Tag: taxes

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Retirement taxes versus paycheque taxes

RobHLeave a comment

I’ve talked about how to think about taxes in retirement before (and I re-read my post, it still holds up) but maybe something that isn’t clear how it differs from when you collected a steady paycheque.

The paycheque withholds tax et al at the source; retirement, maybe not

I think this is well understood. The government likes getting taxes all year round, not just in April. And so part of your paycheque is remitted to the government — taxes, yes, but also CPP/EI contributions and all that stuff that no longer applies when you stop collecting a paycheque.

Withholding tax is an excellent example of the “pay yourself first” principle popularized by The Wealthy Barber. You never see the money, so you sort-of forget it’s yours. Anyway, all things being equal, the withholding amounts should be pretty close to correct, but there are all kinds of things that can throw off the calculation: bonuses, charitable giving, and RRSP contributions are the main ones. I never quite understood people who were happy to get a tax refund. That’s your money you’re getting back, and you’ve given the government an interest free loan.

Anyway, in retirement, this may not be the case:

  • If you pay yourself RRIF minimum (as I do) then there is no tax withheld at source. Of course, you can take MORE than RRIF minimum, in which case you will experience withholding tax, just like the bad old days when you were working.
  • If you pay yourself from non-registered investments (as I do), you’re likely creating taxable income if you’re selling assets that have increased in value. And that taxable income contributes to (surprise, surprise) your tax bill. Now it bears repeating that only half of your capital gains attract the CRA’s attention: the other half, and the money you put in, are all yours to keep, tax-free.
  • And of course T-slip capital gains, interest income and dividend income isn’t taxed at the source either. All of it must be accounted for at tax time.

The implication of all this is that you have to be ready to pay some of your retirement salary back to the CRA. I have a special Wealthsimple savings account1 that I contribute to monthly; I “self-withhold” about 15% of my salary, fully expecting to drain this account come tax time2.

You care less about marginal tax rates, and more about overall tax rates

In case you weren’t aware, not every dollar you make is taxed the same way. Canada has tax brackets; each tax bracket has its own tax rate. Thanks to taxtips.ca, you can get a combined federal/provincial look for how your income is taxed:

This table (and most tables like it) are showing marginal rates. The marginal rate is the tax rate charged on the income that sits above the floor of the tax bracket. Lots of people mix up the idea of marginal rates versus overall tax rates. Let’s take a simple example of someone who is drawing a salary or getting their income from a RRIF: both are taxed as “other income” in the table above:

  • Net income: $50,0003. Tax bill: 19.05%*$50000=$9525. In this example, there is no difference between your marginal rate and your overall rate.
  • Net income: $55,000. Tax bill: $9525 on the first $50,0004, and 23.15%*$5000=$1,157.50 on the remainder. Your total tax bill in this case is therefore $9525+$1157.50=$10,682.50. Your marginal rate is 23.15%, but your overall rate is much lower: $10682.50/$55000=19.4%.

My financial advisor I hired pre-retirement suggested I should target a 15% marginal tax rate, blended between my spouse and I. That’s not easy to do on RRIF payments alone, but then of course you have to consider other income sources like capital gains and dividends.

Non-registered investments can pay a salary; but tax treatment is quite different

So I look for my non-registered investments to generous returns — whether those are capital gains or dividends is unimportant. From a tax perspective, capital gains are especially weird because when you’re paying yourself by selling assets, you are typically earning MORE than “just” the capital gain (i.e. the part that is taxable) part. An example may help.

Let’s say you bought $10000 of XEQT in January 2023. As of today (October 22), it would be worth $200005:

And say you sold it all on October 22m — you’d have $20000 in your bank account. Hooray. CRA would say you made a capital gain of $10000. So if that represented your whole taxable 2026 income, that would attract a tax bill of 9.53%*$10000 =$953.00. Thinking about overall rather than marginal tax rates, you’d therefore have an overall tax rate of $953/$20000 = 4.7%! Pretty sweet.

If instead that $20000 was a RRIF withdrawal, and you had no other taxable income, CRA would present you a tax bill of 19.05%*$20000=$3,810.00, an overall tax rate of 19.05%,

Maybe you’re counting on your non-registered investments generating $20,000 of dividends instead. This generates an overall tax credit in this case6!

Retirees are obsessed with how much tax they pay

Since taxes tend to be your single biggest expense in retirement, I understand why. I try to be smart without going to extreme lengths; as I learned managing my parents’ estate, there’s either going to be a tax bill while you’re alive, or a much larger one when you’re dead. Taxes you avoid in the early years of retirement are either going to come due once you start collecting CPP/OAS7, or when you’re dead. RRIFs8 and non-registered accounts are considered liquidated on the day of death, attracting all the income/capital gains in one calendar year, and hence the highest possible tax bracket.

  1. This account does NOT factor into my net-worth calculations. I’ve already, in effect, written it off. ↩︎
  2. And in my case, this I expect will start to be every quarter as I’ll shift to paying tax in instalments. Oh well. ↩︎
  3. Net income is lower than your salary, since everyone has (at least) the personal deduction. ↩︎
  4. using the calculation above ↩︎
  5. And doubling your money in less than 4 years is an excellent argument for holding equities. (Of course, you’ll all be crowing when the floor eventually falls out, but equities do outperform over time…) ↩︎
  6. If you’re in a lower tax bracket, it’s hard to beat dividends. They start to become less efficient as you climb the brackets, especially if you’re collecting OAS since grossed up amount of dividends are use to test eligibility for OAS. ↩︎
  7. OAS clawback is a particular obsession of the retired. ↩︎
  8. Unless you declare your spouse as a successor annuitant; you’ve already done that, right? ↩︎

What’s included in your “retirement bucket”?

RobHLeave a comment

My monthly retirement salary is calculated using a methodology called Variable Percentage Withdrawal, or VPW for short. You can read about the methodology over here, and you can follow an excellent real-time illustration of how it works over at https://tinyurl.com/vpwForwardTestFiniki.

Part of the “how it works” is calculating your total retirement savings on a monthly basis. For me that includes the real-time value of:

  • 5 different RRIF accounts (3 for me, 2 for my spouse)
  • 2 TFSAs (1 for each of us)
  • 3 non-registered accounts (one for me, one for my spouse, one that serves as VPW’s cash cushion)

But what’s not in it?

  • My day to day chequing accounts
  • A rainy-day savings account
  • A tax savings account
  • A short term investment account

Since I’m continually talking about what’s in my retirement portfolio (most recently here), I figured a few words of other assets I have might be helpful.

My day to day joint chequing account

This is the account my spouse and I use for day to day banking. It’s an account we’ve held at CIBC for decades. It’s the kind of account that charges no fees as long as a minimum balance is maintained. It doesn’t pay any interest on balances. I could still conceivably use it to write physical cheques, but I can’t remember the last time I used it for that. Like most day to day banking, it has inputs and outputs:

  • Inputs: RRIF payments, payments from my non-registered retirement accounts, my spouse’s salary, eTransfers
  • Outputs: Most bill payments (subscriptions, utilities, insurance, credit cards, taxes, charitable donations), eTransfers, transfers to other accounts

As I build my relationship with Wealthsimple, some of the day-to-day duties are being shared — depending on cash flow I will sometimes pay bills from Wealthsimple, and if my CIBC balance gets too high (not often, but it does happen sometimes) I will move money from CIBC to Wealthsimple since Wealthsimple pays interest and CIBC does not. And if I’m traveling in a foreign country, the Wealthsimple credit card comes into play1, and balances for this card need to be paid from a Wealthsimple account.

My rainy day savings account

Every month, without fail, I redirect some funds to my rainy day savings account2. This is a separate account that pays interest. The rainy day fund pays for unexpected (but never ending) expenses. These could be car related (major repairs), house related (renovations, repairs), or sometimes a large splurge (vacation related). There isn’t a hard and fast rule as to when to apply rainy day savings, but a good starting point is when the cash flow of the joint chequing account looks like it’s heading to dip below the threshold where bank fees start getting paid for day to day banking. I hate all banking fees. Discretionary3 spending from the rainy day account is a joint decision.

My tax savings account

Every month, without fail, I direct some funds from my chequing account to the tax savings account. As a retiree, my only income comes from

  • Monthly RRIF minimum payments, which get no special tax treatment4. It’s like income. The big difference between a RRIF paycheque and a salary paycheque is that a typical salary paycheque has tax withheld at the source, CPP payments, EI payments… A RRIF paycheque has none of that.5
  • Payouts from my non-registered accounts, which also don’t come with any withholding tax. Every payout typically6 generates a capital gain and even with a 50% tax break on capital gains, it adds up!

So yeah, there’s a good chunk of income coming in (all flowing in to my day to day chequing account) but no taxes. So to cushion the blow in April, I’ve set aside funds to pay the looming tax bill. And for simplicity, I keep this separate from other accounts so there’s no temptation to “borrow” from it or to “forget” to make a payment. Payments are automated, direct from the chequing account every month. Wealthsimple makes this sort of thing quite painless to set up. And it’s a straight savings account, paying a small amount of interest, about 50 basis points below Bank of Canada overnight rate.

Short term investment account

This is something I’ve set up after getting a small inheritance. I haven’t decided what to do with this money, but while I think about it, I have it invested in an account with a reasonable return without taking on too much risk. It’s like the rainy-day fund, but with a likely longer time horizon.

The firewall between retirement savings and everything else remains in place. But everything else is a bit more complex than you might expect at first glance!

  1. No FX fees when I use this card. One of three I carry, which I talked about lately. ↩︎
  2. There’s actually a few of these held at different providers (Wealthsimple, Simplii) at the moment; this needs to be consolidated. ↩︎
  3. Renovations that aren’t urgent, for example. ↩︎
  4. I’m ignoring the fact that if you’re over 65 (I’m not) then you can split RRIF income with your spouse however you like. Because I planned ahead, my spouse and I are both the same age, and have very nearly the same RRIF value saved up, so even once I turn 65, the splitting may not be needed. ↩︎
  5. To clarify, if you take RRIF minimum payments (as I do) then there is no withholding tax. If you take more than RRIF minimum, then there is, and the amount withheld will depend on how much above the minimum you go. Full and complete rules outlined by the CRA (prepare coffee before reading). ↩︎
  6. A lot of the things I hold in my non-registered account I have held for a long time. And since it’s mostly boring index funds (I covered what’s inside a while back), they tend to increase in value over time. ↩︎

News: Extended Tax Filing Deadline for some of us

RobHLeave a comment

Summary: If you have capital gains to report for the 2024 tax season, your tax filing deadline has been extended by a little over a month, until June 2, 2025.

Much ink has been spilled about the proposed/delayed/killed changes in the tax treatment of capital gains in Canada. All the fuss simply means that some of us get an extension to our 2024 tax filing deadline. Does it apply to you? It might. Here are some1 scenarios where you might get a chance to file a bit later.

You Have a Non-Registered Investment Account? Read on.

Some people get confused over capital gains. Capital gains don’t apply to TFSAs, RRSPs, RRIFs, LIRAs or FHSAs. So if that’s all you have for your investments, you don’t need to worry. But if you do have a non-registered account, then the extended deadline may apply to you.

Did you get a T3 or T5 slip? Read on.

Box 21 of the T3 slip and box 18 of the T5 slip shows capital gains realized by funds you held in 2024. If you have values in these boxes, then you can procrastinate!

These boxes will be non-zero if you held ETFs or mutual funds that sold shares behind the scenes and made a profit. My go-to investment asset-allocation ETF (XGRO) made capital gains of nearly 15 cents per unit held2, per https://www.blackrock.com/ca/investors/en/literature/tax-information/distribution-characteristics.pdf.

Some people are confused by the idea of having to declare a capital gain on an asset they didn’t touch in the course of the year. While you didn’t do anything, the people who manage the fund on your behalf did. The alternative would be to hold individual stocks yourself, but I myself prefer the massive diversification of funds like XGRO.

Did you SELL an asset in a non-registered account in 2024? Read on.

In many circumstances, the sale of a stock/ETF/mutual fund/foreign currency3 in a non registered account will generate a capital gain. While this scenario doesn’t apply to me in 2024, in 2025 it certainly will since part of my retirement income comes from this exact source.

None of this applies? No extension for you, probably.

If you answered “no” to all the previous questions, then you should file your taxes per the usual deadlines. And even if you answered “yes”, there’s no harm in filing your taxes anyway, since modifying a filed return is pretty easy to do online. Be aware, though, that some providers may delay getting T3s and T5s to you, so if you’re expecting these documents and haven’t seen them yet, you should probably wait for them before attempting to file. The providers I deal with typically don’t issue all documents until the last week of March, so I’ll get started on filing my own taxes starting in April.

  1. There are almost certainly other scenarios where you get an extension. I’m not an accountant or a tax lawyer. Caveat emptor. ↩︎
  2. In my case, I don’t actually hold XGRO in any non-registered account at the moment. It’s all in RRIFs/TFSAs where I don’t have to worry about such things. ↩︎
  3. Interactive Brokers issued me a statement showing me the money I made buying and later selling a chunk of USD in 2024. That counts too. ↩︎