Your Guide to Retirement Income in Canada

So, a retirement savings goal is a subjective thing, based on:

• Projected lifestyle,
• The age at which you begin drawing on your savings, and
• How much of an inheritance you want to leave to your children and other family members.

Sort Out Your Sources of Income

Regardless of the actual level of savings you eventually achieve, it’s important to know from what sources you can draw retirement income and how this money will be taxed. For most retirees, this includes:

• Savings accumulated in government pensions,
• Employer pensions,
• Life income retirement accounts,
• Registered retirement savings plans (RRSPs),
• Tax-free savings accounts (TFSAs), and other investments and savings outside the various tax-advantaged vehicles.
  
  

Here’s a breakdown of your likely income sources:

Government Pensions

These include Old Age Security (OAS) and the Canada Pension Plan (CPP) – or, if you live in Quebec, the nearly identical Quebec Pension Plan (QPP, or Régime des rentes du Québec). Your OAS entitlement depends on how long you have lived in Canada and your overall income level once you begin receiving this pension. C/QPP is available solely based on your contributions to these plan(s) during your working years. (CPP and QPP are largely synchronized, so if you worked both inside and outside Quebec over the years, your contribution records are consolidated.)

OAS and GIS: As of 2024, OAS will pay a maximum of $713 for those ages 65-74 and $788 if 75 and over. These amounts will be greater if you delay beginning to receive payments, which you are permitted to do until age 70. However, if your annual net income from all sources exceeded $86,912 during 2023, you will be subject to the OAS pension recovery tax, more popularly referred to as the “clawback”. OAS income received from July 2024 through June 2025 must be partially repaid (depending on your income level) and fully repaid if your 2023 income exceeded $142,609 (or if 75 and over, $148,179). For the following period (July 2025-June 2026), the clawback threshold (based on 2024 income) will be $90,997, with benefits completely paid back if your income exceeds $148,605 ($153,771 for 75-plus recipients).

To help determine your OAS payments, consult the online Old Age Security Benefits Estimator here.

There is an extra amount known as the Guaranteed Income Supplement (GIS) available for low-income seniors whose income is below $21,624 (income thresholds are higher for those with a spouse, depending on whether they receive a full OAS pension.

C/QPP: The normal age for applying for Canada or Quebec Pension Plan benefits is 65. You have the option of starting to receive benefits as early as age 60, but the monthly amount will be smaller. Payments will decrease by 0.6% each month (or by 7.2% per year) up to a maximum reduction of 36% if you start at age 60.

By the same token, if you postpone receiving your pension (as old as age 70), you’ll receive bigger monthly payments. These will increase by 0.7% each month (or by 8.4% per year) up to a maximum increase of 42% if you start at age 70.

To assist in deciding when to start taking your pension, consult this calculator on the CPP website:

Click here to apply for CPP.

Click here to apply for QPP.

Employer Pensions

Your employer’s pension department (or the financial institution that administers the plan) will provide you with information on the benefits (usually as periodic payments) you will receive, usually beginning at age 65. In the case of a defined benefit plan, the payments will be fixed and guaranteed (and in some fortunate cases, indexed to inflation). Defined contribution plans are similar to employers’ group RRSPs; your plan administrator will provide details on the payment amount and other details.

In some cases, you may have employer-pension-related savings in a locked-in retirement account (LIRA). This is akin to a locked-in RRSP, where you have control of how the money is invested but cannot withdraw until retirement, when the LIRA is converted to a life income fund (LIF) or, in some situations, a locked-in retirement income fund (LRIF) or a restricted life income fund (RLIF). The latter operates similarly to a RRIF, discussed below.

As with other types of pension income, proceeds from employer pensions are fully taxable.

TFSAs

Although not specifically designed to provide retirement income, a TFSA is often part of the mix. However, it can last for as long as you live, including ongoing annual contributions. As such, it provides a continual tax shelter, as withdrawals are completely tax-free. Draw down your TFSA only if you need money beyond what you are receiving from other sources.

RRSP Savings

The bulk of most Canadians’ retirement income comes from hopefully many years of making significant contributions to their RRSPs. These contributions are tax-deductible, which means the entire amount in your plan (capital and income) grows on a tax-deferred basis over the years until money is withdrawn, in most cases through a registered retirement income fund (RRIF). Since this generally happens after retirement, in theory, tax will be payable at a lower tax rate than had you made the withdrawal in a higher income, working year.

An RRSP must be terminated by the end of the year in which you turn 71. The proceeds can be taken as cash (and fully taxed in that year – a very expensive choice!). The viable options are to transfer the RRSP balance to a RRIF or, alternatively, purchase a registered annuity. In both cases, the savings continue to be enhanced by a tax deferral until the money is paid out to you, at which point the proceeds (both capital and income) are fully taxable.

With a registered annuity, you surrender control of your retirement assets in exchange for a guaranteed payment, either a fixed amount or an indexed amount, depending on the level of interest rates at the time the annuity is purchased and on the type of annuity. Some annuities pay for life while others terminate at a specified age, such as 90.

RRIFs are the Most Popular Option

Most people take the RRIF route, as it allows you to retain control over how your savings are invested and the amount of income you can draw down. The only difference from an RRSP is you must withdraw a minimum percentage amount each year, and that amount increases each year.

If you begin taking RRIF payments in the year in which you are age 71 as of Jan. 1, the minimum withdrawal for that year is 5.28% of the fund’s total assets. The minimum withdrawal payouts increase incrementally, to 5.40% the following year (based on age 72 on Jan 1), 5.53% the next year, and so on.

Receiving RRIF payments

While many retirees opt to receive periodic payments (usually monthly or quarterly) for the sake of managing their cash flow, the most tax-effective timing is to withdraw the minimum amount just before the end of the year, thus maximizing the tax deferral.

Remember, RRIF payments are fully taxable at your marginal tax rate, and tax may be withheld by the financial institution that holds your fund. If you withdraw only the minimum amount, no tax will be withheld at source. On amounts in excess of that, in all provinces except Quebec, 10% of the first $5,000 will be remitted to the Canada Revenue Agency, 20% on $5,000 to $15,000, and 30% on the amount above $15,000. In Quebec, the federal withholding on the above excess amounts is 5%, 10% and 15%, respectively, plus a flat 15% withholding of provincial tax.

Get Your ‘Bonus’ RRSP Contribution at 71

RRSP contributions do not necessarily have to be deducted for the year in which they are made. They can be carried forward and used in any future taxation year. Thus, if you have unused RRSP deductions after you have collapsed your RRSP, these still may be used to reduce taxable income.

But there is a perhaps little-known kicker to gain an additional deduction for the year after your RRSP has ended. This of course assumes you are still working and thus have “earned income” that qualifies you to make RRSP contributions. Here’s how to get an extra kick at the RRSP can:

• Normally, you would have until March 1, 2025, to make a contribution for 2024, but if you turned 71 this year, this is the final year of your RRSP. You must make your contributions by the end of this calendar year.
• In addition, before the end of this year while your RRSP is still in place, make an additional contribution equal to the maximum allowable contribution for 2025, based on your estimated 2024 earned income.
• With the above contributions in place, convert your RRSP to a RRIF by year-end.
• The result: You will be penalized for making an RRSP overcontribution for 2024 (which is the amount you had contributed for the 2025 taxation year). The penalty for doing so is 1% per month of the overcontributed amount, less the $2,000 that anyone is allowed to overcontribute on a cumulative basis without penalty. If you were entitled to the maximum $31,560 contribution for 2024, the amount of overcontribution during December would be $29,560 ($31,560 less $2,000). The 1% penalty per month would be $295.60.
• The benefit: As of Jan. 1, 2025, your contribution room for the new year would be $32,490. This would bring your overcontribution in December 2024 onside. And it would allow you to claim an RRSP deduction when you file your 2025 income-tax return. The after-tax value of that 2025 deduction would be far greater than the penalty paid on the 2024 overcontribution.