This is a guest post by invitation, from Graeme Hughes, PFP. Thanks to Graeme, this is a wonderful follow up post to The 3 Most Common Mistakes of Canadian Investors. Over to Graeme …
Canada’s tax and benefits system is a convoluted tangle of programs, rules and exceptions that can be a genuine challenge to navigate. Like all complex systems, having some knowledge of how it works often reveals opportunities to benefit. And as a taxpayer, it only makes sense to ensure that we are accessing all the benefits our tax contributions have made possible.
One of the greatest areas where this type of planning pays off is in structuring our early-retirement income to maximize pension benefits. Here we will be looking at two benefits in particular, the Guaranteed Income Supplement (GIS) and the Canada Pension Plan (CPP).
Accessing The Guaranteed Income Supplement
Often, the GIS is viewed as being strictly a benefit for seniors who are living in poverty. However, recent studies show almost a third of Canadian seniors are receiving this benefit, and it can add substantially to your total retirement picture.
The GIS is an add-on payment to Old Age Security (OAS). It provides a maximum monthly benefit of $1,138.90 for single, widowed or divorced OAS recipients, and $685.56 for each married and common-law OAS recipients, whose partners also receive the full OAS benefit. Benefits are income-tested, with eligibility and payment amounts based on the previous year’s income. For single recipients, the standard GIS benefit is generally reduced by $1 for every $2 of other income. For couples, each partner’s GIS benefit is generally reduced by $1 for every $4 of combined income. Additional income exemptions and GIS top-ups can affect the actual calculation. The clawback rates are variable depending on total income, and more detailed tables can be found here.
The GIS is a non-taxable benefit, and OAS payments are excluded from the income calculation. For October to December 2026, GIS eligibility ends when annual income reaches $23,112 for single individuals, or $30,528 in combined annual income for couples where both partners receive the full OAS pension. Different income thresholds apply when a spouse does not receive OAS or receives the Allowance.
These are not universal couple thresholds. If one spouse does not receive OAS or the Allowance, the combined income cut-off rises to $55,392.
How To Maximize The GIS If You Have Modest Savings
Knowing this, if I were a retiree with modest savings and no employer-sponsored pension, I would be tempted to ensure I reached age 65 without any RRSPs. Given the GIS clawback would apply to taxable RRSP withdrawals, the RRSP becomes a very inefficient way to fund additional retirement spending.
For example, consider a single retiree aged 65 or older who receives 70% of the maximum CPP pension at age 65 (approximately $1,055 per month in 2026). Assuming full OAS eligibility, they would also receive up to $762.50 per month in OAS, plus an income-tested GIS benefit.
While the GIS payment may not seem substantial, it can represent an important portion of total retirement income. This is where careful planning becomes particularly important. For every additional dollar withdrawn from an RRSP, a retiree receiving GIS will generally lose at least 50 cents in GIS benefits. In other words, an RRSP withdrawal can trigger both income tax and a reduction in government benefits.
That makes the timing and amount of RRSP withdrawals an important consideration in retirement income planning. Drawing down registered savings without considering the impact on GIS could mean unnecessarily sacrificing valuable retirement income.
However, this clawback does not apply to TFSA withdrawals as they are non taxable and withdrawals from non-registered accounts face lower taxes compared to RRSP/RRIF/LIF. In non-registered accounts, any interest, dividends or capital gains that are earned would result in GIS clawbacks, but these would likely be much more minor unless the balances are sizeable. Keep in mind that qualified Canadian dividends can work against OAS and GIS clawback as the dividends are first grossed up by 38% before the tax calcualtion.
So for many retirees, it may be beneficial to liquidate their RRSPs prior to age 65, or shortly after 65, and move the proceeds to a TFSA first, with any excess amounts going to a non-registered account. This will maximize the value of the money they have worked hard to save, and optimize their entitlement to government benefits.
Of course, the tax consequences of liquidating RRSPs need to be carefully considered and compared to the GIS benefits likely to be gained. The larger the RRSP balances, the harder this strategy is to justify.
How To Benefit From The GIS If Your Retirement Savings Are More Substantial
The GIS options become even more interesting for retirees that have larger amounts of savings and limited sources of retirement income outside of government pensions. In this case, appropriately structuring your affairs can provide a real advantage in increasing the longevity of your retirement assets.
Here’s another example. Consider a couple heading into retirement at age 65. If both qualify for full OAS and have no other income, they would be entitled to combined OAS and GIS payments of approximately $2,896 per month, or $34,753 annually.
That’s a pretty healthy starting point for retirement income, particularly when you consider that approximately 47% of it comes from the non-taxable GIS benefit.
For lower-income retirees, these government benefits can provide a meaningful foundation for retirement spending, while also reducing the amount they need to draw from personal savings.
Ideally, this income could then be topped up from non-taxable TFSA or non-registered account withdrawals, as needed to meet spending needs. CPP payments can now be deferred until age 70 and RRSP withdrawals until age 72. During this period, little or no tax would be due on these income streams, and government benefits would be fully maximized.
Currently, a couple who have been eligible for the TFSA since its introduction in 2009 could have combined contribution room of up to $218,000. Even without accounting for any investment returns, that would support annual withdrawals of $25,400 for more than eight and a half years.
Added to their combined OAS/GIS benefits of approximately $34,753 annually, that would provide total household income of about $60,153 per year, potentially with no income tax to pay.
Consider investment gains and that TFSA amount would increase substantially. The might have $600,000 combined in TFSAs.
And here’s the beauty of the TFSA: withdrawals are tax-free and do not count as income when calculating GIS benefits. That’s a pretty attractive retirement income combination!
The Benefits Of CPP Deferral
An additional benefit to this strategy comes from the planned deferral of CPP benefits until age 70. Deferring CPP increases the benefit by 0.7% for every month after age 65, resulting in a 42% increase at age 70, on top of annual inflation adjustments.
For someone entitled to 70% of the maximum CPP pension at age 65, that would increase their benefit from approximately $1,055 per month to $1,499 per month. That’s an additional $443 per month, per person, or $5,319 annually, that no longer needs to be funded from personal investments.
Assuming a 4% safe withdrawal rate, that additional CPP income is equivalent to having approximately $133,000 more in retirement savings per person to generate the same annual income.
In effect, delaying CPP allows retirees to shift some of the responsibility for funding their later retirement years from their investment portfolio to a larger, inflation-indexed government pension.Even if you are not targeting receipt of the GIS benefit, arranging your retirement income to defer CPP benefits until age 70 removes a significant amount of both investment return risk as well as longevity risk, as a larger portion of your later retirement years will be covered by safe, guaranteed, inflation-protected government benefits.
Of course, CPP deferral is not for everyone. You need to have sufficient assets to supplement your income as required from age 65 to 70. You also should have at least an average life expectancy to make the enhanced CPP amount pay off over time.
Further, the more conservative you are as an investor, the greater the benefits of CPP deferral, since the lower investment returns you are likely to realize make longevity risk a greater consideration.
Be Aware, And Do Your Homework
Of course, given the constraints of time and space, this is not a comprehensive assessment of the retirement planning opportunities presented by both the GIS benefit and the deferral of CPP benefits.
There are other features of these programs to be considered, along with significant tax considerations and the uniqueness of each individual’s circumstances. But being aware that these opportunities are available, and that they apply largely to people going into retirement without significant sources of income outside of government pensions, can help you decide if they might be an appropriate solution for you.
If it seems like these approaches may result in a financial advantage for you, do your homework, and get qualified help if you need it. Maximizing your access to government benefits could drastically change your retirement outlook for the better.
Bio:
Graeme Hughes was an accredited Financial Planner with 23 years of experience in the financial services industry. During the course of his career he completed hundreds of financial plans and recommended and sold hundreds of millions of dollars of investment products. He believes that financial independence is a goal anyone can aspire to and is passionate about helping others to live life on their own terms.
