Baby boomers in Canada are not very tax-savvy, and they risk having their government benefits and credits clawed back unless they learn to manage their retirement income in a tax-efficient way, according to a new report from the BMO Retirement Institute.

The report, called Mind Your Taxes in Retirement, shows that only a small percentage of Canadian boomers know how best to maximize their tax savings, leaving them vulnerable to having benefits and credits such as Old Age Security and the Age Credit clawed back.

Of more than 500 Canadians 45 and older who were surveyed, 79% either answered incorrectly or did not know how dividend income and capital gains are treated from a tax perspective. More than one-third did not know how interest income is treated from a tax perspective and 41% did not recognize the correct tax effect of making a withdrawal from a Registered Retirement Income Fund.

“It’s critical that retirees be tax smart and adopt a long-term approach that will allow them to pull their income from the most advantageous sources,” said Tina Di Vito head of the BMO Retirement Institute. “Doing so will also ensure that those with a higher retirement income don’t exceed the thresholds that allow them to continue to receive government benefits and credits, which could have a significant impact on their total annual income.”

Nearly half of those surveyed who are retired said they rely on OAS as one of their principal sources of income. OAS, which is provided by the government to Canadians 65 and older, is an income-tested benefit that could be taken away if a recipient exceeds a certain income level. It is therefore critical for clients to be aware of their income level and tax bracket in order to preserve their eligibility to the benefit.

Yet, only 21% of the retirees surveyed knew the exact tax bracket they would be in once retired.

Advisors can help retirees and pre-retirees minimize their taxes and maximize their retirement revenue through the following strategies:

  • Ensure clients are managing their retirement income wisely to take full advantage of tax credits and benefits, such as the pension credit and spousal pension income splitting. For some clients, this may mean converting RRSPs to RRIFs before age 71 and taking out more than the minimum required amount during the transition years between retirement and the age at which government benefits start to apply.
  • Urge clients to take advantage of tax-free savings accounts. For example, seniors who have a large RRIF and don’t want to give up the tax-sheltered treatment of their assets could redirect funds out of the RRIF every year into a TFSA – subject to availability of TFSA contribution room – where the tax-sheltering continues.
  • Help clients understand how taxes will impact their retirement income, and educate them which types of income are more tax-efficient than others.