Planning to retire in Canada someday?
Then it’s important to get a handle on all the different sources of income available to retired Canadians.
I’ll focus on the more common ones I’ve seen from my days as an investment and insurance advisor.
Here are the crucial retirement income sources in Canada that you should be aware of.
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Navigating Canada’s Retirement Income System
Whether you plan on retaining your current lifestyle, upgrading, or downsizing, you’ll need a steady source of retirement income to keep the bills paid during your “golden years.”
From government pension plans to employer-sponsored pension plans and personal accounts, these are the top sources of retirement income you’ll be able to choose from.
1. Canada Pension Plan (CPP)
The CPP tops this list because it is Canadians’ most common source of retirement income. Most working Canadians should qualify for this payment, regardless of income level.
How Much CPP Can You Get?
It’s a bit tricky to forecast what your exact CPP payments will be, and the CRA doesn’t disclose it until you retire, but it gets easier as you approach retirement.
The average CPP payout for 2022 is around $717.77/month, but the CPP max amount was $1,306.57/month. The amount you receive could be more, but more likely, will be less.
To receive the maximum CPP payments, there’s something called the Yearly Maximum Pensionable Earnings. If you earned an income equal to or higher than the (YMPE) for 39 out of the 47 years between the ages of 18-65, then you could qualify for the max CPP payouts.
The YMPE is different every year. The YMPE for 2022 is $66,600. Here’s a link to the YMPE amount for all prior years.
To learn more about how much CPP you can get, read this article.
What Age Should You Start Your CPP?
Deciding what age to start your CPP is crucial. You’ll be able to start it at any year between the ages of 60 to 70. Here are some quick facts you should know about making this decision:
CPP Age Decision:
- If you start taking CPP at age 60: You will receive 0.6% less per month or 36% less if you start taking your CPP at age 60 vs. age 65.
- If you start taking CPP at age 70: You will receive 0.7% more per month or 42% more than if you start taking your CPP at age 70 vs. age 65.
- If you live past age 74: You will earn more money if you start CPP payout at age 65 then at age 60.
- If you live past age 81: You will earn more money if you start CPP payout at age 70 then at age 65.
For a more in-depth breakdown of what age to start your CPP, read this guide.
CPP Disability Benefits
If you answer yes to this checklist:
- Are suffering from a severe and prolonged disability.
- Made enough contributions to the CPP.
- Are under the age of 65.
You might qualify for CPP Disability Benefits, so check with the CRA. For more details, read this CPP disability eligibility guide.
The Quebec Pension Plan (QPP): For Quebec Residents Only
Similar to the Canada Pension Plan (CPP), which serves the rest of Canada, the Quebec Pension Plan (QPP) is funded by contributions from both employees and employers.
Although these two programs are very similar, there are a few key differences between the QPP and CPP.
For one, the QPP is managed by the Caisse de dépôt et placement du Québec, while the CPP is federally managed.
Rates for contributions and benefits may also vary between the two. For instance, the QPP has slightly higher contribution rates compared to the CPP, which could lead to higher future benefits for recipients.
Both plans are portable across provinces, meaning you can collect benefits even if you move from Quebec to another Canadian province or vice versa.
Both plans aim to provide a basic level of income during retirement, but they are meant to supplement, not replace, other retirement savings.
2. Workplace Pension Plans
If you’ve worked at a larger Canadian company for any period of your career, chances are you have a workplace pension plan that you can draw on for when you retire.
The pension amount you can receive will vary widely and depends on factors such as your income, the length that you worked at the company, and the performance of the pension investments.
An excellent perk of most workplace pension plans is the matching feature – this is where your employer will match a portion of how much you put into your pension plan. It’s like getting free money and if offered by your employer, it should always be taken advantage of to its fullest.
There are two main types of workplace pension plans you can receive:
Type 1: Defined Contribution Pension Plan (DCPP – More Common Today)
The way this plan in Canada works is that you make contributions to the DCPP while you work for your company.
If you are a part of this plan, you can allocate a portion of your salary (before taxes) to the plan. The company you work for can potentially the contribution up to a specific limit that it sets, which is always recommended to do because who doesn’t like free money!
Your company does not manage the amount in your DCPP. As an employee, you have the power to choose where the contributions are invested, but you’re usually limited by the partners and investment options provided by your company.
With a DCPP, there is no guarantee of a fixed amount that you can receive when you retire. It all depends on how well your investments perform.
How to Extract Money From Your DCPP
By the time you retire, you can have options to take out your money and put it in one of three options:
- A Locked-In Registered Retirement Savings Plan (RRSP) or Locked-In Registered Retirement Income Fund (RRIF)
- An annuity, or:
- A combination of these two.
For more info on the DCPP, check out this article.
Type 2: Defined Benefit Pension Plan (DBPP – Less Common Today)
According to this plan, the company you work for will pay you a predefined monthly income for life after you retire as an employee of the company.
The DBPP amount you receive after you retire can be calculated in various ways. Typically, the formula used to calculate the payments you receive is based on the average highest salary you made while you were at the company and the number of years of service you provided the company.
In this plan, the employer is responsible for guaranteeing a certain amount in payments to their employees. The benefit is already defined, regardless of the performance of the investment.
This is fantastic because the employer is entirely responsible for investing the funds and all the gains or losses that come with it. This shifts any investment decision and risk from you to your employer.
The DBPP is an Endangered Species
Companies don’t want the risk of having to pay a specific amount of employees anymore, so you’re seeing almost no new issuances of DBPPs in recent years in Canada.
The vast majority of companies today only issue the Defined Contribution type of pension plan.
For more info on the DBPP, check out this guide.
3. Old Age Security (OAS)
The OAS is an important provider of income for many Canadians.
The payment can be different depending on how long you have lived in Canada. You must have lived in the country for at least 40 years after turning 18 to receive the full OAS pension payment.
If you have not resided in Canada for 40 years after turning 18, you can receive partial pension benefits.
OAS Example: John arrived in Canada at the age of 45. He has been living in the country for 20 years. It means John has spent 20 years as an adult living in Canada. According to the requirements, John is eligible to receive 20/40th of the full benefit – half of what he would receive if he had been living in Canada for 40 years.
The payment cycles for OAS start in July of each year. For Jan to March 2023, you can receive a maximum of$687.56 per month in your OAS pension.
OAS Clawback
Be aware that the CRA will not give you your full amount of OAS even if you do qualify for it. For most people, for every dollar you have in income over $79,845 per year, you will get 15% of that deducted from your OAS pension.
Read this ultimate guide on the OAS clawback for more info.
4. Guaranteed Income Supplement (GIS)
The GIS is an additional benefit available to seniors with a low retirement income in Canada who either already receive or qualify for an OAS Canada pension. To qualify for GIS, you must:
- Have an annual income lower than the maximum annual threshold, and:
- Currently receive an OAS pension.
The government uses your Federal Income Tax and Benefit return to review your income information. Depending on how much you (or you and your spouse combined) earn, your benefit will automatically renew if you qualify.
Both OAS and the GIS are commonly referred to as government income-tested benefits, since the amount you receive depends on your income.
For low-income seniors already receiving GIS Canada can get a letter in the mail with either the notice that their benefit has been renewed or stopped. It could also state that you need to provide additional information so you can qualify for the benefit.
Check out if you qualify for the GIS here.
5. Convert Your RRSP to an RRIF
Contributions to Registered Retirement Savings Plans are tax-deductible, meaning you can subtract the amount you contribute from your taxable income, effectively lowering your taxable income while allowing you to invest in your retirement.
The funds within the RRSP grow tax-deferred, allowing your investment to compound over time without immediate tax implications.
Say you’re approaching retirement age, and you’ve built up a nice tidy sum in your RRSP. Now what?
Well, it’s time to convert that hard-earned RRSP money into a Registered Retirement Income Fund (RRIF) to start enjoying the fruits of your labour.
There are four main steps to converting your RRSP to an RRIF:
- Choosing the investment institution: This is simply figuring out where you will hold your money.
- Complete the RRIF application.
- Choosing an RRIF beneficiary: Most commonly chosen are your spouse or children.
- Figure out withdrawal schedule: This is by far the hardest step, and it can get quite complicated in the calculations. You have to start withdrawing by age 71, but you can start before that, also.
It’s a complicated decision of when to start converting an RRSP to an RRIF, which is why I refer people to this RRIF rules article to learn more.
Keep in mind that although the funds were able to grow tax-deferred in your RRSP, your withdrawals from the RRIF are subject to income taxes. Over the course of your retirement, these income taxes can really add up and cost you more than you may have budgeted for.
This is one of the key reasons why I often recommend that younger Canadians maximize their TFSA contributions before investing in an RRSP.
TFSAs can hold the same investments as RRSPs and are excellent investment vehicles. Since contributions are made with post-tax dollars, you don’t have to pay tax on your withdrawals, which can make your retirement budget simpler.
6. Tax-Free Savings Account (TFSA)
Tax-Free Savings Accounts are Canadians’ most popular investment and savings accounts. It edges out the RRSP, with over 57% of Canadians owning a TFSA.
The limit is growing quite high for the TFSA, which is why many Canadians are planning to use it as a retirement income source.
The max limit as of 2023 is $88,000, which is nothing to sneeze at. This amount can grow very large by the time you hit retirement age if you play your cards right and invest wisely.
It’s also the most versatile and flexible investment account. It has such a simple concept that it’s extremely easy to understand: (almost) everything that you invest inside this account will not be taxed on any of the income it earns.
You can plan to take out the TFSA in whatever way you choose as you retire; there are no withdrawal limitations.
Read more with this TFSA Ultimate Guide.
7. Investment Income (Non-registered and More)
All the previous sources of retirement income on this list have either been government payouts, pensions, or registered accounts.
Here are some other common retirement income sources that don’t fall into these categories or that you can hold in a non-registered account:
- ETFs and Mutual Funds
- Stocks
- Bonds
- Cash Equivalents: GIC, High-Interest-Savings-Account (HISA)
- Robo-Advisors
- Alternative Investments
Before opening a non-registered investment account, I recommend maximizing your contributions to a TFSA, where your funds can grow tax-free.
The biggest drawback to non-registered investment accounts is that you must pay capital gains tax once you withdraw the money.
This is a tax that’s applied to 50% of the profits realized in an investment account.
For example, if you sell an investment for a $10,000 profit, only $5,000 would be added to your taxable income for that year.
This “inclusion rate” softens the tax blow compared to other forms of income like salary or interest. The tax rate applied to the taxable portion of the capital gain depends on your overall income, and it is taxed at your marginal rate.
That being said, the advantage of non-registered investment accounts is that you don’t have to worry about annual or lifetime contribution limits, as you do with TFSAs and RRSPs.
This makes them a good alternative for those who’ve already maximized their contributions to registered accounts but still have money left over in their personal savings that they would like to invest.
Note that the returns on your investments are not guaranteed, and you need to manage your investments carefully to minimize risks.
Read more about the best investment options in Canada here.
8. Real Estate
Canadians love investing in real estate. And for many retirees today, this has definitely paid off (especially those in Toronto and Vancouver!) There are several ways that you can get retirement income from real estate:
- Primary Residence – Can take out a Home Equity Line of Credit (HELOC). You can also sell your home and live in a smaller one when you retire. With the primary residence tax-free allowance, you get all the capital gains for free.
- Rental Income – If you have a residential or commercial property, you can rent it out for extra income
- Airbnb – You can rent out a room or two in your existing property. Not only can you earn some extra money, but you can meet interesting people from around the world.
To learn more, here’s a list of the best real estate investing options in Canada.
9. Insurance Policies
Here are some ways you can receive retirement income from insurance policies:
- Term life insurance – if someone you know who has passed away has named you as a beneficiary
- Whole life or Universal Life Insurance – There is an investment component to these policies, and you can draw out income as you get older. When I was a life insurance advisor though, I usually did not recommend these policies. It’s my opinion that you should keep your insurance and investments separate.
- Critical Illness Insurance – You can get income from a policy such as this if you suffer from something like a stroke or heart attack. It’s usually given as a lump sum payment.
- Disability Insurance – If you can’t work due to a disability, you can qualify for these monthly payments if you have the proper insurance in place.
10. Your Children (Or Parents!)
If you’re fortunate enough to have raised successful and kind children, they can help provide income and care for you in your golden retirement years if you’re in need.
Your parents can also provide for you. Sometimes it’s through an allowance, but unfortunately, it is usually through an inheritance when they pass away.
11. Business Income
If you own or are invested in a successful business, you can draw a salary, dividends, or a combination of both to fund your retirement.
If you pay yourself, your salary will be taxed at your marginal rate, while dividends are taxed more favourably due to the dividend tax credit. You may choose to combine both to get the best tax benefits.
If you already own a successful business by the time you retire, you might also consider selling it for a lump sum.
Choosing The Right Retirement Income Sources In Canada
If you’re worried about not having enough sources of income after you retire, you can rest assured that many options exist.
If you’re unsure how much money you need to retire in Canada, check out this guide here.
