Financial Considerations for Retirees: Income Sources

April 9, 2025

For many people, the definition of retirement includes leaving the work force behind. This means a big part of planning for retirement is making the transition from paying for expenses from income earned while employed to living on retirement income. Understanding where retirement income will come from is important for planning.

The retirement income system in Canada is a blend of several income sources including publicly administered pension plans operated by the federal and provincial governments, employment-based pension plans and personal retirement savings. It is important to evaluate all sources of retirement income to understand how they will be impacted by taxes and factors like the possibility of reduced purchasing power due to inflation. It is never too early to start planning and setting goals for your retirement.

Main Sources of Retirement Income

Canada Pension Plan (CPP)

A source of taxable pension income that every employee and their employer pays into. Contributions are mandatory for all employed and self-employed Canadian residents who are 18 years of age or older and have an annual employment income over $3,500. The amount of an individual’s CPP payment is based on their earnings, contributions to the plan and decisions about when to start their CPP retirement pension. At retirement, a monthly income is received.

The CPP retirement age is currently 65 years of age. Individuals must apply to receive CPP payments and may choose to begin CPP payments early or delay receiving the payments. The amount of the CPP payment is affected by whether it begins on, before or after the participant’s 65th birthday.

• At age 65, contributors may begin to receive an unreduced CPP payment.
• Early CPP payments may begin at age 60 however this will result in a reduction of 0.6% for each month, to a maximum of 36% if taken at age 60.
• Waiting to receive CPP payments after age 65 and up to age 70 will result in an increase of 0.7% for each month, to a maximum of 42% if taken at age 70.

The decrease or increase in CPP payments remains in effect throughout the lifetime of the pensioner. Some factors to consider when deciding on when to start receiving CPP include the income needs of the individual in retirement prior to age 70, other income sources in retirement that could be drawn from earlier to enable CPP to increase in value, and the individual’s life expectancy.

Old Age Security (OAS)

A federal program which pays a taxable monthly payment to most individuals when they turn 65 years of age if they have lived in Canada for more than 10 years after age 18 or lived or worked in a country that has a social security agreement with Canada. The recipient must be a Canadian citizen, or a legal resident to begin receiving OAS. If you have lived in Canada for 40 years after age 18 you will be eligible for the full OAS pension.

A partial pension is payable at a rate of 1/40th of the full pension for every year resided in Canada after age 18. You may defer receiving your OAS for up to 60 months from eligibility with a 0.6% increase monthly to a maximum of 36% at age 70. Individuals with an income above the yearly determined limit will have an ‘OAS Pension Recovery Tax’ by CRA also known as a clawback. The clawback reduces the pension by 15 cents for every dollar earned in excess of the determined limit.

Guaranteed Income Supplement (GIS)

A non-taxable monthly benefit available to individuals receiving OAS with low income. The amount of GIS received depends on your marital status and previous year’s income or combined income if you are married. Payments can change according to any fluctuations in annual income.

Registered Pension Plan (RPP)

A formal arrangement where an employer provides retirement pension income in consideration of past service. There are two main types of RPPs:

• Defined Contribution Plans (DCPs) provide a retirement pension based on the accumulated funds acquired through regular contributions of the employee and the employer plus investment income achieved throughout the life of the plan. At time of retirement the employee receives a cash lump sum which can be transferred to a financial institution as a Locked-In Retirement Account (LIRA) and converted into an annual income stream. The plan can also purchase a retirement income product such as an annuity.
• Defined Benefit Plans (DBPs) provide a monthly pension amount for the lifetime of the retiree. The amount is calculated based on a set formula that includes such factors as salary history and years of service. Many DBPs have spousal continuance options if the pensioner were to pass away.

All RPP contributions are considered a pension adjustment which are a tax deduction to taxable income, reduce RRSP contribution room and when paid out are considered taxable income.

Registered Retirement Savings Plan (RRSP)

An investment strategy specifically designed to save funds for retirement. Individuals make tax-deductible contributions, earning tax-deferred income such as interest, dividends or capital gains with the intention of using the funds to supplement retirement income. RRSPs are converted into Registered Retirement Income Fund (RRIF) to create an income stream. All withdrawals from an RRSP or RRIF are taxable income in the calendar removed. Planning the timing and amount of withdrawals can help manage tax liabilities.

Tax-Free Savings Account (TFSA)

An investment strategy allowing for Canadian residents over the age of 18 years of age or older with a valid social insurance number (SIN) to set aside savings throughout their lifetime. The TFSA can be utilized for multiple savings goals including long term savings to supplement retirement income or withdrawn to fund large purchases in retirement. Contributions are not tax deductible for income tax purposes, growth earned is generally tax-free and all withdrawals including growth normally are considered tax-free.

Non-Registered Savings Plan

A savings option that helps individuals keep investing for their future and can work in partnership with other investment accounts. Fundamental features of the non-registered savings plan include no limit on the amount that can be invested and a customized portfolio can be built through a combination of various investment options such as Guaranteed Investment Certificates, stocks, bonds and mutual funds. Earned growth is taxed with interest or dividend income taxed as it is earned, while capital gains are taxed as they are realized.

Employment Income

Some retirees may choose to work part-time, which can supplement their income. Income earned will be added to taxable income for income tax purposes.

Some Strategies to Consider for Married or Common-Law Partners

In retirement there can be many different streams of income that can be earned and maximizing after- tax income is an important factor to consider. Within a marriage or common-law union there are several strategies that can be utilized to distribute income between the individuals.

Spousal RRSP

Allow for a higher-income spouse or partner (contributor) to reduce their tax liability while building retirement savings for the lower-income spouse or partner (annuitant). The contributor uses the contribution as a tax deduction on their taxable income, while any amounts withdrawn during retirement will be added to the taxable income of the annuitant who is potentially in a lower marginal tax rate (MTR). From the time a contribution is made into a spousal RRSP, the funds must remain in the account for the remainder of that calendar year plus the two subsequent years to be considered income of the annuitant. Any funds withdrawn within three years will be attributed back to the contributor’s taxable income. This is most beneficial to families with a large difference in retirement income, providing a benefit of income splitting and potentially reducing after-tax family income.

Income Splitting

This allows for a higher income individual to allocate up to 50% of their eligible pension income to their spouse or common-law partner. Common eligible pension income includes life annuity payment from a superannuation, RPP payments or if the transferring spouse is 65 yrs of age RRIF, RRSP, Deferred Profit Sharing Plan (DPSP) and annuity income can be income split.

CPP Sharing

This is the processing of sharing your CPP pensions with your spouse or common-law partner. If only one spouse contributed to CPP then the one CPP pension can be shared, however if both spouses contributed to CPP, the combined total amount of the two pensions stay the same and can be shared. The portion of your pension that can be shared is based on the number of months the spouses or common-law spouses lived together during the joint contributory period.

For Canadian retirees, income during retirement typically comes from several sources. By carefully considering all income sources along with the tax implications associated with each source, retirees can create an effective financial strategy that maximizes after-tax income. Speak to your financial advisor to help create the customized retirement path for you.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

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