By Evelyn Jacks, President and Founder, Knowledge Bureau

How do you create a tax-efficient retirement income after a lifetime of saving? Government pensions will help, but investing privately will definitely improve your standard of living in retirement. By planning and starting early, you and  your spouse will be well positioned, especially if you invest wisely to accumulate funds in several different “buckets” from which you can build a tax-efficient income. 

Private pension income can come from several different sources. Commonly, those who participated in an employer-sponsored Registered Pension Plan (RPP) will receive a periodic monthly pension on retirement. Other employees may have been members of a Deferred Profit Sharing Plan (DPSP).

For those who did not have an employer-sponsored plan, or were not able to top it up, a Registered Retirement Savings Plan (RRSP), and/or a Tax-Free Savings Account (TFSA) can be the means to generate periodic retirement income.


There are some important differences between an employer-sponsored registered pension plan (RPP) and a self-funded RRSP.  In both cases, all withdrawals will be taxable, but eligibility to claim the $2,000 pension income amount, which is a non-refundable tax credit, depends on the definition of “qualifying pension income”. Recipients of superannuation payments from RPPs will qualify to claim the pension income amount at any age. Those with RRSP and DPSP accumulations must wait to age 65. 

Here’s why this is particularly significant: if you qualify for the $2,000 pension income amount, you will also be able income split the qualifying pension income with your spouse.

Pension income splitting

Eligible taxpayers may elect to split up to 50% of their qualifying pension income with their spouse, by annually filing Form 1032 Joint Election to Split Pension Income, with their tax return. The split-pension amount is then deemed to be income of the transferee; it’s deductible by the transferor, and both taxpayers can claim the pension income amount.  To be eligible, both the transferee and the transferor must be residents in Canada at the end of the taxation year in which income is to be split or at the time of death.

Tax savings can be significant if the transferee spouse is in a lower tax bracket than the transferor, but savings can also occur where the lower earnings spouse has more than $2,000 eligible pension income and the higher has none.  By splitting pension income, up to $2000 can be received tax free because of the pension income credit.

Qualifying pension income

For taxpayers who are under 65, qualifying pension income includes payments in respect of a life annuity from a superannuation or pension plan, but not RRSP or RRIF benefits. Amounts received from the following sources because of the death of the taxpayer’s spouse will qualify:

  • RRSP annuity or RRIF payment; DPSP annuity; and
  • Amounts accrued under certain life insurance policies and annuities.

For persons over 65, eligible pension income includes:

  • Payments in respect of a life annuity from a superannuation or pension plan;
  • RRSP annuity receipts;
  • RRIF withdrawals;
  • DPSP annuity receipts, and;
  • The interest portion of annuity payments and amounts accrued under certain life insurance policies and annuities.

Changes in tax remittances

If the balance due on your return is $3,000 or more for two out of three years, you’ll be required to make quarterly instalments, with each instalment equal to one-quarter of the balance. Once your return is assessed, you’ll get a reminder from the tax department outlining the details. This is of particular concern to couples who start to split retirement income sources. If you’re making instalments and your income decreases, be sure to adjust your instalments downward as well.   

Pension income splitting may also affect the clawback of Old Age Security, the Age Amount and federal/provincial taxes payable by each spouse, often reducing combined taxes payable by the household.

Generating Pensions from an RRSP

Before the end of the year in which the taxpayer turns 71, RRSP accumulations can be cashed out in full and reported as income; however, this is generally a bad idea. 

A better plan is to arrange periodic payments that are taxed over time, by transferring balances to a Registered Retirement Income Plan (RRIF) or purchasing an annuity. Taxpayers may no longer contribute to an RRSP after the end of the year in which they turn 71, but if they have unused RRSP contribution room and a spouse who is age-eligible (under 72),  a spousal RRSP contribution can be made.

Spousal RRSPs

It is not possible to split RRSP retirement income with a spouse until the taxpayer is 65 and RRSP income becomes eligible for pension income splitting. Until then, all withdrawals must be reported as income by the plan annuitant.   

In the case of a spousal RRSP, the withdrawals are taxed in the hands of the “annuitant spouse,” that is, the spouse whose name is on the account, providing three years have passed from the last contribution to a spousal plan. If withdrawn before that time, the withdrawals must be reported on the contributing spouse’s return.

When the annuitant spouse transfers the RRSP savings to his or her own RRIF, the minimum payments required under the plan will be taxed in his or her hands. Generally speaking, amounts over the minimum payments will be taxed in the hands of the contributor spouse until the restriction period has passed. If your plan is to retire prior to age 65, it may be a good idea to consider withdrawing from a Spousal RRSP first, so the lower earner is taxed.

Death of an RRSP holder

When you die, the full amount of your RRSP accumulations is included in income on the final return, but it is possible to transfer or “roll over” any RRSP accumulations on a tax-free basis to an RRSP or RRIF for your spouse, or an RRSP or RDSP for a surviving financially dependent child.

Layering in Other Sources

Most taxpayers supplement their pension income with investments held in non-registered accounts. In order to achieve the best overall tax results, the tax attributes of those income sources need to be understood.

The taxable amount of a dividend from a publicly traded Canadian corporation is 38% greater than the cash amount of the dividend, for example. This can affect the amount of Old Age Security and other social benefits that seniors receive, as the “gross-up” increases net income on the tax return.

In another example, compounding interest income must be reported annually even though cash is not received until maturity. While interest rates have been low in recent years, those planning to retire in the future, when interest rates may be higher, will want to take this into account.

Clever Financial Moves

Planning how to “layer” income from all your savings – public pensions, private accumulations and TFSAs – will help you to “average down” the taxes payable in the retirement period. Be sure to take advantage of income-splitting opportunities, too.  Best of all, maximize your TFSA contribution room throughout your lifetime, as it’s one of the best ways to continue to accumulate, grow and preserve your wealth.