grandchildren.

Optimizing Different Types of Income:

• Tailored Withdrawal Strategies: Understanding how various income sources (TFSA, RRSP, RRIF, LIRA, LIF, dividends, interest, capital gains, etc.) are taxed is crucial. This includes navigating forced conversion dates and optimizing withdrawal amounts.
• Specific Considerations for Income Types: For instance, LIRAs can be split between spouses only after converting to LIFs and annuitizing. Also, the tax treatment of eligible dividends generally favors them over interest income, though considerations like OAS claw backs and alternative minimum tax may apply.

Additional Retirement Considerations:

• Early CPP and OAS Strategies: Decisions around applying for CPP early or deferring OAS and CPP need to be tailored to individual circumstances, potentially increasing future benefits.
• International Residency Considerations: Time spent outside Canada, particularly in the U.S., requires careful planning to avoid U.S. residency rules and filing requirements. Strategies include filing Form W8840 with the IRS or claiming treaty exemptions.
• Charitable Giving: Establishing a foundation or contributing to existing ones can be both a philanthropic endeavor and a tax-efficient strategy.

Conclusion: Each retirement plan is as unique as the individual it serves. Therefore, it’s imperative to consult with a qualified professional advisor such as Shajani CPA – someone who can merge expertise in tax, trust, estate, and retirement planning – to ensure your retirement income and assets are optimized for your specific needs and goals. At Shajani CPA, we are committed to providing tailored advice to help you navigate the complexities of retirement planning with confidence and clarity.

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. ©2023 Shajani CPA.

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