With
work pensions, government pensions and RRIFs, they are all paid to you as
income and are taxed according to your tax rate. Unfortunately, we
cannot just convert them to non-registered income to reduce tax.
However, there are opportunities to split government pensions between
spouses that may reduce income tax.
Click here to download the form for Canada Pension Plan splitting
which includes the contact information of your nearest Human Resources Development Canada
(HRDC) office.
There
are basically 3 types of investment income - interest, capital gains, and
dividends. Interest income is fully taxable each year whether you
spend the interest or not. So it is desirable to try to receive
investment income in the form of capital gains or dividends. You
will need to review these options with your financial/investment advisor.
Another
financial strategy that can help reduce tax and increase retirement income
is with the use of Prescribed Annuities. An annuity is essentially a
mortgage in reverse. You will transfer a specified amount of money
to an insurance company and in exchange they will pay you a specific
amount of money (typically either monthly, quarterly, or annually) every
year for the rest of your life. This payment represents both a
principal portion of your capital which is totally tax free and an
prescribed interest portion which will remain the same each and every year
and will be the amount you will include in your income. However,
since annuities use both principal and interest, payments may stop at
death and no capital will pass to your heirs. Life insurance is
commonly used to replace this capital upon death. Even with the
added expense of the life insurance premium, this strategy can
significantly increase your after-tax income and guarantee it for life
while at the same time, preserve capital for your heirs
