Taxes are among the largest expenses people face, both during their working years and in retirement or semi-retirement. While the annual filing deadline in April brings taxes to mind, the planning that can reduce tax bills should begin well before year-end.
The task is complicated by frequent changes to tax brackets, the Basic Personal Amount (BPA), Old Age Security (OAS) thresholds, inflation adjustments and other policy updates. These shifts affect retirement income planning, OAS clawbacks, and withdrawal strategies from registered accounts such as RRSPs and RRIFs.
If you want a detailed, technical overview of the new numbers for 2025, consider reading the Financial Post column by CIBC Wealth’s tax specialist Jamie Golombek, which summarizes the Canada Revenue Agency’s updated rates and thresholds.
Inflation is another critical concern for retirees. Certified financial planner Morgan Ulmer recommends using Statistics Canada’s Personal Inflation Calculator to compare your personal inflation experience with the broader Consumer Price Index (CPI). Understanding your personal inflation rate can help you plan how much to draw from savings versus leaving funds invested.
Ulmer views the higher indexed tax brackets and inflation-based adjustments as an opportunity for retirees to build a savings buffer. The Canada Pension Plan (CPP) is indexed annually to inflation, while OAS is adjusted quarterly. If a retiree can keep their spending increases below the CPI, the difference can be saved as an emergency reserve or invested in a TFSA (tax-free savings account).
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Inflation and tax bracket changes
For 2025, the inflation rate used to index federal tax brackets and amounts is 2.7%, down from 4.7% in 2024. The Basic Personal Amount, which shelters income from federal tax, rises to $16,129 in 2025 (it was $15,000 in 2023). All five federal income tax brackets are indexed to the 2.7% rate.
| Federal tax rate | Taxable income ranges |
|---|---|
| 15% | $0 to $57,375 |
| 20.50% | $57,375 to $114,750 |
| 26% | $114,750 to $177,882 |
| 29% | $177,882 to $253,414 |
| 33% | $253,414 and higher |
In practical terms, the lowest federal rate (15%) will apply to income up to $57,375 in 2025; the second bracket (20.5%) applies to income from $57,375 to $114,750; 26% applies from $114,750 to $177,882; 29% from $177,882 to $253,414; and 33% to income above $253,414. Remember that provincial taxes are added on top of the federal rates and are indexed differently by province.
For retirees and those approaching retirement, a key consideration is how these thresholds interact with OAS. In 2025, the OAS recovery tax (clawback) begins at taxable income of $90,997. For recipients aged 65 to 74, OAS is fully eliminated at $148,451; for those 75 or older, the cut-off is $154,196. The OAS clawback is calculated on individual income, not household income.
Timing of CPP payments is another issue that can affect taxable income. Retired actuary Fred Vettese advises anyone planning to start CPP soon to compare the benefits of beginning payments in December of the current year versus waiting until the new year. The optimal timing depends on recent inflation and wage trends and can influence benefit indexing.
Deferring CPP and OAS until 70
Portfolio manager and senior financial planner Matthew Ardrey notes that tax brackets often matter more in retirement than during working life, because retirees have more flexibility in how and when they receive income. One common strategy is deferring CPP and OAS until age 70 while drawing from registered savings first.
Using federal brackets alone, a single taxpayer can receive $57,375 of income and pay very little tax when the BPA of $16,129 is factored in. Retirees under 70 can defer CPP and OAS, withdraw from RRSPs and convert to RRIFs as needed, and potentially have substantial after-tax income. For example, in Ontario, a single person with $57,375 of income could retain nearly $50,000 after tax; a couple using similar strategies could generate roughly $100,000 of after-tax income between them.
Ardrey recommends transferring RRSP withdrawals into a RRIF first to take advantage of pension tax credits after age 65 and to enable income splitting between spouses when account sizes differ. Deferring CPP and OAS to age 70 increases CPP payouts by 42% and OAS by 36%, which boosts lifetime annuity-style income and may reduce RRIF withdrawals enough to avoid OAS clawbacks.
Dividend tax credits
Eligible Canadian dividends can also be tax-efficient for retirees. Ontario taxpayers with no other income can receive up to $57,375 of actual dividend income with little or no federal tax payable, thanks to dividend tax credits. If both spouses employ the strategy, that can amount to nearly $115,000 of tax-advantaged income.
Keep in mind, however, that eligible dividends are grossed up by 1.38 on tax returns. The grossed-up amount—not the cash dividend—counts toward OAS clawback calculations. Ardrey estimates the OAS clawback starts to affect dividends at roughly $66,000 of dividend income, depending on other income sources like CPP.
Ulmer adds that while the income threshold that triggers an OAS clawback is standard for everyone, the actual OAS ceiling varies with when you start collecting. Delaying OAS past 65 raises the benefit amount and therefore increases the dollar room before the 15% clawback eliminates benefits. Delaying OAS can be a useful strategy if you expect higher income in retirement and want to preserve more of your OAS.
Some advisors, including Allan Small of IA Private Wealth, report a shift among investors away from RRSP contributions when a tax deduction isn’t needed. Instead, those investors prefer topping up TFSAs where money grows tax-free and withdrawals are not taxed. Keep in mind that RRSPs defer taxes rather than eliminate them; at age 71 an RRSP must be converted to a RRIF or an annuity, at which point tax becomes due on withdrawals.
Small also notes that some people are opting to take CPP earlier because they worry that waiting longer requires more time to recover the forgone payments, despite higher monthly amounts if benefits are delayed.
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RRSP meltdowns
The idea of an RRSP “meltdown” — withdrawing large sums from registered accounts to manage lifetime tax rates — deserves careful consideration. Federal tax brackets and most provincial brackets are indexed each year (although some provinces paused indexing in the past). Your financial planner or accountant can model your projected taxable income to see if staged withdrawals make sense.
Ulmer suggests that it can be beneficial to withdraw from registered accounts to smooth taxable income over time, especially if the funds are used for living expenses, paying down debt, or replenishing a TFSA. Withdrawing simply to move money into a taxable account is usually not tax-efficient.
Retirees should also aim to use up non-refundable tax credits such as the BPA, age amounts, medical expenses and disability credits. Many of these credits cannot be carried forward and may be lost if not utilized. Strategically timing withdrawals to absorb non-refundable credits can reduce overall lifetime taxes.
Read more Retired Money columns:
- How much money do you need to retire in Canada? Is it really $1.7 million?
- Infinite banking in Canada: Should you borrow from your life insurance policy?
- Should retirees in their early 70s partly annuitize?
- RRSP to RRIF, and LIRA to LIF: How it all gets done