This is a guest post by Mark McGrath, CFP®, CIM®, CLU®. Mark is based in Squamish, BC. Over the past decade, he’s worked with over 500 Canadian physicians and their families to achieve clarity, confidence, and comfort with their finances. Follow him on Twitter for more incredibly useful financial planning tips.

More than 1 in 5 working-age Canadians are between the ages of 55 and 64 – more than at any time in our history. With the impending retirement wave, retirement planning is on the minds of more Canadians than ever.

And while planning for a successful retirement involves many uncontrollable factors – things like inflation levels, interest rates, and your own longevity – there are some strategies you can use to increase your chance of success.

Let’s look at eight often overlooked ways to save tax in retirement and keep more money in your pocket.

Some of these may be familiar to you. But I bet there’s a couple you didn’t know about.

Make use of the pension income amount tax credit

If you have qualifying pension income, you may be able to claim the pension income amount tax credit.

A tax credit reduces your taxes owing. If you owe $500 in taxes but have a $200 tax credit, you only owe $300.

The federal amount is 15% on pension income up to $2,000, and each province has their own credit as well. On the federal portion alone, that’s a $300 reduction in your taxes.

The types of income that qualify are:

• eligible pension income such as registered pension plan, RRIF and LIF payments (or both); and
• annuity payments if you were 65 years of age or older on December 31, 2022, or, regardless of your age, you received payments because of the death of your spouse or common-law partner.

While this list is not exhaustive, note that income from OAS benefits, CPP benefits, and QPP benefits do not qualify.

If you don’t report eligible pension income, it might be worth taking some RRIF income before it’s required. You can convert a portion of your RRSPs – say $2,000 each year to a RRIF and get the full pension income tax credit. If you are 65 years of age or older, and your spouse does not report pension income, you can withdraw $4,000, split the income on your tax return, and each qualify for the full credit.

If you have a high income from other sources – say you’re still working, for example – this might not be to your advantage. If you withdraw RRIF income at a high tax rate that would otherwise be deferred into the future when you’re in a lower tax bracket, you may pay more tax now than if you deferred it. Even after accounting for the tax credit.

Using your younger spouse’s age for minimum withdrawals

If you have RRSPs or Locked-In RRSPs, you’ll likely convert them into RRIFs and LIFs eventually. When you do, you are required to make a minimum taxable withdrawal each year. The minimum is by default based on your age, and the percentage goes up yearly.

When you open your RRIF/LIF, you can instead opt to use your younger spouse’s age to calculate the minimum withdrawal.

For example, at age 72, the minimum withdrawal is 5.40% of the account’s value at the beginning of the year. But at age 65, the amount is only 4%.

Since you can always take more than the minimum but never less, this gives you more flexibility – it sets a lower minimum income floor.

One thing to know is that when you take the minimum amount, you are not required to have tax withheld at the source (it’s still taxable, of course). Any amount over the minimum does require withholding tax. Because of this, if you need more than the minimum based on your own age but elect to use your spouse’s age, you might receive less income each month due to the withholding tax. It all comes out in the wash when you file your taxes at the end of the year, but it can be a surprise if you’re unaware of it beforehand.

Once you elect to use either your age or your spouse’s age, you can’t change it. So, if you opt to use your age but then decide you want to use your spouse’s, you’ll have to open a new RRIF, make the appropriate age election, and then transfer your existing RRIF to the new one.

Unlock your LIF account over time

A LIF is a Life Income Fund and is like a RRIF in a few aspects. Where it differs is that there is a maximum annual withdrawal limit each year too. This maximum is the greater of either the amount set out by provincial pension legislation or the growth of the investment account in the previous year.

Each year, you must withdraw an amount between the minimum and the maximum and, like a RRIF, pay tax on it. But you might not know that you can transfer the difference between the maximum and the minimum to an RRSP (if you’re age 71 or below) or a RRIF. Doing so slowly converts a less-liquid asset – the LIF – to a more liquid asset – your RRSP or RRIF.

This gives you more flexibility in case you need to make a large one-off withdrawal, say for an unexpected expense.

Income splitting with a spouse or common law partner

Since Canada uses a graduated tax system, the more income you earn, the higher the tax on each incremental dollar of income.

By splitting income with a spouse or common law partner, you can take advantage of their lower tax brackets and reduce the family tax bill.

For example, in BC, an individual earning $100,000 of income will pay roughly $21,000 in tax. But a couple earning $50,000 each would only pay roughly $13k in tax – a difference of nearly 40%!

There are a few income-splitting techniques available to retirees in Canada:

1. Eligible pension income splitting
2. Using Spousal RRSPs
3. Sharing CPP credits

Pension income splitting

Up to half of eligible pension income can be split with a spouse – the same type of income that qualifies for the pension income amount tax credit.

By moving income out of your hands and into those of a lower-income spouse, you can equalize your family income, use up their lower tax brackets, and reduce your family tax bill.

Using Spousal RRSPs

This one takes some foresight but can shift a substantial amount of income to a spouse.

A spousal RRSP gives the contributor the income deduction, but the account owner – the spouse – claims the income on withdrawal. Say you earn $100k per year, and your spouse earns nothing. If you were to use an RRSP in your own name, you would get a tax deduction on the contributions, but when it comes time to withdraw the funds in retirement, the income is taxed in your name.

Because RRIFs withdrawals are eligible pension income, you can then elect to have half of the withdrawal taxed in your spouse’s name.

Using a spousal RRSP instead, you can shift the entire withdrawal to a spouse – not just half.

Depending on your other income sources in retirement, this can lead to more income in your spouse’s hands, taking advantage of their lower tax brackets.

Another trick with spousal RRSPs is that if you have a younger spouse, you can contribute to them even when you’re no longer eligible to have your own RRSP. Usually, you must wind up your RRSPs by the end of the year you turn 71, most often by converting them to a RRIF.

But if you are still working, you’re still generating RRSP room for yourself – even if you can’t own your own RRSP. In that case, you can contribute to a spousal RRSP if your spouse is 71 or younger.

Sharing CPP

CPP income doesn’t qualify as pension income for the purpose of pension income splitting.

That doesn’t mean you can’t share it, though.

You can share half of your CPP based on the number of years you lived together. It’s calculated by dividing the number of years you lived together by the ‘’joint contributory period’’.  This period starts when the older of you turns 18 and ends when you both take CPP payments.

You must both be age 60 or older and receiving CPP payments to qualify.

For example, say Bob and Alice have been living together for 20 years. They’re the same age, and they take CPP payments starting at age 68. That means the joint contributory period is 50 years. Of that, they’ve been living together 40% of the time.

They can share half of 40% of their CPP.

Say Bob’s CPP payments are $600 and Alice’s are $1,000.

The simple way to calculate this is to take the difference in their CPP payments ($400), divide it in half, and multiply it by 40%. You increase the lower CPP amount and decrease the higher amount by this number. In their case, that’s (($400/2) X 40%) = $80 each.

In the end, Bob claims $680 in CPP income, and Alice claims $920.

The only circumstance where the amounts would be equal is if they had been living together for the entire joint contributory period.

And you can’t elect to have only one spouse share CPP – either both share, or neither do.

To share your CPP, you must apply for it through Employment and Social Development Canada. CPP sharing starts as soon as your application is approved, and you can’t apply retroactively.

Claiming medical expenses on the tax return of the lower-income spouse

Certain medical expenses qualify for a non-refundable tax credit. This tax credit can be transferred to a spouse, meaning either spouse can claim it, and qualifying medical expenses can be combined on one tax return to maximize the tax credit.

The tax credit is calculated based on the excess above the lower of two amounts – either 3% of net income or the provincial and federal thresholds for the year. For 2023, the federal threshold is $2,635.

Since either spouse can claim the expenses, it often makes sense to combine the expenses and claim them on the return of the lower-income spouse. That’s because 3% of their income is likely below the threshold set out by CRA, allowing more of the expense to be eligible for the credit.

For example, you and your spouse each incurred $1,000 of eligible medical expenses. At first glance, you would not qualify. Even combining the expenses, the total falls short of the $2,635 threshold.

But assume you are the lower-earning spouse, and your income is $40,000. Since 3% of $40,000 ($1,200) is lower than the CRA threshold, you can combine the expenses and claim the amount that exceeds $1,200 ($800 in this case). Doing so gets you a federal tax credit of 15%, or $120. Each province has a medical tax credit as well, so the savings may be even higher.

The medical tax credit can be claimed for any 12-month period that ends in the tax year. So, for 2023, you can claim expenses from June 2022 to May 2023, for example, if that’s more advantageous for you – as long as you haven’t claimed those expenses previously.

Transferring capital losses to a spouse

While this is situational, if you have capital losses from your investments that you can’t use, there’s a trick to transfer them to a spouse. Capital losses can be used to offset capital gains in the current year, the previous three years, or any year in the future.

To transfer them to a spouse, we must take advantage of the superficial loss rules that apply to non-registered accounts.

Rules prevent you or an affiliated party such as a spouse from triggering a capital loss without also divesting of the underlying asset for a meaningful period. That period is 61 days – 30 days before the loss occurs, the day of the loss, and 30 days after. If these rules didn’t exist, we could just sell an investment when there was a loss and immediately buy it back, crystallizing the loss for tax purposes but not truly disposing of the asset. CRA doesn’t like that.

The rules are designed to capture investments owned by a spouse as well. So, if you sell an investment at a loss, but then your spouse immediately buys it – the loss will be denied.

To see how it works, let’s meet Jane and Darrel.

Darrel has an unrealized capital loss this year. He got caught up in the meme-stock craze and took a bath. He has $20,000 in capital losses but no gains against which to apply them. His cost basis is $50,000, and the market value of his investment is $30,000.

Jane, however, a prudent index investor (and disappointed in Darrel’s investment decisions), has $20,000 in capital gains on her index fund portfolio.

Darrel sells his meme stocks, crystallizing his capital loss.

Jane immediately buys the same meme stocks, in the same amounts, in her own non-registered portfolio.

This does two things:

1. Darrel’s capital loss is denied because of the superficial loss rules – his spouse bought the same shares; and
2. The $20,000 is added to Jane’s cost basis

So while Jane bought the stocks for $30,000, her cost basis is $50,000. If she waits 30 days to sell the stocks, presuming they are still trading around $30,000 (or even lower!), she can sell them. Since her cost basis is $50,000 due to the superficial loss rules, she now has a capital loss.

Darrel’s loss is her gain.

*A Word About Single Retirees*

As many readers have pointed out, many of these strategies are only useful when there is a spouse or common law partner involved. I do want to address the concern that single seniors are being “punished” though.

Let’s reframe these ideas from the perspective of a couple.

Traditionally, there has been an income disparity between spouses. Without income-splitting strategies, spouses are unfairly affected by the existing rules, and the lower- or no-income spouse’s contribution to household finances is ignored.

For example, if one spouse stays home to raise children, their contribution to the home allows the other spouse to continue to work, earn an income, contribute to CPP, and save in their RRSPs.

Is it fair that this individual bears the entire tax burden for the family both during their working years, and through retirement? Without income-splitting, the family’s taxes are lopsided despite the low- or no-income spouses’ significant contribution to the family.

So while I don’t disagree that there are fewer tax strategies available for singles, I view the rules that single seniors must abide by as the baseline.

And these strategies are in place to prevent couples from being “punished”.

Final Thoughts

Sound planning and strategy can go a long way to ensuring a successful retirement. Using the tax saving strategies above, you give yourself that much more opportunity to enjoy the retirement you designed.

Mark McGrath is a Wealth Advisor with Wellington-Altus Private Wealth (WAPW).

The information contained herein is the opinion of the author and not of WAPW. This article is for informational purposes only and is not intended as investment, tax or legal advice. Please contact your financial advisor for advice with respect to your personal financial situation and objectives. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

Canadian taxpayers have until May 1st, 2023 to file their 2022 taxes (April 30th falls on a Sunday). However, as the calendar turns over to a new year many Canadians want to know how best to maximize their tax refund or minimize what they owe the government.

Related: How a “first 60 days’ assessment saves me taxes year round

The two main ways to reduce taxes owing are through tax deductions and tax credits. What’s the difference between a tax deduction and a tax credit? Let’s explore:

Tax Deductions

A tax deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $221,708, you’d be taxed at the federal rate of 33% and a $1,000 tax deduction would save you $330 in federal tax. On the other hand, if you earn less than $50,197, you’d be taxed at the federal rate of only 15% and a $1,000 tax deduction would only save you $150 in federal tax.

Two of the most valuable tax deductions are:

RRSP contributions

Your RRSP contribution is an example of a tax deduction, and is likely the best tax saving strategy available to the majority of Canadian taxpayers. The contribution reduces your net income, which in turn reduces your taxes owing. An added bonus for families who contribute to RRSPs is that the resulting lower net income will likely increase their Canada Child Benefit.

You have until 60 days of the current year to make a contribution to your RRSP and apply the deduction towards last year’s taxes. One tip for those who know in advance how much they’ll be contributing to their RRSP is to fill out the form T1213 – Request to Reduce Tax Deductions at Source.

Related: How to crush your RRSP contributions next year

You can contribute 18% of your income, up to a limit of $29,210 (2022). Watch out for RRSP over contributions – there’s a built-in safeguard where you can over contribute by $2,000. Excess contributions are taxed at a punitive 1% per month.

Child-care expenses

Day care is likely one of the largest expenses for young families today. Child-care expenses can be used as an eligible tax deduction on your tax return.

Typically, child-care expenses must be claimed by the lower income spouse. One exception is if the lower income spouse is enrolled in school and cannot provide child-care, the higher income spouse can claim the child-care costs.

The basic limit for child-care expenses are:

• $8,000 for each child under 7 years of age at the end of the year
• $5,000 for each child between 7 and 16 years of age
• $11,000 for each child who qualifies for the disability tax credit

Note that most overnight camps and summer day camps are also eligible for the child-care deduction.

Tax Deductions checklist:

• RRSP contributions
• Union or professional dues
• Child-care expenses
• Moving expenses
• Support payments
• Employment expenses (w/ T2200)
• Carrying charges or interest expense to earn business or investment income

Tax Credits:

There are two types of tax credits – refundable and non-refundable. A non-refundable tax credit is applied directly against your tax payable. So if you have tax owing of $500 and get a tax credit of $100, you now owe just $400. If you don’t owe any tax, non-refundable credits are of no benefit.

For refundable tax credits such as the GST/HST credit, you will receive the credit even if you have no tax owing.

Three of the most valuable tax credits are:

Basic Personal Amount

The best example of a non-refundable tax credit is the basic personal amount, which every Canadian resident is entitled to claim on his or her tax return. The basic personal amount for 2022 is $14,398.

Instead of paying taxes on your entire income, you only pay taxes on the remaining income once the basic personal amount has been applied. 

Spousal Amount

You can claim all or a portion of the spousal amount ($14,398) if you support your spouse or common-law partner, as long as his or her net income is less than $14,398. The amount is reduced by any net income earned by the spouse, and it can only be claimed by one person for their spouse or common-law partner.

Age Amount

The Age Amount tax credit is available to Canadians aged 65 or older (at the end of the tax year). The federal age amount for 2022 is $7,898. This amount is reduced by 15% of income exceeding a threshold amount of $39,826, and is eliminated when income exceeds $92,479.

The Age Amount tax credit is calculated using the lowest tax rate (15% federally), so the maximum federal tax credit is $1,184.70 for 2022 ($7,898 x 0.15).

Note that the age amount can be transferred to the spouse if the individual claiming this credit cannot utilize the entire amount before reducing his or her taxes to zero.

Tax Credits checklist:

• Work from home expenses
• Adoption expenses
• Interest paid on student loans
• Tuition and education amounts
• (T2202, TL11A), and exam fees
• Medical expenses (including details of insurance reimbursements)
• Donations or political contributions

The Verdict on Tax Deductions and Tax Credits:

Tax deductions are straightforward – if you earned $60,000 and made a $5,000 RRSP contribution your taxable income will be reduced to $55,000. Deductions typically result in bigger tax savings than credits as long as your marginal tax rate is higher than 15%.

A non-refundable tax credit, on the other hand, must be applied to any taxes owing and is first multiplied by 15%. That means a $5,000 non-refundable tax credit would only result in about $750 in tax savings.

The most overlooked tax credits and tax deductions (the ones most likely to go unclaimed) are medical expenses, union dues, moving expenses, student loan interest, childcare expenses, and employment expenses (including work from home expenses).

That’s why it’s important that Canadian tax filers make a checklist of every tax deduction and tax credit available to them at tax-time and take advantage of all that apply to their situation.

It’s a classic mistake I’ve seen time and time again. You scramble to make your RRSP contribution before the deadline and then give yourself a giant pat on the back. But wait a minute. You’re not done yet. Not if your RRSP contribution is just sitting idly in cash.

You need to put that RRSP money to work.

Remember, you don’t actually “buy RRSPs”. Your RRSP is simply a container in which you can hold a wide variety of investments such as GICs, bonds, stocks, mutual funds, and exchange traded funds (ETFs).

It’s those investments that offer returns that hopefully beat inflation over time and provide you with a nest egg to draw from in retirement.

The RRSP container keeps those investment gains sheltered from the tax man until it’s time to withdraw the funds – the idea being that you’re in a lower tax bracket than you are when you made the contribution.

Your RRSP Contribution in Three Steps

Think of your RRSP as a three-step process.

1. Open an RRSP account (if you haven’t done so already) at a bank, credit union, investment firm, robo-advisor, or online brokerage account.
2. Contribute to your RRSP (transfer money into it from your chequing account).
3. Purchase the investment that aligns with the asset allocation outlined in your financial plan.

That allocation will be different for everyone. A conservative-minded investor might be happy with a 5-year GIC, while a do-it-yourself investor with a long time horizon might gravitate towards a globally diversified portfolio of mutual funds or low cost ETFs.

Related: DIY Investing Made Easy

The point of an RRSP contribution is not just to get a tax refund – although that’s indeed a juicy perk. Your RRSP is for retirement savings. Every day your money sits in cash is a day it’s not earning interest, dividends, or capital gains.

You’ve heard that compound interest is the eighth wonder of the world? Albert Einstein said, “He who understands it, earns it … he who doesn’t … pays it.”

The other issue with simply holding cash in our RRSPs is the temptation to raid it for short-term needs instead of using it for its intended purpose – retirement. Sure, there are legitimate reasons to withdraw money early from your RRSP, such as the Home Buyers’ Plan, or to cover a gap in employment or financial hardship.

But how many Canadians contribute to their RRSP during RRSP season (i.e. the first 60 days of the year), simply for the allure of a big tax refund? At best many of us spend the refund instead of putting it into our RRSP, TFSA, or to pay down our mortgage. At worst some of us spend the refund AND take out our initial RRSP contribution to fund vacations, cars, or just to make ends meet. Don’t laugh, I’ve seen it.

That’s right, many of us are raiding our RRSP savings well before retirement. Indeed, Canada Revenue Agency once reported that 55% of total RRSP withdrawals were made by Canadians under 60. That’s an alarming number of people raiding their retirement savings!

Taking money from your RRSP early is troublesome for three reasons. One, you’ll permanently lose that contribution room in your RRSP. Two, you’ll pay taxes on any withdrawals because the amount is included in your taxable income for the year. Finally, you’ll miss out on that tax-sheltered compounding that could have turned your $5,000 contribution into more than $21,000 (assuming a 6% return for 25 years).

For all of these reasons you’ll want to make sure to contribute to your RRSP this year and then complete the process by purchasing an investment product that fits your age and risk profile.

You’ll not only get closer to your financial goals, but you’ll make it that much harder to raid your retirement fund for something frivolous. If your RRSP contribution is just sitting idly in cash, it’s much more tempting to move it back into your chequing account – which is what we’re trying to avoid.