By Julie Cazzin with Allan Norman
Q: I am 67 and my wife is 62. I’m newly retired and haven’t started Canada Pension Plan (CPP) or Old Age Security (OAS) benefits. My assets include a holding company with $200,000, registered retirement savings plans (RRSPs) of $410,000, a tax-free savings account (TFSA) with $75,000 and $180,000 in a non-registered investment account. I had a heart attack five years ago. When should I start my CPP and OAS? And which accounts should I generally draw from? — Marko
FP Answers: First, Marko, you’ll want to identify your current and anticipated lifestyle expenses, and the amount you’d like to leave to others when you die. Then you can start to think about how to minimize your tax, because taxes will be your biggest expense in retirement.
Minimizing taxes will help you maximize your tax credits and maybe avoid OAS clawbacks. I’ll remind you of the main tax credits available, then discuss your accounts and provide a framework for an organized withdrawal and asset location strategy.
The main credits a person older than 65 has are the $2,000 pension income tax credit and the age amount credit. If you have up to $2,000 of “eligible pension income,” you can claim a federal tax credit that will reduce your tax payable on that income by 15 per cent. The age amount tax credit is available if you’re 65 or older at the end of the taxation year. For 2022, this federal age amount is $7,898.
If you don’t have a pension, convert some or all of your RRSP to a registered retirement income fund (RRIF). RRIF income qualifies as pension income, allowing you to claim the pension tax credit. The age credit essentially increases the basic personal amount (the tax-free amount) for anyone over 65 to roughly $22,000 in 2022 from $14,400. As your taxable income moves from about $38,500 to $90,000, the tax-free amount gradually reduces back to $14,400. Your OAS starts to get clawed back once your taxable income is more than about $79,000.
Marko, you have four different account types: an RRSP, TFSA, holding company (holdco) and non-registered investment account. Each has its own tax characteristics and purpose. As well, you’ll have predictable taxable income from CPP and OAS. I suggest you start with your RRSP when developing a withdrawal strategy. Remember, investment growth in an RRSP/RRIF is tax sheltered, but all withdrawals are taxed as income.
Estimate the amount you can draw from your RRIF so it’s almost depleted from the ages of 85 to 90. Then check your marginal tax rate in future years with CPP and OAS included, and after pension splitting with your spouse. If your RRSP isn’t providing enough income to meet your lifestyle needs, fill the gap with withdrawals from non-registered or holdco money.
This gives you a baseline to work from and you can play with different RRIF start dates, or combine RRIF and TFSA withdrawals if you like, but I suspect it won’t make much difference in most cases. My preference is to save your TFSA money for large one-off expenses or future medical costs.
A TFSA is also one of the best accounts for leaving money to children. Investments inside a TFSA grow tax free, and all withdrawals are tax free, meaning they are not counted as taxable income, and do not affect the age credit or OAS clawback.
Investments in your non-registered account and holdco are both subject to interest income, dividend and capital gains tax, but that’s where the similarities end. Distributions, sells and withdrawals from your non-registered account will increase your taxable income, may affect the age credit and could also result in OAS clawbacks.
Your holdco investments are taxed separately and don’t affect your personal taxable income until you start to draw money from them. Here are a couple of tips for your holdco. You can draw about $32,000 in non-eligible dividends and pay very little tax if you have no other income. It may make sense to draw dividends, supplemented by TFSA withdrawals, until age 70, and then start CPP and OAS.
FP Answers: What is the benefit of a graduated rate estate when doing estate planning?
FP Answers: What are the best investment options for cash in my portfolio now that bond returns are lagging
FP Answers: What is a ‘letter of wishes’ and how does it help achieve my estate planning goals?
FP Answers: Is it right to draw on stocks for retirement income in good market years, and GICs in bad ones?
The best-to-worst taxable distributions and income are: capital gains, dividends and interest income. Generally, public and private equities create capital gains and dividends. Low distribution equities (those that pay little or no dividends such as growth stocks) are best suited for non-registered and holdco accounts.
Equities may also be good for TFSAs if your goal is long-term growth. Bonds can be a combination of capital gains and interest income, while private credit (loans made by lenders other than banks), guaranteed income certificates and cash are taxed as income. These are best suited for RRSP investments and TFSAs. The amount depends on your withdrawal needs, goals and, of course, your risk tolerance.
Marko, I have covered a lot of ground here, but I didn’t get to your CPP question. There has been a lot written on this, but if you have had a heart attack, it may be a good idea to start withdrawals now.
Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or firstname.lastname@example.org. This commentary is provided as a general source of information and is not intended to be personalized investment advice.
If you like this story, sign up for the FP Investor Newsletter.