That’s a tax-efficient way to take funds out of registered retirement savings plans (RRSPs). “To make this even more tax efficient, the withdrawal amount should be transferred to a (registered retirement income fund) RRIF first,” says Ardrey. After age 65, this move will generate the pension tax credit and if a couple has different RRSP/RRIF account sizes, “the income can be split between spouses.”
If CPP and OAS are both deferred to 70, payouts will be higher by 42% and 36% respectively, allowing for greater annuity payments for the rest of a taxpayer’s life, Ardrey says. This also reduces future RRIF payments, “which increases the likelihood that OAS will not be clawed back.”
Dividend tax credits
Canadian retirees can take further advantage of tax brackets by receiving eligible Canadian dividends in their taxable investment accounts. Ontario taxpayers can receive $57,375 of actual (not grossed up) dividend income and, if they have no other income, will have that amount with zero taxes owing, Ardrey says. And “if two spouses can employ the identical strategy, that is almost $115,000 of tax-free income.”
Remember, though, that eligible Canadian dividends are “grossed up” on tax returns by 1.38. It’s this grossed-up amount—not the original dividend actually received—that impacts the OAS clawback calculation. Ardrey estimates the OAS clawback starts to occur at about $66,000 of dividend income. Retirees need to consider how this income combines with other income like CPP.
Ulmer says that while the income amount at which OAS is clawed back is the same for everyone, the OAS ceiling isn’t the same for everyone.
“If an OAS recipient has delayed their OAS past 65, then the ceiling is incrementally higher,” she says. “This is a function of how the clawback works—15 cents per dollar. If more OAS, then more room to go before that 15% clawback eats it all up.” She adds that the OAS ceiling depends on when you start collecting: “Therefore delaying can be a good strategy for this reason alone—you may get to keep more of your OAS if you have a high income in retirement.”
Allan Small, senior investment advisor with Toronto-based IA Private Wealth and MoneySense columnist, says that while investment strategies are specific to individuals, he’s starting to see some investors moving away from RRSP investing.
Some feel that if a tax deduction is not necessary, they’d “much rather top up the TFSA instead. Money grows tax-sheltered, like within an RRSP, but you don’t pay tax when money is pulled out of this account.”