Many Canadians expect their taxes to drop in retirement — but that’s not guaranteed. In fact, without a clear plan, you might pay more tax than necessary and risk losing access to government benefits like Old Age Security (OAS).
Understanding how tax on retirement income in Canada works is key to keeping more of what you’ve saved. In this blog article, we’ll go over how you can build a tax-efficient retirement income plan in Canada.
Why Taxes Still Matter in Retirement
Without a strategy, you might:
- Move into a higher tax bracket
- Trigger OAS clawbacks
- Miss out on pension income splitting opportunities
- Pay more tax than necessary across your lifetime
Make the Most of RRIF Withdrawals
Use Your TFSA as a Flexible Buffer
Your Tax-Free Savings Account (TFSA) is one of the most powerful retirement tools available:
- Withdrawals are completely tax-free
- They don’t affect your eligibility for government benefits
- There are no minimum withdrawal rules or age limits
Using your TFSA to top up income during low-income years can help you delay CPP or RRIF withdrawals and keep your tax rate low.
Take Advantage of Pension Splitting
Why It’s More Useful Than a Simple Estimate
More Financial Stability, Less Flexibility
While some retirement tools give you a basic number, your Retirement Score is more holistic. It evaluates your entire financial health rather than just your savings balance.
It helps answer:
- Am I saving enough right now?
- Can I retire when I want to?
- How do I compare to others at a similar life stage?
- What adjustments could improve my readiness?
- Having this level of clarity can make planning less overwhelming and more actionable.
Let's look at an example
Grace and Peter
Grace and Peter, both 68, live in Port Moody. Together they have $1.1 million in RRSPs, $150,000 in TFSAs, and Peter receives a $40,000 annual pension. Grace draws $15,000 a year from her RRSP.
At first, their combined income pushed Peter into a higher tax bracket and triggered partial OAS clawbacks. Their advisor helped them restructure their income:
Grace increased her RRSP withdrawals to reduce future RRIF obligations
They began splitting Peter’s pension, cutting his taxable income in half. TFSA withdrawals filled in the gaps without raising their overall income.
Peter delayed CPP to age 70 for a higher benefit later on
These simple shifts saved them over $3,000 per year in taxes and helped them avoid losing OAS — all while maintaining a stable monthly income.