To begin with, taxes work a bit differently in retirement. Like employment income, most retirement income is taxable. In retirement, there are some additional types of income that can be taxed. This can include things like an annuity from a pension plan, an annuity from an insurance company, or an annuity from a mutual fund company.
Once you retire, your tax bill drops dramatically because your income likely drops. But it’s still a good idea to know how much tax you’ll pay each year.
Are My Pension Payments Taxable?
Like employment income, most retirement income is taxable. That includes Canada Pension Plan (CPP), Old Age Security (OAS) and company pension payments.
What are CPP and OAS? Are they taxable?
When you retire, you may be eligible for Canada Pension Plan (CPP) payments, Old Age Security (OAS) payments and the Guaranteed Income Supplement (GIS).
The Canada Pension Plan (CPP) is a retirement income program administered by the Government of Canada through Service Canada. It is funded through contributions made by employees and their employers. In most provinces, employers and employees each pay half of the CPP contribution. Self-employed individuals must make their own contributions. When you retire, you can receive CPP payments. The amount of your CPP payments depends on how much you contributed while you were working and how long you worked.
Old Age Security (OAS) is available to Canadian citizens and residents who are at least 65 years of age and who have lived in Canada for at least 10 years after they turned 18. To receive the maximum you need 40 years’ residency.
Is The Canada Pension Plan (CPP) Taxable?
Your CPP retirement pension counts as income and is taxable. Taxes aren’t automatically deducted.
Is Old Age Security (OAS) Taxable?
Your Old Age Security (OAS) retirement benefit is taxable. OAS payments are included in your taxable income for the year and taxed based on your income tax bracket. At the end of the tax year, Service Canada will send you a T4A (OAS) tax slip showing how much you received from OAS and how much was deducted in taxes. Other OAS benefits (i.e., GIS) are not taxable, however, you must still report these benefits on your income tax return. Additionally, you might find your OAS income clawed back if you earn too much? How much is too much? Income over $78,500 will result in an OAS reduction.
What About RRSPs and RRIFs?
One notable exception to the typical tax rules are Registered Retirement Savings Plans (RRSPs). An RRSP is a tax-deferred retirement savings plan that is registered in your name with the CRA and contains tax-sheltered investment assets, such as GICs, mutual funds, stocks, bonds, ETFs and other financial instruments. If you are eligible to contribute to an RRSP, you can put money in and receive a tax deduction at the time of contribution. You don’t pay tax on the income earned within the RRSP until you take the money out later.
By the year you turn 71, you have to make a decision with your RRSP. Even if you do not need income payments, you must convert the RRSP into income in the year that you turn age 71. You start taking income at age 72.
You will likely turn your RRSP into a RRIF (a Registered Retirement Income Fund). This special extension of your RRSP lets you withdraw money from your RRIF in regular payments based on by the Canadian government dictated minimum withdrawal amounts. In round numbers, count on withdrawing 5% of your RRIF at age 72. The percentage increase annually. Once you convert your RRSP to a RRIF, your investments move into a RRIF account and you cannot make contributions to the RRIF. The funds in your RRIF are still sheltered from taxes; however, once you start withdrawing money from your RRIF, you will be taxed on it as income. For maximum tax deferral, you want to take out as little as possible from your RRIF for as long as possible. But be careful not to die with loads of money in your RRIF. RRIFs only pass to a spouse or partner tax free. i.e. Not to your kids.