It’s the right time of year to think about tax! CRA provides a pension credit of $2,000 to all taxpayers 65 years of age and older (it’s possible to receive this credit at a younger age).  CRA also allow spouses to split pension income between themselves. For the income to be considered eligible pension income, it needs to come from a source other than the government e.g. a RRIF.  Once you turn 65, consider converting part of your RRSP into a RRIF, which pays $4,000 per year for six years (both spouses would have to be over 65).

You’ll have eligible pension income, but because CRA provides a credit and not a deduction, it’s likely you’ll pay some tax on the income. If you and your spouse pay tax at the current highest marginal tax rate of 53%, the credit would reduce the tax rate to 29%. On the assumption you’ll continue to be taxed at the highest rate of tax until age 71, the tax rate on the RRIF income received between age 65 – 71 will be reduced by 24%.

For six years on $4,000 of pension income, even if you and your spouse pay tax at the highest rate, you’ll save $1,000 a year based on the 2017 tax rates.  While not a huge savings, the money is better in your pocket than CRA’s.

Everyone’s situation is different, and you should consider what rates of tax will apply to your income after you turn 71. You should also bear in mind that by receiving income earlier, you’ll be prepaying tax and the income earned on the RRIF proceeds annually will be taxable.

If you consider this suggestion to have merit, please contact your financial advisor to obtain your own tax advice. My Tip of the Month provides ideas for you to consider and discuss with your own professionals and should not be relied on.