You’ve spent years of hard work and perseverance building your business and wealth. Now it’s time to reap the rewards and begin a new adventure…Retirement! To begin this phase, tax expertise is essential to retirement planning to make sure you maximize your savings and minimize taxes.
When it’s time to shift from accumulating to decumulating wealth, deciding the best order to draw funds requires expert assistance. Each account comes with unique tax implications, opportunity costs, and estate planning considerations.
A strategically designed withdrawal strategy can help you minimize taxes, extend the life of your savings, and ensure a smoother transfer of wealth to your beneficiaries.
Let’s consider three common accounts you might have
- RRSP/RRIF
- TFSA
- Corporate investments in a holding company
and explore tax concepts related to each that can empower you to ask better questions and make confident decisions in retirement planning.
RRSP/RRIF – Timing is Everything
Once you convert your RRSP to a RRIF, the Canada Revenue Agency (CRA) mandates that you make annual withdrawals. These withdrawals are fully taxable, and failing to meet the minimum can result in a hefty 50% penalty on the shortfall.
Taxable Nature: Since the CRA considers RRIF withdrawals as income, delaying them can cause larger mandatory withdrawals in later years, potentially pushing you into a higher tax bracket.
OAS Clawback: High taxable income can trigger the Old Age Security (OAS) clawback, effectively reducing your retirement benefits. The OAS clawback begins for individuals with a taxable income of $93,454 for the income year 2025.
Estate Considerations: If you pass away, any remaining RRIF balance is included as income in your terminal tax return unless it’s transferred to a surviving spouse’s RRIF or RRSP. If transferred to a surviving spouse, it would be tax-deferred. If the RRIF is not left to a surviving spouse, the resulting taxable income inclusion can lead to significant taxes if the balance is high.
Your Spouse: If a large RRIF balance is transferred to your surviving spouse, it increases their future RRIF minimum withdrawal amounts. Since the minimum amount is based not only their RRIF balance, but also yours. This can result in higher annual taxable income for them, potentially pushing them into a higher tax bracket and jeopardizing their access to OAS.
Retirement Planning Strategies for RRIF Withdrawals:
- Consider drawing more than the mandatory minimum early in retirement. You can reinvest the surplus amount withdrawn into a TFSA (if you have contribution room) or a non-registered investment account to continue growing it.
- Evaluate if converting your RRSP to a RRIF earlier than the required age of 71 can help smooth taxable income over a longer period. For example, could you benefit from pension income splitting with your spouse at age 65?
- Coordinate RRIF withdrawals with other income sources to minimize the overall tax impact.
Corporate Savings – Tap in with a Careful Plan
Your corporate savings may represent a significant portion of your wealth. Withdrawals require careful planning to reduce tax owed and maximize the value for your estate.
Consider the following:
Dividend Income: You can withdraw funds from your corporation as dividends, and depending on your province and income level, you may pay a lower tax rate than on salary or RRIF withdrawals.
Refundable Dividend Tax on Hand (RDTOH): When dividends are declared, your corporation recovers refundable taxes on investment income. This tax refund enhances the efficiency of dividend withdrawals and reduces the effective tax rate on corporate funds.
Estate Planning: Upon your death, and if you don’t leave your shares to a surviving spouse, you may need to pay capital gains tax on the value of shares you held at that time. There could also potentially be additional tax on dividend withdrawals by your beneficiaries. Post-mortem pipeline planning can be undertaken to mitigate the overall tax impact of this to ensure tax efficient transfer of wealth. The capital gains on a deemed disposition of property will only result in a partial income inclusion – unlike the RRIF which is a full taxable income inclusion.
What are some tax-efficient retirement planning strategies you can consider for corporate withdrawals?
- Spread withdrawals over multiple years to avoid significant income spikes.
- Declare dividends strategically to recover RDTOH and enhance overall tax efficiency.
- Consider estate-freeze strategies and post-mortem pipeline planning to minimize overall taxes upon your death.
- Integrate corporate withdrawals with your personal finances to balance immediate needs and long-term estate goals.
Tax-Free Savings Account – Play the “Long Game”
Your TFSA is one of the most versatile tools for tax-free growth and a critical component of your estate plan. Withdrawals are tax-free, and any unused contribution room carries forward indefinitely, allowing you to recontribute in future years.
In most cases in retirement planning, it’s best to hold off on withdrawing from your TFSA until last. Why?
Tax-Free Growth: Funds in a TFSA grow tax-free, maximizing the value of your investments. Imagine that both you and your spouse have fully maximized TFSAs. If you were both at least 18 years of age in 2009 and always resident in Canada, this would mean that each of you would have up to $102,000 of contributions growing and working for you on a compounded tax-free basis. On a couple basis, this is up to $204,000!
Flexibility: You can make withdrawals without triggering taxable income, providing a reliable source for unexpected expenses or strategic planning. There’s also no clawback on income-tested benefits like OAS!
Estate Benefits: You can transfer your TFSA to a spouse or designated beneficiary tax-free. This ensures the funds remain intact and avoid the tax burden of other accounts. Make sure you understand the important difference between beneficiary vs. successor-holder designations!
How can you strategically use your TFSA? A few options are:
- Hold investments with high growth potential to shelter your returns from taxes.
- Re-invest excess withdrawals from your RRIF or corporate savings to your TFSA for continued tax-free growth.
- Use your TFSA as a reserve for late retirement or emergencies when you may deplete other income sources.
Estate Planning in Retirement
Each account type has unique implications on death, making the withdrawal order critical for effective estate planning:
RRIF: The CRA taxes the remaining balance unless you transfer it to a surviving spouse. However, large RRIF balances transferred to a surviving spouse can increase their future taxable income, impact OAS eligibility, and create challenges with higher minimum withdrawal amounts.
Corporate Savings: The value of your shareholdings of your corporation may be subject to tax upon death. This requires careful planning to minimize double taxation.
TFSA: The most tax-efficient account for estate purposes, as it can pass to a beneficiary without tax consequences on death.
Align your estate plan with your withdrawal strategy to preserve your wealth and transfer it efficiently to your beneficiaries.
Final Thoughts on Retirement Planning
Accessing your retirement income requires more than drawing from whichever account seems convenient.
Consult with a professional to guide you through retirement planning. The peace of mind and financial benefits you gain—during your lifetime and for your beneficiaries—are worth it.
If you have questions about your specific situation, reach out to us at Compass CPA. A little planning today makes a big difference tomorrow.
