Valle: Paying more taxes in retirement can be a good thing, but there are ways to lighten the load

I’m 68 and I work part time teaching an employment workshop in retirement. I love it and it keeps me active. But I read somewhere that I’m paying too much in taxes. Is that true and what can I do to keep taxes under control? Should I stop working?

– Claude

Taxation has been with us since the first cities took shape. Much of humanity’s earliest efforts in math, writing, science and even food production and trade revolved around taxes — how to pay them, collect them or avoid them. For better or for worse, taxes are here to stay.

Maybe you are paying more tax than you expected, and I’ll tell you why that’s probably a good thing. First, let’s look at why working part time in retirement is good for your health. Second, we’ll see how progressive taxation works. Finally, we’ll look at what you can do to keep taxes manageable in retirement.

In A Wealth of Well-Being, Meir Statman summarizes decades of academic research on what contributes to our overall wellness. In a chapter simply titled Work, Statman highlights the “expressive and emotional benefits of identity, structure and meaning” that employment provides. Statman cites a 2007 study showing clear differences in the health of retirees:

Impact of retirement on health

• Mobility: 16% decline for full retirees vs. 10% for partial retirees
• Illness: 6% increase vs. 4% increase
• Mental health: 9% decline vs. no significant change

The researchers concluded that the negative effects of retirement stem largely from a sudden loss of social interaction and physical activity. They strongly suggested part-time work as an excellent way to reduce the negative aspects of retirement.

One way to safely transition to retirement is through “bridge work.” I recently met an 82-year-old retired lawyer who now represents his regional chapter of the Association québécoise de défense des droits des personnes retraitées et préretraitées. He told me he eased into semi-retirement by freelancing as a legal consultant for non-profit organizations. This let him slow down while preserving his sense of purpose.

So why do some retirees feel penalized for working? Often it’s because of the tax bill they receive after filing their returns. A 2025 H&R Block survey found that “only 12 per cent of Canadians know how much tax should be deducted from their paycheque.” And two-thirds of Canadians do not understand how our tax system works.

Canada uses a progressive tax system. As your income rises, the next dollar you earn is taxed at a higher rate. Think of it like filling buckets of water. The first bucket is cheap, while subsequent buckets each cost a bit more. These buckets are your marginal tax rates — each time the rate increases, it doesn’t apply to all of your income, just the last portion of it.

Once you understand this, you can plan your retirement more strategically. The goal is to find the right balance between a lower level of taxation, ensuring your money lasts, and maintaining a good quality of life.

Your Quebec Pension Plan and old age security can be taken as early as age 60 and as late as 70 for OAS and 72 for QPP. The difference can be as much as 48 per cent less — or more — income per year. Taking benefits early might be best for lower-income Canadians. For many middle-class retirees, delaying can be more advantageous. If your spouse receives lower QPP payments, you can elect to split QPP equally to reduce your marginal tax rate.

Another strategy is converting your RRSP to a RRIF earlier. If your spouse is younger, you can set the RRIF withdrawal rate at their age, allowing you to withdraw a smaller percentage each year, while still benefiting from the $2,000 Pension Income Tax Credit.

If you have more cash flow than you need, you can reinvest the surplus into your TFSA, which can be transferred to the next generation almost entirely tax-free. You can also donate a portion of your income for a tax credit or simply give the money to your family, since you’ve already paid taxes on it.

The sooner you discuss these options with a financial planner, the better your chances of keeping your taxes under control. Tell them what you want in retirement and ask them to build a strategy that fits your needs.

If there’s one thing I want you to take away from this column, it’s this: Working in retirement — and yes, paying taxes — will probably do more for your health in your later years than any gym membership ever could.

Do you have a personal finance question? Send it to Carlo Valle at [email protected].

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