People often ask me how I went into retirement with no cash flow changes, but with reduced income taxes. It takes planning, discipline and preparation prior to your retirement age. Remember, once you turn 65, you are able to apply for both the Canada Pension Plan and Old Age Security, although these benefits both come with income tax consequences.
At age 40, my circumstances in life changed. I was self employed, on my own, and planning my future as an individual now. I held RRSP’s (Registered Retirement Savings Plan) and open investments that were growing in markets that were doing well. I also formed a Personal Corporation to carry on consulting and my other business opportunities. This is when I took charge of making my future work.
Set Retirement Goals
I set life and financial goals, and reviewed these goals each year to stay on track with my plan of retiring at age 60.
Look For Opportunities to Melt Down your RRSP
In mid life, in my early 50’s, I took the opportunity to take a sabbatical to travel by stepping back from my daily business. This was a great opportunity to reduce my RRSP’s as my work income was low for this period of time. The lesson here is to always look for opportunities to “melt down” RRSP’s whenever your marginal tax rate is low with less regular income. Depending on your province, you can consider melting down RRSPs any time your income is less than (approximately) $47k.
Move Personal Investment into A Corporation
As the markets fluctuated, I took opportunities to sell my personal investments and move them into my Corporation. Again, I only did this with those that weren’t performing to my standards. By moving portfolios when they were below cost, I minimized the capital gains payable in my personal name.
Draw On Your Investments through a Shareholder Loan
By the time I was 60, I had no RRSP’s in my personal name, so therefore no tax consequences as all registered retirement products MUST be cashed in as income. My other investments were mostly held in my corporation by this time. I was able to draw on them as a return of Shareholder loan, which is not taxable income. I took these returns of capital as a monthly withdrawal. Again, the amount I was withdrawing was in my control, not the CRA’s. My living expenses were reasonable, and I was quite comfortable during this time of my life.
Always Be In Control
The next 5 years were well thought out. By 65, I was ready to start to apply for the Federal Canada Pension Plan and Old Age Security benefits. These taxable benefits are paid in your personal name and taxable at your personal marginal tax rate each year. Calculate your living expense needs and the taxable benefit payments received yearly, allowing you to estimate the amount owing to Revenue Canada. ALWAYS BE IN CONTROL.
The less you own in your personal name, the less taxes you will pay yearly or upon death. The more you own in your Corporation name, the easier it is to leave a legacy.
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