How financial professionals are helping retirees navigate the year-end tax minefield


By Brenda Bouw

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Investment returns are just one way advisors can help retirees increase their net worth. Many advisors also look for tax-reduction strategies and say year-end is a good time to finalize those moves.

It’s easy in the fall months to tax plan,” says Ethan Astaneh, a financial advisor at Nicola Wealth Management Ltd. in Vancouver. “If something needs to be done by year-end, now is the best time to maybe estimate, for example, the investment income earned throughout the course of the year.

It’s also a good time to factor in any government changes that may affect taxes paid. For example, in March, the federal government lowered the annual minimum withdrawal amount from a registered retirement income fund (RRIF) by 25 per cent for 2020 to help retirees cope with a potential drop in the value of their stock portfolios owing to the COVID-19 pandemic.

Even if retirees’ investments have since recovered, Mr. Astaneh says they might take advantage of the move to reduce a clawback of their Old Age Security (OAS) or lower their tax bill for the year.

“As an advisor, you need to make sure you’re covering the various categories of tax strategies and apply the specific ones that might apply in a given year,” he says.

There are some common tax-saving strategies that advisors recommend to their clients each year, including pension income splitting, which is popular among many retirees, says John Waters, vice-president and director of tax consulting services at BMO Nesbitt Burns Inc. in Toronto.

The strategy enables higher-income-earning spouses to transfer up to 50 per cent of their eligible pension income, such as a company registered pension plan (with exceptions in Quebec), to their lower-income-earning spouses. It means lowering the overall tax bill in that particular year.

“That’s great for retirees because it’s not uncommon for retirees to have disproportionate incomes,” Mr. Waters says.

Couples can also set up a spousal registered retirement savings plan (RRSP), which shifts future retirement income from a high-income-earning spouse to a lower-income-earning one, but Mr. Waters says it generally needs to be done in advance of retirement, when RRSP “earned income” is still being generated.

“This requires a bit more foresight because it’s something you do while you’re working, putting money in for the benefit of your spouse,” he says. “The idea is you’re taking a deduction now against your income, presumably at a high-income tax rate. Then, at retirement when it’s drawn down, it’s the lower-income-earning spouse that’s taking that income, ideally at their lower tax rate. So, there are [tax] savings there as well as the [tax] deferral. … It’s something that can be very valuable.”

Tax-loss selling is another way retirees can reduce taxes in a given year and could be popular this year given the volatility in the markets, Mr. Astaneh says.

“What’s unique about this current year is that some investments have gone down in value and recovered, and some have gone down in value stayed down,” he says.

Mr. Astaneh says the loss can be used to offset any capital gains. He notes that capital losses must be applied first against any capital gains realized in the year, but any excess capital losses can be carried back for up to three years or carried forward.

Also, the loss can only be claimed if the same security isn’t repurchased within 30 days, he says.

Advisors can also help retirees reduce their taxes by setting up a plan for when to withdraw funds from each of their registered and non-registered investments.

For example, depending on cash-flow needs and marginal tax rates, there may be a window for some clients to draw down a portion of their registered assets before they start receiving Canada Pension Plan, OAS and mandatory RRIF payments, Mr. Waters says.

“However, because RRSP/RRIF withdrawals are taxed as 100 per cent income, pulling from non-registered funds is often best because any potential capital gains realized are taxed at only 50 per cent,” he says, adding that a mix of both strategies is also common.

Mr. Waters says the discussion depends on how much a retiree has in those accounts, their cash-flow needs each year, and takes into consideration factors such as life expectancy, marginal tax rates, possible OAS clawbacks and the ability to split pension income, including RRIF withdrawals, which must start no later than the year after which the investor turns the age of 71.

“We often have conversations around the opportune time to take money out,” Mr. Waters says.

He adds that tax-free savings accounts (TFSAs) can be a good place for seniors to put the money they’re forced to withdraw from a RRIF that they don’t need.

“A good strategy is to put it back into the TFSA and continue with the tax-[free] growth,” Mr. Waters says.

There are several ways retirees can reduce their annual income taxes, but the planning needs to begin long before they step away from the working world, says Mayeer Pearl, partner in the audit and advisory practice at Crowe Soberman LLP Chartered Professional Accountants in Toronto.

“The last thing you want to do is wait until they’re [retired] and say, ‘Okay, now’s the time to figure it out,’” he says. “We try to work with clients as early as possible and figure out what their retirement needs are … and if they have enough assets available to fund it.”

Mr. Pearl says advisors need to stay on top of a client’s various assets and income, including how they may change throughout the year.

“Unless you’re having conversations deliberately with the client about tax-planning during the year – not just at tax time – you might be at the risk of missing a tax strategy for their benefit,” he says.