When it comes to your income, things change after age 65. Canada Pension Plan benefits must begin and Old Age Security is received; thereby raising taxable income. Many Canadians also begin to melt down their RRSP accumulations; usually in the hands of the lower income earner first. The timing of those withdrawals, for maximum tax efficiency, is critical in creating the most purchasing power possible.
Yet, we often fail to take into account that by the time public pension benefits begin to flow for many Canadian couples, a significant number will face the illness or death of their partner. Not only do we fail to take this into account from a personal life change perspective, the financial consequences can hurt, too. Now, filing as a single taxpayer, there are no further income splitting opportunities, cash flow levels change and tax burdens often increase.
Investment product selection and timing, therefore matters, and it’s important to have the conversation about this early. For example, one way to eliminate clawbacks of the Old Age Security and the Age Credit is to stop generating taxable investment income by utilizing a Tax Free Savings Account. Capital gains income can be eliminated early in retirement, by choosing investments that defer the tax until deemed or actual disposition later in life. Adjusted Cost Base levels can also be bumped up during the process of filing a final return for a deceased spouse, in order to minimize tax later for the survivor.
The moral? Tax efficient investment product choices together with sound planning for the unthinkable realities of life and death can significantly reduce the impact of clawbacks in the present, thereby increasing cash flow, while preserving capital and maximizing real returns on investments over the long term. When your tax and financial advisor together, it can really pay off.