This article was reviewed by Chris Singer, CFP®.
It’s that time of year again. You’re coming down from the holidays and getting back into normal life again and two words snap you back to reality: “Tax Season.” But never fear, we have got you covered for the 2022 tax season with some tips and tricks from our friends and tax experts who handle this very thing every year without worry.
Whether you’ve just retired, or are planning to in the next few years, understanding what tax deductions are available to you based on your past year, and which pitfalls are most common is half the battle (and the other half is having a trusted team in your corner). So without further ado, let’s dive into what the experts are sharing for the 2022 Canadian tax season!
What are the top mistakes you see people nearing retirement make when it comes to tax season?
All of our experts agree on one big mistake they see regularly, and that’s not planning for retirement early enough. Most people have an idea of what they want their retirement to look like, but don’t think about how their income will change or what impact it will have on their taxes.
Shannon van Tunen (CPA, EA), Managing Partner at Aylett Grant Tax LLP, identified Old Age Security (OAS) as a common issue. She mentions that most people “[are not] aware of what their post-retirement income will be. What will they receive from OAS, CPP (Canadian Pension Plan) etc. [They aren’t clear on] when they should take OAS and CPP (Canadian Pension Plan), [and aren’t] aware of OAS claw back threshold and planning around it.”
Kevin Schindler (CPA, CA), Principal and President of KCS Inc., sees similar things with his clients and adds that “[most people wait] too long to come to see their accountant,” and “[aren’t aware] about all available tax credits—specifically medical expenses, the cost of care at home or in a home, [and] the BC Renovation credit for seniors.”
John Bowling (CPA, CGA), Co-Founder and CFO at Float House, sums it up as “Tax season is just the fallout for what they did the prior year. Cashed in RRSP’s without considering the real tax cost is one [thing we see a lot].”
The big take away here is to plan ahead. Reach out to your financial planning team to understand all your income sources and plan ahead to maximize your deductions. Retirement brings more changes with it than just what your week days look like, and by planning ahead and understanding what those changes will look like on your taxes, you’ll save a few headaches (and deductions) in your first years of retirement.
What are the top tax savings opportunities you encourage people nearing retirement or in retirement take advantage of?
Our panel of experts each have various tips that fall into the category of “planning ahead” (are you seeing a trend emerging?). A big factor in preparing for retirement and getting the most out of your taxes is a plan for RRSP contributions. See our recent Guide to RRSPs for Retiring in Canada for more information on planning for retirement.
- Manage your tax brackets.
- Make donations while you are still alive, consider donating publicly traded shares to avoid capital gains taxes and get a donation credit.
- Pension income splitting and CPP sharing.
- Pay into Spousal RRSP’s until your spouse is over 71 to balance out RRIF’s between the couple.
- Plan a year ahead: What will your base taxable income be and what can you do to take advantage of the low tax bracket (ie move RRSP out when in a low bracket)?
Shannon van Tunen
- RRSP contributions: reduces taxable income and defers taxes until money is withdrawn.
- TFSA contributions: there are no current tax savings but any income is tax free.
What is a common misconception you hear from your clients nearing or in retirement when it comes to taxes?
We all have an idea of what we want our retirement to look like. For some, it’s spending days in the garden and entertaining family and friends. For others, it’s taking an RV up the Alaskan highway and making every stop on the way. And for others, it means simply scaling back how much they work to meet their goals while staying mentally and physically active.
Whatever your retirement dream is, it’s always easier to achieve when you have a plan that you’ve discussed with your financial team ahead of time. Here are some common misconceptions our accounting experts hear from their clients regularly that you can start to discuss with your own team.
- Refer to your purpose in life. You may not need millions in the bank per se.
- Transferring your home to the kids, and now losing the primary residence exemption on any gain often outweighs the small probate fee and now the house is a family asset of the kids, opening up other issues.
- i.e. separation or the death of a child, and the house goes to someone unintended.
Shannon van Tunen
- You cannot contribute to an RRSP after age 71–most people do not understand that if you have a spouse under the age of 71 you can contribute to a spousal RRSP even if you are over 71.
- All regular fees paid for full-time care in a nursing home or for specialized care in an institution are eligible for medical expenses including: food, accommodation, nursing care, administration fees, maintenance fees and social programming and activity fees!
- You cannot claim the disability credit simply because you have a disability. You must have an impairment in physical or mental functions that is severe and prolonged, and that requires you to get assistance with the functions of daily living: dressing, eating etc.
What is your biggest piece of advice for people nearing or in retirement when it comes to their tax planning?
- Budget well in advance.
- What is your plan for [your] home? [Will you] use it for medical/care home?
- Consider insured inheritance well before you get too old for affordable insurance. Don’t cancel insurance policies, consider letting the kids pay the premium and make them beneficiaries. Again what is your purpose in life?
- And the biggest thing, GET YOUR WILL IN ORDER early. Do not procrastinate and think of as many what if’s as you can. Have an end game for your will too. You don’t want your inheritance going to a lawyer trying to track down relatives in different countries who may have passed already.
- Get professional advice—someone to review all of your assets and their taxability, as well as your future gifting wishes per your will in order to develop a short-term plan and a long-term plan.
Shannon van Tunen
- Plan for your retirement. Many people do not have a retirement plan in place.
- Being realistic about your cash needs after retirement.
- Pay attention to your tax brackets. Will you be in a higher tax bracket after retirement so taxes paid on RRSP withdrawals will be higher than current taxes?
The biggest takeaway from our team of accounting experts is this: have a plan in place for your retirement—and review (and revise) it regularly with your financial team.
Take the stress out of tax season
Hopefully understanding some of the common issues that retirees face at tax season, and reviewing some great tips on what to keep an eye out for, has made you more comfortable with your 2022 filing.
Don’t worry if the idea of tax season still sends shivers down your spine, experts like your financial planner or the accountants we’ve shared are always here to make tax season easy for you—if may seem crazy, but this is what they love to do! The important thing is to involve the experts on your planning team early.