Retirement Planning: Four Tax-Efficient Income Options

Have you explored all of the tax-efficient income options available to generate consistent income that will provide for your retirement needs and wants? If you’re a Boomer challenged to find tax-efficient options, discuss these four alternative sources with your tax advisor today.

Many tax advisors will have these resources available in their retirement toolkit, in addition to the government benefits and private savings options that are more commonly used by Canadian investors. Taking advantage of these alternatives is especially important if you’re self-employed.

Pooled Retirement Pension Plans (PRPP).This new type of pension plan was passed into law by the federal government in 2012 and provincial legislation has since followed for most provinces. The plan provides a voluntary and affordable alternative for small businesses to offer an employer-sponsored pension plan at work, with contribution levels that will mirror those available under the Registered Pension Plan (RPP) defined contribution or money purchase rules. Pre-retirees should discuss the opportunity to initiate such a plan for their smaller business enterprise.

Individual Pension Plans (IPP). Individual Pension Plans are established for an owner-manager who is an employee of his or her own corporation. Annual minimum amounts are required to be withdrawn from the IPP once the plan member is 72, similar to the rules under the Registered Retirement Income Fund (RRIF). Also, contributions related to past years of employment must come from RRSP or RPP assets or by reducing RRSP contribution room, before deductible contributions to an IPP can be made.

Registered Disability Savings Plan (RDSP) Rule Changes. First established in 2008, the RDSP is used to accumulate private pension funds for the benefit of a disabled person. RDSPs function in a similar fashion to RESPs, in that contributions are not tax deductible, earnings accumulate on a tax-deferred basis and the government contributes grants and bonds to enhance savings. Any person eligible to claim the Disability Amount can be the beneficiary of an RDSP and the plan can be established by them or by an authorized representative. Until the end of 2023, a family member may be the plan holder for the beneficiary if the beneficiary’s capacity to enter into a contract is diminished.

German and other Foreign Pensions. If you receive German social security pension, it’s reportable in Canada, but you will qualify to claim a partial exempt portion; the exemption depends on when you started receiving the pension benefits. Ex-pats who receive any German pension benefits will also have filing obligations in Germany. Taxpayers may claim foreign tax credits on any income that is taxed both in Canada and Germany. To determine the proper credit, you’ll have to file returns in both countries rather than relying on taxes withheld at source which may be fully or partially refunded by filing a tax return. For other taxpayers with offshore pension income sources, don’t forget to report world income in Canadian funds; claiming a foreign tax credit if there are any foreign tax withholdings. Offshore assets require the filing of Form T1135 Foreign Income Verification Statement if the cost of assets exceeds $100,000 Canadian. This form must be filed by April 30.

Additional educational resources:

For further information and specialized training in retirement income planning, become a designate in Knowledge Bureau’s Master Financial Advisor – Retirement and Estate Services Specialist program, or the Tax Efficient Retirement Income Planning course. As a taxpayer, looking for an advisor with these credentials and consulting Evelyn Jacks’ latest book – Essential Tax Facts – can help you focus on tax-efficiency for every stage of life.

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