Quick summary: When retirees draw cash flow in retirement, they can really benefit when they consider tax strategy. We explore some of the essential concepts for investors to consider as they work with their advisor and tax specialist: 

  • Managing tax brackets
  • Being aware of income thresholds for key government programs and tax credits (i.e., claw backs)
  • Thinking long term: A small difference in tax efficiency today can make a big difference over time
  • Considering the different types of income: capital gains, eligible dividends, non-eligible dividends, Registered Retirement Income Fund (RRIF) withdrawals, etc.
  • Canada Pension Plan (CPP) take-up
  • Knowing the impact of different types of investment income on a retiree’s net income
  • Investment vehicles (i.e., the account types that contain your investments, such as Registered Retirement Savings Plans (RRSPs), or the structure of your underlying investments, such as corporate class mutual funds)

Let’s talk about income. Income may refer to specific line items on a Canadian’s Income Tax and Benefit Return (T1), depending on the goal of the retiree. Whether the taxpayer is attempting to reduce taxes or claw backs, it’s critical to monitor the nature of retirement income and be aware of the impact on the Income Tax and Benefit Return (T1) in the interest of optimizing after-tax cash flow. 

Why is it so important to monitor income in retirement?

Management of key income thresholds

While there are various tax credits and means-tested government programs that may be reduced or depleted, based upon the T1’s calculation of net income for tax purposes on line 23600 or net income before adjustments on line 23400, we’ll focus on two pertinent items for retirees.

  1. The Age Amount Tax Credit - This age amount is a non-refundable tax credit, claimed on line 30100 of the T1. This tax credit is available to individuals who are aged 65 or older by the end of the relevant tax year. The tax credit is calculated using the lowest tax rate (15% federally). The federal age amount for 2021 is $7,713, but the credit can be clawed back by 15% of the amount of net income for tax purposes on line 23600 that exceeds a threshold of $38,893 for 2021. It is eliminated when this net income figure for 2021 exceeds $90,313. The maximum tax savings available for a qualifying Ontario taxpayer in 2021 is $1,425.21 via the combined federal ($1,156.95 = $7,713 x 15%) and provincial ($268.26 = $5,312 x 5.05%) age amounts.
  2. The Old Age Security (OAS) Claw Back - Generally the OAS pension is available to Canadian citizens or legal residents age 65 or older, who have lived in Canada for at least 10 years after turning 18. For 2021, the maximum OAS monthly benefit is $615.37 for a 65-year old. The benefit may deferred to age 70, resulting in an increase of up to 36%. Seniors must pay back all or a portion their OAS if their annual net income before adjustments on line 23400 exceeds $79,845 in 2021. OAS is clawed back at a rate of 15% on excess income, and is eliminated when this net income figure exceeds $129,075 for 2021.

Because the age amount has a lower threshold, in some cases it may not be possible to retain the age amount tax credit, however optimization tactics should always be employed for spouses (or common law partners) together, rather than separately. In the hypothetical case scenario below, we have quantified the potential costs of these claw backs along with the cost of mismanaging tax brackets for the taxpayer.

Tax bracket management

Another critical underlying reason to monitor income in retirement is to allow for effective management of income relative to the various Federal and Provincial tax brackets. After all, net income, as referred to above, more often than not equates to the taxable income figure on line 26000 of an individual’s T1 from which income tax is calculated.

By managing net income, and in turn taxable income, a taxpayer can ensure that they stay within their target tax bracket, while not being subjected to needless taxation.  Unnecessarily pushing taxable income beyond the top of an individual’s target tax bracket can result in thousands of dollars of additional taxes payable each year. In retirement, this can be particularly unfortunate given the prevalence of longevity risk. Simply put, retirees do not want to outlive their investments. 

Mismanagement of brackets and thresholds: A hypothetical case scenario

Assume an Ontario taxpayer has a variety of potential sources of income/cash flow, but does not efficiently manage their tax brackets during retirement for 2021. This results in taxable income of $83,000 for the year. For the purposes of the exercise, we’ll assume the income is fully taxable (for example, interest income or RRIF withdrawals). By breaching the top of their target tax bracket, they will be subject to a tax rate of 31.48% on their taxable income above $79,505.  This results in additional personal taxes owing of $1,100 for the year, not to mention a reduction in the age amount by $6,616 and a $473 claw back of the OAS pension benefit. In this case, it likely wasn’t realistic to retain the entire age amount, but if income was otherwise managed to remain within the identified target tax bracket, the available age amount would have increased by $524.

By managing brackets more efficiently, and strategically drawing on more tax favourable levers in retirement, the taxpayer could have avoided these results.

The big picture

While these amounts may not seem significant, they add up over time. If we assume the same mismanagement year over year for this taxpayer, in ten years’ time that’s approximately $18,000 that will not be available for retirement (assuming a 4% average annual return on the realized savings). Savings are based on unnecessary taxes paid, tax savings lost in not optimizing the age amount, and the after-tax value of OAS that would have otherwise been available without mismanagement. 

How to keep net income in check in retirement

How much does it cost to withdraw an additional $1.00 after tax? It depends on your tax bracket and the type of income. The table below shows combined Federal and Ontario rates.



Fully Taxable

Capital Gains

Eligible Dividends

Non-eligible Dividends
















































































*Tax-Free Savings Account (TFSA); return of capital (ROC)

Source:  https://www.taxtips.ca/taxrates/on.htm

Tax efficient ‘levers’

Not all income is created equal for tax purposes and that is especially crucial in retirement. In the mismanagement scenario above, we alluded to the concept of pulling cash flow from tax-efficient levers. More specifically, that could include cash flow via tax-free return of capital (ROC) or even tax-free TFSA withdrawals. Per the chart above, a $1 withdrawal will net a taxpayer $1 from either of those two levers while having zero impact on net income or taxable income, regardless of their tax bracket.

While it would be nice to only draw on tax-free sources of cash flow in retirement, this isn’t practical for most retirees. As such it is important to take a long-term approach in managing tax brackets and thresholds over the course of the entire retirement timeline, keeping in mind that there will likely be multiple sources of retirement income available.

Fully taxable

Fully taxable income includes sources such as employment income, RRSP/RRIF withdrawals, pension income, rental income, interest income, foreign income, etc. In the hypothetical case scenario above, we assumed that the taxpayer was extracting from a fully taxable source, such as their RRSP/RRIF. As such, in order to net $1 in their pocket (after-tax), it was costing them $1.46 once they breached the top of their target tax bracket ($79,505). In certain instances, this outcome may be unavoidable, but typically a more efficient alternative is available, whether that be strategic TFSA withdrawals or income splitting with a qualifying spouse (or common law partner) if disparity in RRSP/RRIF balances and or income levels exists. The name of the game is optimizing retirement income not just for the taxpayer, but for the household.

Realized capital gains & capital gains dividends/distributions

In a non-registered account, when capital gains are realized, or capital gains are distributed from an underlying mutual fund or ETF, the gains are included in net income at only 50% of the capital gain that has been realized.  This is preferable to fully taxable income, so the outcome may not be as detrimental from a tax perspective. While carrying forward net capital losses of prior years can assist in reducing the tax on realized capital gains in the current tax year, this strategy will not reduce the net income on a taxpayer’s T1. This is a common oversight in planning and can lead to unexpected claw backs.

Eligible dividends

These dividends are typically received via publicly traded Canadian corporations. They are grossed up 38% for the purposes of calculating net income. An attractive tax credit isn’t applied until after the calculation of taxable income. So while it can be cheaper to get that additional $1 after-tax, the true cost of those additional potential claw backs must be taken into account. If a taxpayer is comfortably within their target brackets, and/or thresholds, eligible dividends in a non-registered environment can be very attractive from a tax standpoint. For Ontario in 2021, the total eligible dividend tax credit available is just over 25% of the grossed-up amount – which is why a taxpayer in a lower tax bracket fares so well.  

Ineligible dividends

These dividends are typically received from Canadian Controlled Private Corporations (CCPCs). They are grossed up at 15% for the purposes of calculating net income, but the tax credit isn’t quite as attractive as with eligible dividends. This type of income typically forms are larger aspect of a private business owner’s retirement income plan.

Government pensions

Like OAS, CPP retirement income is fully taxable, and the benefit can also be deferred until age 70. In some scenarios, this deferral can be attractive, especially considering the degree to which this lifetime guaranteed income opportunity will be enhanced. For an individual deferring their CPP income from age 65 to 70, the benefit increases by 42% plus indexation. This can be an attractive proposition for a conservative investor who maintains adequate assets to bridge their income throughout the deferral period, while maintaining confidence they will live to, and or potentially beyond typical life expectancy. Spouses should consider the effects of CPP sharing in addition to the timing of receipt of their CPP in retirement.  

Appropriate investment vehicles

Investors have two things to consider in making tax-effective decisions: the choice of specific investments and the vehicles that hold those investments. For instance, using non-registered funds to purchase an annuity that qualifies for preferential prescribed tax treatment would be more tax-efficient than if that same annuity were purchased within an RRSP.

Often, retirees want foreign exposure (which includes the U.S.) in addition to conservative, fixed income investments. But, the income generated by these types of investments is generally inefficient from a tax standpoint – that is, it’s fully taxable.  One vehicle option that enables a retiree to gain such exposures, while mitigating the negative tax consequences, is a corporate class mutual fund. For non-registered portfolio holdings, this structure may be attractive, as it will not distribute interest or foreign income into the investor’s hands. Typically, taxable distributions are substantially less (than a comparable mutual fund trust or ETF) and compound growth is enhanced as a result. Corporate class can enable investors to better manage tax brackets while optimizing net income in the face of potential claw backs. Consider this positive impact in conjunction with exposure to eligible dividend income and the resulting gross-up, depending on the underlying fund of choice.

A smooth, consistent approach

Retirement income planning is a marathon, so a consistent approach can smooth income over the course of retirement, while maintaining flexibility. Consider the implications of how assets are held, where they are drawn from and the ripple effects of each decision on net income before adjustments, net income for tax purposes and taxable income. This planning is complex, and often requires working with a qualified tax professional.  

Information contained in this article is provided for information purposes only and is intended to provide high-level insights on cash flow planning and taxes in retirement only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your advisor or tax specialist before undertaking any of the strategies in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.

The case scenario presented is hypothetical in nature and is provided for illustrative purposes only. The case scenario included certain material factors or applies certain assumptions to draw conclusions believed to be appropriate in the circumstances, but is not intended to represent an investor(s) personal scenario.  Prior to making any decisions or taking any action, investor(s) should conduct a thorough examination of their circumstances with their advisor(s) prior to implementing any of the strategies discussed herein. Each investor(s) will have individual personal income or tax situations that may have additional complexities outside the scope of materials discussed in this article.