Tax strategies for soon-to-be-retired singles

Although older Canadians are more likely to live alone, according to Statistics Canada, tax planning strategies available to this demographic are few and far between.

Unlike spouses, singles can’t split their income or defer their taxes owing upon death. But some advanced planning can help even the playing field with married and common-law seniors, says Evan Parubets, head of advisory services at Steadyhand Investment Funds Inc. in Toronto.

TFSAs vs. RRSPs

Mr. Parubets emphasizes tax-free savings accounts (TFSAs) for singles as any returns on investments remains tax-free. With a registered retirement savings plan (RRSP), withdrawals count as taxable income.

This scenario can be difficult for single clients to grasp, as high earners may want to contribute to their RRSPs to lower their net income and, possibly, move to a lower tax bracket in their working years.

“We have to factor in whether it makes sense to lose the RRSP deduction to have tax-free income down the road,” he says. “Their tax bracket will come into play.”

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Single clients who have children might contribute to RRSPs to ensure they receive the Canada Child Benefit, which is an income-tested benefit, Mr. Parubets says.

Travis Koivula, senior wealth advisor at Island Savings Wealth Management, a division of FW Wealth Management Ltd., in Victoria, notes that a single person who dies with a large RRSP is in the worst possible tax scenario as, unlike spouses, there’s no way to defer or roll over the immediate tax hit.

Instead, investments in the RRSP are deemed sold and fully taxable upon death. It’s why he often looks at strategies for withdrawing from RRSPs earlier if the single client is in a low income-tax bracket.

Most of his retired senior clients in their 60s don’t contribute to their RRSPs as doing so won’t affect their income tax bracket. They might opt for a non-registered account instead, in which there’s more flexibility with withdrawals in the future years.

CPP and OAS withdrawals

A single retiree also needs to decide when to take their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

Mr. Parubets finds that most of his single clients want to start taking their CPP benefits at age 60, the earliest opportunity. But he advises most of these clients to postpone until age 70, which means up to 36 per cent more guaranteed income for the rest of their lives. As singles only have their own income to rely on, with fewer back-up reserves, boosting financial security with more guaranteed income is a good thing, he adds.

“A senior outliving their money is more of a risk than dying prematurely,” he notes.

OAS benefits don’t commence until age 65, and again Mr. Parubets says it may be worth delaying. The OAS clawback starts at a net individual income of $90,997 for 2024. Unlike spouses, singles don’t have the option of income-splitting their pensions to reduce their net income to fall under the clawback threshold.

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Single retirees could contribute to their RRSPs to reduce their net income, but that RRSP money is eventually taxable when withdrawn and may place clients in a higher tax bracket at a later date.

Mr. Parubets sometimes advises single clients to adopt an RRSP meltdown strategy. The client withdraws from their RRSP each year from age 65 to 70 and defers OAS until they turn 70. By then, the RRSP is smaller and will hopefully mean lower income tax when converted to a registered retirement income fund and there are mandatory minimum withdrawals. By delaying OAS to age 70, the benefits would be 36 per cent larger than if the client opted to take them at 65.

“The idea is to help facilitate better benefits down the road,” Mr. Parubets says.

Don’t sleep on GIS

The Guaranteed Income Supplement (GIS) is often considered to be for low-income seniors, but Mr. Parubets has clients who are eligible for the benefit.

“A client can have a sizable enough chunk of assets, cash and investments and still be eligible for GIS benefits,” he says. “It’s one of the most underutilized benefits out there.”

He recalls one client who received an inheritance they put into a TFSA. They were withdrawing TFSA money regularly to serve as part of their retirement income. That income was exempt from a GIS clawback so the client ended up receiving GIS each month.

Mr. Koivula encourages clients to fill out the GIS part of the application when they apply for OAS.

“The worst thing that happens is the government turns you down,” he says. “If your income ever drops, then you’re automatically enrolled for it.”