What retirees need to know about tax brackets for 2025

The complexity of this task is compounded by almost-annual changes to tax brackets, the Basic Personal Amount (BPA), Old Age Security (OAS) thresholds, inflation adjustments and much more. 

For starters, I recommend reading an excellent article by CIBC Wealth’s tax guru Jamie Golombek. The column appeared in the Financial Post on November 23, shortly after the Canada Revenue Agency (CRA) released its new tax numbers for the year 2025.

Let’s start with inflation, the second serious scourge retirees face, if they live long enough. Here, a useful tool suggested by certified financial planner Morgan Ulmer is Statistics Canada’s Personal Inflation Calculator, which lets you compare your personal inflation rate to the general Consumer Price Index (CPI).

Ulmer, of Toronto-based Caring for Clients, sees the higher tax brackets and inflation adjustments as an “opportunity for retirees to build a savings reserve.” The Canada Pension Plan (CPP) is indexed to inflation yearly while OAS is indexed quarterly.

So, “if a retiree is able to increase their spending at a rate that is less than CPI, the difference could be saved as an emergency reserve or invested in a TFSA (tax-free savings account).”

Inflation and tax bracket changes

Back to some key data cited by Jamie Golombek. The inflation rate used to index 2025 tax brackets and amounts will be 2.7%—just over half the 4.7% in effect in 2024. The good news is that the BPA, on which no federal tax is levied, rises to $16,129 in 2025. It was $15,000 in 2023. 

All five federal income tax brackets are indexed to the 2.7% inflation rate. 

In 2025, the bottom federal tax bracket of 15% will apply to income between $0 and $16,129. The second-lowest bracket of 20.5% will apply to income between $57,375 and $114,750. The 26% bracket will apply to income between $114,750 and $177,882, while income between $177,882 and $253,414 will attract a 29% federal tax. After that the federal rate will kick in at 33%. 

Don’t forget, there will be additional provincial taxes on top of the federal haul, also indexed to inflation at various provincial rates. 

Since this Retired Money column is meant for retirees and those near retirement, we’ll skip the material on CPP contributions, which can be found in the Golombek column linked above. What is relevant for those in the retirement zone is the higher threshold on OAS. In 2025, according to Canada.ca, OAS begins to get clawed back for taxable income of $90,997. OAS benefits disappear entirely at $148,451 for those between the ages 65 and 74 in 2025, and at $154,196 for those 75 or over. Note: the OAS clawback is based on individual incomes, not household income. 

While I’m not commenting on the changes workers face to CPP contribution rates, there’s a wrinkle involving retiree timing of receiving CPP benefits down the road. 

Retired actuary and author Fred Vettese tells me that anyone thinking of starting CPP in the next few months should be taking a close look at the merits of starting payments in December of the current year versus sometime in the new year. Which date makes most sense comes down to “what price inflation was—for the 12 months ending October—versus wage inflation—for the 12 months ending June,” he says.

Deferring CPP and OAS until 70

Matthew Ardrey, portfolio manager and senior financial planner for Toronto-based TriDelta Financial, agrees that tax brackets, whether federal or provincial, “become more of a consideration in retirement” than in our working years. 

For many Canadians receiving a T4, there is little we can do as retirees to keep income in the lower tax brackets. But there’s plenty to think about when considering tax minimization and decumulation strategies. 

Referring to Golombek’s article, Ardrey says that, when using federal brackets only, taxpayers can receive $57,375 of income and pay very low rates of taxation, especially when the $16,129 basic personal amount is considered.

Retirees younger than 70 can defer CPP and OAS until 70 and try to live on withdrawals from their registered plans instead. With no other income, taxpayers could have almost $50,000 of after-tax income, or $100,000 for tax-paying couples. This is for someone making $57,375 in Ontario.

That’s a tax-efficient way to take funds out of registered retirement savings plans (RRSPs). “To make this even more tax efficient, the withdrawal amount should be transferred to a (registered retirement income fund) RRIF first,” says Ardrey. After age 65, this move will generate the pension tax credit and if a couple has different RRSP/RRIF account sizes, “the income can be split between spouses.”

If CPP and OAS are both deferred to 70, payouts will be higher by 42% and 36% respectively, allowing for greater annuity payments for the rest of a taxpayer’s life, Ardrey says. This also reduces future RRIF payments, “which increases the likelihood that OAS will not be clawed back.”

Dividend tax credits

Canadian retirees can take further advantage of tax brackets by receiving eligible Canadian dividends in their taxable investment accounts. Ontario taxpayers can receive $57,375 of actual (not grossed up) dividend income and, if they have no other income, will have that amount with zero taxes owing, Ardrey says. And “if two spouses can employ the identical strategy, that is almost $115,000 of tax-free income.”

Remember, though, that eligible Canadian dividends are “grossed up” on tax returns by 1.38. It’s this grossed-up amount—not the original dividend actually received—that impacts the OAS clawback calculation. Ardrey estimates the OAS clawback starts to occur at about $66,000 of dividend income. Retirees need to consider how this income combines with other income like CPP.  

Ulmer says that while the income amount at which OAS is clawed back is the same for everyone, the OAS ceiling isn’t the same for everyone.

“If an OAS recipient has delayed their OAS past 65, then the ceiling is incrementally higher,” she says. “This is a function of how the clawback works—15 cents per dollar. If more OAS, then more room to go before that 15% clawback eats it all up.” She adds that the OAS ceiling depends on when you start collecting: “Therefore delaying can be a good strategy for this reason alone—you may get to keep more of your OAS if you have a high income in retirement.”

Allan Small, senior investment advisor with Toronto-based IA Private Wealth and MoneySense columnist, says that while investment strategies are specific to individuals, he’s starting to see some investors moving away from RRSP investing. 

Some feel that if a tax deduction is not necessary, they’d “much rather top up the TFSA instead. Money grows tax-sheltered, like within an RRSP, but you don’t pay tax when money is pulled out of this account.” 

Eventually all those tax refunds and deferred taxes come home to roost when the RRSP becomes a RRIF (or annuity) at the end of the year you turn 71. “People don’t understand that RRSPs help you defer paying tax, not eliminate it,” says Small. He’s also seen more investors taking CPP earlier “as they realize that the longer they wait, the more time it takes to make back the lost time even with a higher percentage payout if you wait to receive CPP later in life.”

RRSP meltdowns

Which brings us to the controversial topic of RRSP meltdowns. Ulmer notes that federal tax brackets and most provincial ones are increased annually. (Nova Scotia has not indexed its tax brackets since 2000, but it will begin doing so again for 2025. P.E.I. has not indexed its brackets since 2008, and Alberta took a hiatus from 2020 to 2022.)

Your financial planner and/or accountant can help you estimate your annual taxable income. Depending on the results, Ulmer says “it might be beneficial to withdraw from your registered accounts to increase your taxable income and smooth out your lifetime tax rates.” She cautions, however, that this should not be interpreted as blanket advice for everyone. 

“It generally works best if the funds are needed for spending, to pay off debt, or if they are saved into a TFSA. It isn’t always beneficial to withdraw funds from a registered account if they are simply going to be invested in a taxable non-registered account.”

Those in or near retirement should also try to use up any non-refundable tax credits. As Ulmer notes, some tax credits are non-refundable (like the BPA and the age amount, medical expenses and disability tax credits). She says it’s usually a good thing to withdraw more from your registered accounts to create enough taxable income to use up your non-refundable tax credit. 

“Many, but not all, non-refundable credits cannot be carried forward and are otherwise lost,” she says.

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

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

Linkedin Twitter Facebook Website