A Common Human Failing in Planning

Most people think income and cash flow are tightly connected.

At the beginning of one’s life, that is not such a bad assessment of reality. Go to work, receive a paycheque and have cash for the balance after taxes, government pensions, employment insurance, group insurance, and union dues. No income – no cash flow.

As life progresses, that changes some. People have gifts, inheritances, proceeds of sale from capital properties, and certainly a lottery win.

At retirement, the distinction becomes important. One must establish how to use time, tax, inflation, and yield to suit the purpose of having a well-funded lifestyle. The key is you spend cash, and sometimes it is cheaper to get it in ways not involving income. Why? Because income attracts tax.

Good money and Bad money

Tax management matters. Consider good money is money flowing in on which tax has already been paid or which is untaxable. In Canada, you cannot rationally invest without knowing about and possibly using a Tax-Free Savings Account. Contributions to them are limited, but income is tax-free. So a dollar earned in a TFSA is worth a dollar while the same dollar might be worth as little as 46.5 cents if taxed at the highest rate on interest.

Withdrawals from a Register Retirement Savings Plans are fully taxed. The plan itself ends up fully taxable in the year of death – subject to a rollover to a spouse. Clearly, tax management becomes vital in deciding between drawing from an RRSP or a TFSA. In general, A TFSA is good money, and an RRSP is not.

For example, retired people generally can earn up to about $50,000 and have marginal tax at 20%. If the size of their RRSP and the taxation of other assets at death could lead to a tax rate of 53.5%, then paying 20% while you go can be quite attractive over time. Money that could have been taxed withdrawn and taxed at 20% in year 1, but is deferred as long as possible, would require waiting 37 years to be worse off. (Assumes RRSP earns 4% and after-tax investment yield on the extra amount drawn for tax management is 2.5%) The RRSP in 37 years will be $21,500 while the taxed investment will be just $10,000) After taxes, it is the same amount in the estate. If you happen to die earlier, you will win, even though the asset pile looks smaller in the interim.

The Takeaway

After retirement, be sure tax management is part of your thinking process. Come to understand that tax management involves how much you keep. Managing the timing is an important consideration in the early years, but as marginal tax rates at death become a concern, deferral can work against you. The arithmetic is straightforward. Spend time.

For those with large pensions. If you have a monthly income that stops at death, dying early in the year makes a difference. The other taxable events begin at zero instead of at the top of your ordinary monthly income. If you have pensions plus government pension plus RRSPs of $75,000 and $500,000 that will hit your tax return at death, passing away on January 1st is about $40,000 cheaper than on December 31st. Further proof that not all tax planning is easily implemented.


I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages—the result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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