The transition from working life to retirement will bring several adjustments, even at the tax level. Indeed, many elements will affect the taxes you will pay and therefore what you will have to support your standard of living.
Given the amount of tax-related measures for retirement, we will present them in two parts.
Part I – Deductions at Source, RRIF, Instalment Payments, Eligible Retirement Income Splitting, Division of the QPP Retirement Pension, and Spousal RRSP
Deductions at Source
One of the important changes is the fact that most of you will receive several sources of retirement income (QPP retirement pension, Old Age Security pension (OAS), pension of a pension plan, RRSPs, LIRAs, investment income, etc.).
The taxes payable on these different types of income will be taken by withholding tax and / or the annual filing of your tax returns. It is therefore essential to understand their respective functioning in order to avoid unpleasant surprises.
Taxes will be deducted at the source according to the federal and Quebec tax tables by the QPP, the OAS and your pension plan. The problem however is that taxes will be collected source by source while the actual calculation when filing tax returns will be done on the total taxable income, which will probably leave you with a tax balance to pay.
RRIF
In the year after you convert your RRSP into a RRIF, you will need to make a minimum withdrawal from your RRIF. The minimum RRIF withdrawal will be taxable but no withholding tax will be withheld by your financial institution, so you will need to provision a tax balance to pay when filing your income tax returns.
However, if you make an additional withdrawal to the minimum withdrawal, taxes will be withheld by your financial institution based on the amount (≤ $ 5,000 = 5% federal and 15% Quebec, $ 5,001 – $ 15,000 = 10 % federal and 15% Quebec,> $ 15,000 = 15% federal and 15% Quebec). It is important to understand that the final tax calculation will be done when filing your income tax returns, which could result in an upward or downward adjustment of taxes payable.
Instalment Payments
If you have a tax balance of more than $ 1,800 in federal or Quebec in the current year and for one of the two previous years, the tax authorities will ask you to make instalment payments at fixed dates (March 15, June 15, September 15 and December 15).
It is important when you receive a request for instalment payments to fully understand the reason for this request. Then you will be able to determine how to react. You can either pay the amounts requested, pay less, pay nothing, or increase the deductions at source on your income.
However, be careful not to undervalue your taxes payable, otherwise penalties and interest may apply if the instalment payments were lower than requested amounts by the government and are ultimately insufficient to cover the sum of taxes due.
Eligible retirement income splitting
Some retirement income will be sharable for tax purposes:
- Before 65 years at the federal level only: the annuity of a registered pension plan;
- At the age of 65: the pension of a registered pension plan, the withdrawal of a RRIF or LIF.
It must be ensured that the withdrawal is made out of a RRIF and not from an RRSP so that it is eligible for splitting.
The splitting of these incomes will reduce the overall tax burden of the couple who will benefit from a lower tax rate, and this will allow for a second pension credit in certain cases, and even the recovery of a portion of the old age security pension.
Division of the QPP Retirement Pension
As soon as the two spouses of the couple receive their retirement pension, an application for division of retirement pensions can be made to the QPP.
Following this division, QPP will pay part of the pension of the spouse with the highest income and the highest level of taxation in favour of the other spouse.
This strategy also aims to reduce the couple’s tax burden.
Spousal RRSP
When the couple is in the retirement accumulation period, a good planning of each spouse’s tax level at retirement will minimize the tax burden during the disbursement period by contributing to the RRSP of the spouse who will have the benefit lower tax rate at retirement.
In light of the various elements mentioned, only a detailed analysis of your situation will ensure you benefit from all available tax breaks and thus minimize your tax burden. We will be pleased to help you take advantage of these steps while optimizing your personal financial and tax situation.
In the next chronicle we will discuss, on the subject of retirement and taxation, the following topics:
Part II – Recovery of OAS, Home-support services for seniors, Equipment to Help Seniors Continue Living Independently at Home, Physical and artistic activities, Home Buyers Plan (HBP), Experienced workers in Quebec, RRSP contribution at age 71, Pension income credit at age 65, Planning Medical Expenses, Charitable Donations, and Stays in the United States.