Over the past decade, the labour-force participation rate of Canadians older than 65 has nearly doubled to 14 per cent, according to Statistics Canada, and that figure is likely to rise.
With better health and longer life expectancy, combined with scaled-back company pensions and other sources of retirement income, the option of working longer is becoming more necessary than ever.
If you decide to work past 71, however, there are a few factors to keep in mind so that you pay the minimum amount in tax.
Know the rules
You can have a registered retirement savings plan (RRSP) until the end of the year in which you reach 71, but then the plan matures and you’ll need to wind it up by the end of that year.
Most people convert their RRSP to a registered retirement income fund (RRIF). You must begin withdrawing money from your RRIF in the year after you open it.
Which makes the age of 71 a pivotal year that can cause considerable consternation, especially for those who are still in the work force.
“I’ve had the odd client phone me up and say, ‘I’m thinking of working. But my friends told me I’m an idiot because everything I make when I work, I’m just going to lose to taxes,’” says Darren Farwell, senior wealth advisor for Scotia Wealth Management in Toronto.
When it comes to weighing the positives and negatives, Mr. Farwell recommends that seniors take the time to plan well in advance before taking the plunge to work past 71. Three things should be factored into the decision.
If you have a younger spouse, you can continue to contribute to a spousal RRSP if he or she has not yet reached 71 and still has an RRSP. This way you can still reap a tax break.
The federal government sets the minimum amount you must take out of your RRIF every year. The minimum amount increases as you get older.
If your spouse is younger than you, you can use his or her age to calculate your minimum amount. The lower the age, the lower the minimum amount and the less income tax you’ll pay on the withdrawals.
This is a good strategy if you have other sources of income and want to leave your money in your RRIF for as long as possible.
Mr. Farwell advises his clients to take advantage of all income-splitting opportunities, maybe hiring an accountant to do so if unsure.
In addition, if you own a business or are self-employed, consider whether the working spouse can deduct personal expenses, reducing taxable income in the process. Or is there the possibility of hiring a spouse to further the benefits of income splitting?
Reduce taxable income
The second factor is to reduce the tax on any current non-registered investment income before hitting 72, when RRIF withdrawals become mandatory. If possible, Mr. Farwell suggests that clients receive income as dividends or income characterized as capital gains investments to reduce the amount of taxable income they are receiving.
The third thing to consider is tax-deductible strategies to offset the new income being received from a RRIF. Mr. Farwell says this is best suited to people who don’t actually need the income coming from a RRIF, although they have to take it because those are the rules.
One strategy would be to start making charitable donations while one is still working, making the RRIF withdrawals tax neutral. Mr. Farwell says one of his clients is still working at 72, and gets a $60,000-per-year RRIF payment, one that she neither wants nor needs. She gives it to a charitable foundation.
“So she gets $60,000 in income, she gets a $60,000 deduction, no additional tax,” he says.
Mr. Farwell also suggests that if clients see themselves working beyond 71, they may want to consider taking money out of their RRSP earlier, for example at 62, or in any year when they might be making less money.
“It may make sense in those years where they’re making less and before their Canadian Pension Plan and Old Age Security payments starts, to do early RRSP withdrawals and that means there’s less money in their RRSP at age 72, so when they’re forced to take it out there’s less that’s being taken out,” he says.
For sole proprietors who plan to carry on working, changing how they pay themselves may be a prudent option.
They may want to consider incorporating and having the income go through the corporation instead of straight into their hands.
“The difference between having all of your income tax in your own hands versus in your corporation if you’re under that $500,000 [small-business deduction threshold] of income then the tax in the corporation is much lower,” says Carol Bezaire, senior vice-president, tax, estate and strategic philanthropy for Mackenzie Financial Corp. in Toronto.
“You get the small-business deduction so it’s about on average about 15 per cent, versus on average about 30 to 40 per cent for a working person.”
Matt Wilhelm, a Sun Life Financial Inc. advisor based in Kitchener, Ont., says he recommends that clients put their interest-earning investments inside their RRIF or tax-free savings accounts and keep dividend-yielding and capital gain investments in non-registered accounts.
“The reason for that is that the income tax on non-registered dividend and capital gain investment is taxed less than GIC [guaranteed investment certificate] interest,” he says.
On top of that, he suggests that taking the CPP and OAS earlier can also be beneficial if a financial plan forecasts that you might earn too much income, thereby triggering a clawback to OAS.
“As long as you earn less than $73,756 of income you won’t have it clawed back, but if you earn more than that number this year you’ll have to pay 15 per cent of any amount over that number,” he says. “In some cases you might be better off to take it [CPP/OAS] earlier, otherwise you might not get it at all.”Report Typo/Error