Who among us is unfamiliar with the chilling epigram: “Nothing is certain but death and taxes?” Variously attributed to Benjamin Franklin or Mark Twain (some sources include Daniel Defoe), the remark carries a nasty ring of truth whatever the true identity of the author.
But of all the taxes guaranteed to give a retiree the maximum degree of anxiety in exchange for the minimum amount of reassurance, it’s hard to beat the ominously sounding “withholding tax.”
The withholding tax is an inescapable reality for all working Canadians – and most other nationalities, too. It is defined as the amount of tax that is taken off each pay cheque and remitted to Canada Revenue Agency (CRA) on every taxpayer’s behalf.
The withholding tax provides a steady flow of income for the government and makes it less likely that you will evade taxes should you be tempted to do so.
And since the withholding tax is levied at source (right from your pay cheque) it cuts down the costs of tax collection. There are other pros and cons surrounding the withholding tax, but the bottom-line for retirees adds up to the following points.
Retirement Income is Not Exempt
Being retired doesn’t exclude you from making remittances to the Canada Revenue Agency (CRA) on your retirement income. As a result, the key is to develop a withdrawal strategy that:
- Considers your different retirement income sources and their respective tax rates
- Enables you, as a result of careful planning, to keep more money in your pocket
And that, right there, is the point of this blog.
Cash Flow Planning is Essential to a Successful Retirement
Recently, The Globe and Mail published a helpful article on the subject, citing the opinion of Allison Marshall, vice-president of financial advisory support at RBC Wealth Management in Toronto. Ms. Marshall observed:
You really have to think about cash flow planning when going into retirement, and where you’re going to draw from, to make sure you can pay your bills every month.
A large part of the problem involves taxpayer ignorance about the withholding tax. Based on a 2019 CIBC poll:
- 89% of Canadians surveyed don’t fully understand how their retirement income is taxed
- Nearly one-fifth of respondents believed the Canada Pension Plan (CPP) is a tax-free benefit
The Globe and Mail article summed up the situation in a succinct single paragraph:
“Like employment income, most retirement income is taxable, including the CPP, Old Age Security (OAS) and company pension payments as well as registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). With some retirement income, such as CPP and OAS, taxes aren’t automatically deducted with each payment, although it’s an option you can ask for to smooth out your finances and avoid a big year-end tax bill, which some experts recommend. Taxes are automatically withheld, however, on RRSP withdrawals, workplace pension income, annuity payments and, in some instances, on other sources – often causing some trepidation among new retirees.”
Invest in Professional Financial Advice
The nuances surrounding the withholding tax makes obtaining professional advice imperative. And that’s where the financial professionals at the financial partners standing behind Everything Retirement can play a vital part.
Each of the credit unions that support Everything Retirement – Coastal Community Credit Union, Coastal Community Private Wealth Group and Interior Savings – have the resources necessary to help you create a wealth and income strategy designed to reduce your tax exposure, identify opportunities to reduce your tax liability, and leave you with more money in your pocket to spend during your retirement years.
We understand that a long, happy retirement starts with being prepared – financially, emotionally, socially, and physically. 30 year long retirements are quite usual nowadays, and 40 year retirements are not unknown. The smaller your reservoir of retirement financial resources, the more important it is to develop a plan.
A written financial retirement plan lays out the different streams of retirement income, investments and savings, and other miscellaneous sources of revenue to which you are entitled. For personalized advice, please consider reaching out to our credit union partners.