Insights & Resources

Retirement tax planning often gets framed as one question: how do you pay less tax? That sounds sensible, but it can lead to the wrong decision when your wealth sits in more than one type of account. If you have a meaningful RRSP and a large non-registered portfolio with embedded capital gains, the real issue is not one tax bill. It is the shape of your income over time.

That matters because these two accounts follow different tax rules, and they tend to create pressure at different points. RRSP and RRIF withdrawals add fully taxable income year by year. Unrealized gains in a non-registered account may sit quietly for decades, then surface later through sales, fund distributions, or a deemed disposition on death. Without a plan, those two schedules can collide with OAS clawback and produce a final tax return that is far larger than expected.

A better approach is to pay tax on purpose. That does not mean paying more than necessary. It means deciding when to recognize income, which type of income to recognize, and how to avoid drifting into expensive years by accident. For many affluent Canadian retirees, that is the difference between a manageable retirement income plan and a series of avoidable tax surprises.

The double-header problem

When you hold a large RRSP alongside a large unrealized gain in a non-registered account, you are managing two separate tax calendars.

The RRSP side is straightforward. Withdrawals are fully taxable as regular income. Once the account becomes a RRIF, minimum withdrawals begin and rise with age. If the account is still large by then, those forced withdrawals can stack on top of CPP, OAS, pension income, interest, and dividends. The result is often a higher marginal tax rate later in retirement than many people expected.

The non-registered side works differently. You do not generally pay tax just because an investment went up in value. Tax is usually triggered when you realize the gain by selling, when a fund distributes gains, or when another disposition occurs. That creates flexibility during life, but it can also create complacency. If gains are never managed deliberately, they often remain embedded until the final return.

That final return is where the second part of the problem appears. In many cases, death triggers a deemed disposition of capital property, meaning the tax system treats appreciated investments as if they were sold at fair market value. Even if the family does not sell immediately, the tax may still be due. A portfolio that looked efficient during life can therefore produce a concentrated tax bill at death.

This is why the issue is not just tax deferral. It is tax concentration. You can spend years with income that is slightly too high, then still leave behind a large, predictable tax bill for your estate.

Why OAS clawback matters

OAS clawback is often treated as a minor nuisance. In practice, it can become a recurring drag on retirement income when large registered and non-registered accounts are not coordinated carefully.

For the July 2027 to June 2028 OAS payment period, based on 2026 income, clawback begins at net income of $95,323. Above that threshold, OAS is reduced by 15 cents for every additional dollar of income. Since clawback is based on net world income, it is not just RRIF withdrawals that matter. Realized capital gains, dividends, interest, pension income, and other taxable amounts all contribute.

Take a retiree with 2026 net income of $130,000. The amount above the threshold is $34,677. At a 15% recovery rate, that produces an OAS clawback of $5,201.55.

That is not trivial when compared with the benefit itself. The maximum OAS monthly payment in January 2026 is $742.31 for ages 65 to 74, or $8,907.72 per year. Losing more than $5,200 of that benefit is material. More importantly, it may not be a one-time event. If income continues to sit in that range, the clawback can repeat year after year.

What makes OAS clawback especially frustrating is that it often feels indirect. It does not always show up like tax withheld from a paycheque. Instead, it appears later as a reduced government benefit. Many retirees notice the reduction without connecting it back to the earlier choices that caused it, such as delaying RRSP withdrawals too long or realizing gains in already high-income years.

That is why the clawback threshold should be treated as a planning marker. In some years, it makes sense to stay below it. In other years, it may be reasonable to cross it deliberately if doing so helps reduce a larger problem later.

Use a tax thermostat

One practical way to think about this is as a tax thermostat. Rather than trying to minimize tax in each individual year, you choose a target income band and manage your withdrawals and realizations around it.

The target is not purely about tax. It also reflects the after-tax cash flow you want, your comfort with OAS clawback, and the future tax risks you are trying to reduce. Once that band is set, your accounts become tools for keeping taxable income near that level instead of allowing it to swing wildly from one year to the next.

Without that discipline, retirement income often lurches. A retiree may spend a few years drawing very little taxable income, perhaps living from cash or avoiding RRSP withdrawals because they do not want to trigger tax. That can feel efficient in the moment. Later, however, RRIF minimums rise, pension income begins, dividends increase, or a gain is finally realized. The years that follow can be much more expensive than the earlier years were cheap.

The thermostat approach changes the objective. The goal is not the lowest tax bill this year. The goal is the lowest reasonable tax burden across retirement and on the final return. In most cases, steady taxable income is cheaper than spiky taxable income.

In Ontario, that point matters even more because higher-income years can also trigger surtax mechanics and the Ontario health premium. At the top end, the combined marginal rate on regular income can reach about 53.53%. For capital gains, the top effective rate is about 26.76% because only 50% of the gain is included in income. You do not need to memorize those figures. You do need to respect what they imply: different income types are taxed differently, and the timing of each dollar matters.

Once you adopt this framework, the planning questions become more useful. If you have room before reaching your target band, should you fill it with RRSP withdrawals? Should you realize some capital gains? Should you use TFSA withdrawals for spending instead? Each choice affects a different future tax problem.

Why early RRSP withdrawals can help

Many retirees treat the RRSP as money that should be left untouched for as long as possible. That instinct makes sense during the working years, when the account is growing on a tax-deferred basis and withdrawals would stack on top of T4 income. The logic can reverse once employment income stops.

After retirement, a large RRSP can become the engine of future tax pressure. Withdrawals are fully taxable, and if the account remains large into the RRIF years, minimum withdrawals may force more income onto the tax return than you actually need for spending. Add CPP, OAS, pension income, and investment income, and the account that once felt protected can become the source of repeated OAS clawback and higher marginal rates.

This is why many plans consider an early RRSP drawdown, often called an RRSP meltdown. The idea is not to empty the account indiscriminately. It is to use the lower-income years at the start of retirement to reduce the account before the system starts dictating withdrawal amounts later.

That approach can be especially helpful when you expect income from age 72 onward to be materially higher than income in your early sixties. If you can withdraw from the RRSP at a moderate rate now, you may reduce the size of future RRIF minimums and create more room for CPP, OAS, and realized gains later.

How OAS timing fits in

OAS timing is part of the same sequencing discussion. OAS can be deferred after age 65, and the benefit increases by 0.6% per month, or 7.2% per year, up to 36% at age 70.

Deferring is not automatically better. It can, however, make sense if your income from age 65 to 69 is already expected to be high enough that much of your OAS would be clawed back anyway. In that case, taking OAS early may just add another taxable benefit into years that are already expensive. Deferring can allow the RRSP to do more of the work first, while preserving a larger OAS benefit for later years when your income is better positioned.

Seen properly, this is not an isolated OAS decision. It is a coordination issue between the RRSP clock, the OAS clock, and the capital gains clock.

The TFSA connection

The TFSA also matters here, even though it is often discussed separately. The 2026 TFSA limit is $7,000, and many retirees still have some unused room. TFSA withdrawals do not increase net income, which means they do not trigger OAS clawback.

That makes the TFSA valuable not only as a tax-free account, but also as a buffer. If you draw down the RRSP deliberately and move after-tax dollars into available TFSA room where appropriate, you may reduce the need to create taxable income later just to fund spending.

Build a capital gains glidepath

The non-registered account needs its own plan. The default behaviour is to avoid selling appreciated investments because triggering tax feels inefficient. In many cases, though, that does not eliminate tax. It only postpones it.

When the portfolio has large embedded gains, deferral can quietly create a future problem with fewer available solutions. If the gains are realized all at once later, they may land in years that are already crowded with RRIF income, pension income, or OAS. If they are left until death, they may contribute to an oversized final return.

A more deliberate approach is a capital gains glidepath. That means realizing gains gradually over time, based on available room in your chosen income band. In a year when taxable income is lower than expected, you may decide to realize some gains. In a year when income is already high, you may leave gains untouched and use another source of cash flow instead.

This approach becomes more manageable when the tax rules are stable. Here, the planning assumption is that the current capital gains rules remain in place, with a 50% inclusion rate, since the proposed inclusion rate increase was cancelled. That does not make gains irrelevant. It just means the planning can be built on a known framework rather than a moving target.

The glidepath also gives you more flexibility during volatile markets. If some holdings are down while others have appreciated, tax-loss harvesting may help offset realized gains. It is not something to force, but it can be useful when the opportunity appears naturally in the portfolio.

Charitable giving and appreciated securities

For families who already give to charity, donating publicly traded securities can be one of the cleanest planning tools available. When structured properly, the donated securities can receive a zero inclusion rate on the capital gain, and the donor also receives a charitable donation receipt.

That combination can reduce the capital gains problem while supporting causes that matter to the family. It is not a reason to give if charitable giving was never part of the plan. But for those who already give, it is often worth reviewing whether appreciated securities are a better asset to donate than cash.

What this means in practice

For a retiree with roughly $750,000 in an RRSP and about $1 million of unrealized capital gains, the planning challenge is not whether tax can be avoided entirely. It cannot. The real work is deciding how to spread that tax burden across many years instead of allowing it to gather in the wrong places.

In practice, that may mean drawing from the RRSP earlier than feels intuitive. It may mean deferring OAS if the mid-sixties are already high-income years. It may mean realizing capital gains gradually instead of leaving them for the estate. It may also mean using TFSA room more deliberately, or coordinating charitable giving with appreciated securities rather than writing cheques from a chequing account.

The common thread is that retirement tax planning is usually about timing and sequencing, not one-time tactics. A good plan reduces repeated OAS clawback, avoids unnecessary income spikes, and makes the final return more predictable for the family and executor.

That is also why generic rules tend to fail in cases like this. The right answer depends on your spending needs, pension income, health, marital status, estate goals, and how the different accounts interact across both spouses. The tax-efficient move in one household can be the wrong move in another.

Final thoughts

When a large RRSP and a large unrealized gain sit side by side, the risk is not just paying too much tax. The risk is paying it at the wrong times, in the wrong order, and with too little flexibility left when the bigger decisions arrive.

A steadier, more intentional plan usually works better than a reactive one. Paying some tax earlier can be the price of avoiding a larger problem later. In many retirement plans, that is a trade-off worth making.

If you want help coordinating RRSP withdrawals, capital gains timing, OAS decisions, and the tax implications for your estate, we can help you evaluate the trade-offs and build a retirement income plan that fits your situation.