Ten Tax-Saving Tips for Retirement in Canada
Retiring has many benefits — sleeping in, travelling without worrying how many e-mails have piled up in your inbox, and tax savings. What? That’s correct; you can save money on your taxes while you’re retired! Read on for ten thrifty strategies to help you enjoy your golden years in comfort.
Reap the benefits of the Old Age Security (OAS) program
Currently, the Old Age Security (OAS), a monthly pension payment, is available to most Canadians age 65 or over. However, proposals announced in 2012 will increase the age eligibility from 65 to 67 between the years of 2023 and 2029. For those born in 1958 or later their eligibility for OAS will be deferred past their 65th birthday.
The OAS is paid to both individuals that are resident in Canada and those that no longer live in Canada. The amount is adjusted quarterly for increases in the cost of living as measured by the Consumer Price Index. The maximum monthly OAS pension payment for July to September 2012 was $544.98.
Eligibility for an OAS pension is based on two criteria: age and years resided in Canada. Two categories of people are eligible for OAS:
People living in Canada who are 65 or older, are Canadian citizens or legal residents, and have lived in Canada for at least 10 years while adults, and
People living outside Canada who are 65 or older, were Canadian citizens or legal residents at the time they ceased to live in Canada, and had lived in Canada for at least 20 years as an adult.
Don’t fall into either of these categories? You still may be eligible to receive OAS! Canada has a number of social security agreements with other countries. If you lived in one of these countries or contributed to its social security system, you may qualify for a pension from that country, Canada, or both.
A full OAS pension will be paid where you lived in Canada at least 40 years while an adult. Even if you do not meet this test, you may meet other criteria that will allow you a full OAS pension. Where a full OAS is not available, a partial OAS can be paid to you if you have been in Canada at least 10 years as an adult. If you were in Canada for 10 years your partial OAS pension would be 10/40ths of a full OAS pension.
To ensure your OAS payments start on time, apply six months before your 65th birthday. Apply using form ISP 3000, “Application for the Old Age Security Pension,” available on Service Canada’s website.
Need help to determine whether you are eligible for OAS? Of whether you are entitled to a full or partial OAS pension? Contact Service Canada at 1-800-277-9914 or drop in to a Service Canada Centre.
Your OAS pension is taxable, and reporting the tax on your return is very simple. You’ll receive a T4A(OAS) information slip summarizing the amount paid. Include the amount noted in box 18 on line 113 of your tax return. Some tax may have been withheld on the OAS pension payment to you; this amount will be noted in box 22 of the T4A(OAS). Be sure to include the withheld tax on line 437 of your return.
Don’t forget to apply for other OAS payments
In addition to a regular OAS pension, an individual may be entitled to additional payments under the OAS program. None of the following payments are taxable but they must be reported on your tax return. The amount paid to you is noted in box 21 of the T4A(OAS) slip. The amount is to be reported as income on line 146 of your return and then deducted on line 250. To receive these special non-taxable OAS payments you apply using form ISP3026:
Guaranteed income supplement: The guaranteed income supplement (GIS) provides low-income seniors in Canada with supplementary pension payments in addition to the regular OAS pension. The GIS is based on the combined income of you and your spouse or common-law partner, if you have one.
The allowance: The allowance is an additional amount paid to low-income seniors aged 60 to 64 with a spouse or common-law partner who receives the OAS and GIS. It’s like an early OAS pension. To receive it, you must meet some residency requirements.
The allowance for the survivor: Additional money is paid to low-income seniors aged 60 to 64 if their spouse or common-law partner has died and they meet residency requirements.
To continue receiving the GIS, the allowance, or the survivor’s allowance, ensure you file a tax return each year. Without a tax return on file, your payments will stop!
Know your CPP/QPP benefits
After the OAS, the CPP (and its Quebec counterpart, the QPP) is a second level of public pension available to certain Canadians. However, unlike the OAS pension, which is available to those who meet certain residency requirements, you receive a CPP/QPP pension only when you’ve paid into the plan. If you earned employment or self-employment income during your working days, you most likely paid into one (or both) of these plans and will reap some benefits in your retirement years.
Table 1 lists the variety of benefits you can receive under the CPP/QPP and notes whether they’re taxable.
|Type of Receipt||Taxable?|
|CPP/QPP retirement pension||Yes|
|CPP/QPP disability pension||Yes|
|CPP/QPP child disability benefit||Yes — but taxed in child’s tax return|
|CPP/QPP survivor benefit||Yes|
|CPP/QPP child survivor benefit||Yes — but taxed in child’s tax return|
|CPP/QPP death benefit||Yes — but taxed in estate|
Don’t forget to report CPP/QPP income on your tax return. Each January, HRSDC sends CPP recipients a T4A(P) tax slip. Enter the amount noted in box 20 on line 114 of your tax return. Amounts in the other boxes on the slip provide a breakdown of your sources of CPP.
Apply for the CPP retirement pension
The CPP is a monthly pension paid to individuals who have contributed to the CPP, or to both the CPP and QPP if they live outside Quebec. The maximum monthly amount in 2012 was $986.67.
Like OAS, you must apply to receive a CPP retirement pension. Use form ISP 1000, “Application for Canada Pension Plan Retirement,” available on Service Canada’s website.
As with the OAS, you may qualify for a CPP retirement pension that is based not only on contributions you have made to the plan, but also on contributions you have made to another country’s social security system. This is good news if you were in Canada for only a short while before you retired but had previously worked in and paid social security taxes to another country. See the International Benefits section on the Service Canada website at for further information.
Claim CPP disability benefits
In addition to the retirement pension, the CPP also provides CPP disability benefits and CPP survivor benefits.
The CPP will provide you with a monthly pension if you’ve been a CPP contributor and are considered mentally or physically disabled. Your disability must be “severe and prolonged.” HRSDC considers “severe” to mean that you cannot work regularly at any job, and “prolonged” to mean that your condition is long-term or may lead to death. The benefit comprises a flat amount plus a second amount based on the number of years you have contributed to the CPP. The maximum monthly disability benefit in 2012 was $1,185.50.
Payments can also be made to dependent children. If you become disabled, your child under 18 can qualify for a benefit. If your child is between ages 18 and 25, he or she will qualify if attending school full-time. The maximum amount paid in 2012 was $224.62 per month per child.
You must apply for both the regular disability benefit and the children’s benefit. Form ISP1151, “Application for Disability Benefits,” is available online, or you can call 1-800-277-9914 or drop by a Service Canada Centre.
Claim CPP survivor benefits
CPP survivor benefits are paid to your surviving spouse/common-law partner, dependent children, and your estate. The three types of survivor benefits are the survivor’s pension, the children’s benefit, and the death benefit.
Survivor’s pension: Your surviving spouse/common-law partner can receive a monthly pension. The amount of the payment depends on how long you paid into the CPP, your spouse or common-law partner’s age when you die, and whether he or she is receiving a CPP retirement or disability pension.
The calculation is based on what your CPP retirement pension would have been had you been 65 at the time of death. This amount is then adjusted to take into account the age of your survivor. The maximum amount that can be received is 60 percent of what your retirement pension would have been — the 2012 monthly maximum is $592.00, or 60 percent of $986.67. To receive this amount, your survivor must be age 65 or over at the time of your death. The maximum for a survivor under 65 in 2012 was $543.82.
Children’s benefit: The children’s benefit is a monthly payment to a deceased contributor’s dependent children. At the time of the contributor’s death, the child must be under 18, or between the ages of 18 and 25 and enrolled full time in a recognized educational institution. The maximum monthly amount in 2012 was $224.62.
Death benefit: The death benefit is a one-time payment to your estate. The maximum amount is $2,500.
You must apply for CPP survivor benefits. Use form ISP1300, “Canada Pension Plan Survivors’ Pension and Child(ren)’s Benefits(s).” The form is available at Service Canada Centres, on Service Canada’s website, or by calling 1-800-277-9914.
Make the most of your CPP credit entitlement
CPP credits are used to determine the amount of your entitlement to a CPP retirement pension. Because spouses/common-law partners build up credits during a marriage or common-law relationship, when a marriage breaks down both can share in the CPP entitlements earned while together.
CPP credits can be split even when only one spouse/common-law partner paid into the CPP.
Investigate other types of pension income
You’ve worked hard, saved for retirement, and perhaps are a member of your former employer’s pension plan. Now you’re in the stage where you’re receiving payments from the plan, or maybe taking out some of your retirement savings through withdrawals from an RRSP, RRIF, or similar retirement saving vehicle.
The dollar amounts of your various pension incomes are to be aggregated and reported on line 115 of your tax return. This is fairly straightforward — most pension income will be reported on T4A slips or other tax information slips.
Descriptions of the various types of pension income are as follows:
Payments from a former employer’s registered pension plan (box 16 of T4A slip). The amount is included on line 115 of your tax return.
Payments from a registered retirement income fund, a RRIF (T4RIF slip) — and payments from an annuity (T4A slip). If you’re under age 65, report these amounts on line 130 of your return — not on line 115. This is because these types of pension income do not qualify for the pension income credit when you are under 65.
Certain annuity income. If you’ve purchased an annuity with non-RRSP funds, the annuity payments you receive are part interest and part capital. As you would expect, only the interest is subject to tax. The capital portion is not taxed because it represents a partial return of the annuity purchase price that you funded with tax-paid dollars.
The interest portion is usually taxed as interest (hey, this makes sense!). However, if you’re age 65 or older and have receipts from a “mixed annuity” (a “prescribed” annuity payment in which the interest and capital portion are determined — or “prescribed” — by tax rules), the interest portion is considered pension income and is reported on line 115.
Claim foreign pension income
Foreign pension income is any pension income received from a source outside Canada. If you worked in the U.S. or any foreign country you may have been part of a foreign employer’s pension plan. You also may have served in a foreign country’s armed forces and be entitled to a pension. Most foreign pension income is subject to tax — but not all!
Other foreign pension income is included on line 115 of your tax return after applying the appropriate exchange rate. If the foreign country withheld tax from your pension payment, do not deduct the tax, but report the gross pension receipt. The foreign tax paid may qualify as a tax credit (referred to as a foreign tax credit) in calculating your tax liability.
Canada has a number of tax treaties with other countries. A treaty may adjust the amount of a foreign pension that is taxed in Canada. The CRA can assist you in determining whether your foreign pension is partially or completely exempt from Canadian tax; call CRA’s International Tax Office at 1-855-284-5942. To make this determination the CRA will ask for details about your pension, so keep any documents from the foreign pension plan. If you determine that an amount is not taxable in Canada, it’s best to include the total income in your return on line 115 and deduct the non-taxable amount on line 256.
Claim U.S. social security income
A common type of foreign pension is U.S. social security paid to a resident of Canada; to receive it, you would have worked in the United States at some time in your life. Include the full amount of U.S. social security income you receive on line 115. Of course, you’ll need to translate the U.S.-dollar amount received into a Canadian-dollar amount!
On line 256 of your return take a 15 percent deduction of the U.S. social security received, leaving 85 percent to be taxed. However, if you (or your spouse/common-law partner) began receiving U.S. social security before 1996 the deduction is 50 percent — leaving only 50 percent to be taxed!