Q. This fall, I will celebrate my 65th birthday, and plan to reduce my work hours to three days a week, from my current full-time hours now. I also plan to begin collecting my Canada Pension Plan and Old Age Security benefits—but, at the same time, I want to avoid being taxed on my income if possible. What would you suggest I do?
A. From a lifestyle perspective, Rose, I think the phased retirement you’ve opted for is a great way to make the transition from full-time work. Not everyone has the option to go from full- to part-time, but if you can, it’s worth considering.
There is a common misconception that you can’t work while receiving your government pensions, or that there is some sort of reduction or clawback. You can, in fact, receive your Canada Pension Plan (CPP) retirement pension and your Old Age Security (OAS) pension while still working, but there are some important considerations.
You can start CPP as early as age 60; if you’re still working at that point, you need to keep contributing to CPP. If you’re 65 or older, and plan to continue working, you can choose not to contribute to CPP by completing Form CPT30 Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. You are not required to contribute to the CPP after age 70, and age 70 is the latest you can defer the start of your pension.
If you haven’t contributed enough to the CPP to receive the maximum benefit, you may opt to continue to contribute after age 65 to enhance your pension. If you are entitled to receive the maximum pension already, oddly, you would need to start your CPP pension to receive any “post-retirement benefit” for contributions you make after turning age 65. (In other words, you would not want to hold off on receiving your CPP benefits.)
OAS is a bit different from CPP. For one, there are no contributions to OAS. And unlike CPP, the earliest you can start your pension is age 65, while the latest you can defer it is age 70. Another consideration is that OAS does have a pension recovery tax, often called a “clawback,” that can reduce your pension income. It doesn’t have anything specifically to do with still working after 65, though, and is simply based upon line 236 (net income) of your T1 tax return.
If this net income—regardless of the source—exceeds $77,580 for the 2019 tax year, there is a pension recovery tax, or clawback, of your OAS for 15 percent of your income exceeding the threshold.
You can choose to defer your CPP or OAS pensions after age 65, Rose. People often feel compelled to begin the pensions because they receive their CPP and OAS applications from Service Canada in the mail prior to their 65th birthday, but you can defer as late as age 70. There is a bigger benefit from deferring your CPP pension (an increase to your benefit of 0.7% per month or 8.4% per year) compared to OAS (an increase to your benefit of 0.6% per month or 7.2% per year) after age 65.
Keep in mind, too, that you don’t need to start both CPP and OAS at the same time. You might consider starting one of your government pensions in the fall, to supplement the 40% reduction in your employment income you’ll experience by moving to part-time hours. You can wait to start your other pension after you’ve fully retired.
Another option could be to start withdrawals from your Registered Retirement Savings Plan (RRSP) when you transition to part-time employment, instead of or in addition to your CPP and OAS. You can simply take an RRSP withdrawal, but it may also be beneficial to convert your RRSP to a Registered Retirement Income Fund (RRIF).
You see, if you have RRIF income after the age of 65, you can receive a tax credit called the pension income amount for eligible pension income. This will save you between $351 and $449 per year depending on your province or territory of residence. CPP and OAS are not considered eligible pension income for this tax credit, nor are RRSP withdrawals. RRIF withdrawals, however, are eligible.
RRIF withdrawals you take after age 65 are also eligible for pension income splitting, whereby up to 50% can be moved from your tax return to your spouse’s tax return. This splitting happens on your tax return and gives you the opportunity to decide retroactively if transferring some of your RRIF income to your spouse, up to the 50% maximum, can save you tax as a couple.
If you expect to have a long retirement, and especially if you don’t have other defined benefit pension income from an employer, that can be an even more compelling reason to defer your CPP pension, OAS pension, or both pensions, until after 65. If you take RRIF withdrawals to supplement your part-time employment income, that will draw down your relatively risky retirement income (investments), while your guaranteed retirement income (CPP and OAS) is allowed to keep on increasing. Your CPP and OAS are inflation protected, and you will keep receiving them even if you live to 110. Your investments may not provide that same inflation or longevity protection.
With regards to your concern about owing tax on your CPP or OAS income, unlike employment income, there is no tax automatically withheld on your CPP or OAS pensions. You can opt to have tax withheld if you’d like.
In summary, Rose, you can start your CPP and OAS pensions at 65, while still working, and you may not lose any if you don’t have a high income subjecting you to OAS clawback. You may or may not want to continue contributing to CPP, but you must submit paperwork to stop contributing. And you may benefit from deferring your CPP, OAS, or both, but need to consider whether to start your RRIF withdrawals now or defer.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.