How to STOP the CRA From Taxing Your OAS and CPP Pension

Invest in the Bank of Montreal to generate tax-free passive income in your TFSA to prevent the CRA from taxing your pensions.

| More on:
TFSA and coins

Image source: Getty Images

Did you know that the Canada Revenue Agency (CRA) considers your Old Age Security (OAS) and Canada Pension Plan (CPP) as pensionable income?

Under the Canadian tax law, your CPP and OAS can count as any other taxable income. While deductions and tax credits can somewhat offset the taxes, you will still need to pay a portion of your cumulative retirement income to the CRA in taxes.

It might seem unfair to pay even more tax after you retire for programs that you have paid for your entire life. The CRA could not be bothered by that. Fortunately, there are ways you can significantly reduce how much taxes you pay on your pension programs.

While it’s impossible to stop the CRA from taxing your CPP and OAS entirely, you can use intelligent investing moves to reduce your taxable income and offset the out-of-pocket expenses for your tax bills.

Focus on investing in a TFSA

The Tax-Free Savings Account (TFSA) is more than a mere savings account. Used properly, the TFSA can be a powerful investing tool. Earnings of any kind from investments that you make in your TFSA are considered tax-free. The CRA can’t count any of your TFSA income as taxable. It means that any capital gains, dividends, and interest income in your TFSA can continue growing your wealth without letting the CRA touch a penny.

TFSA earnings don’t affect your OAS or CPP payments. Investing outside the TFSA would mean that your investment income could force you to repay some of your pension benefits because the income would be calculated as part of your taxable retirement income. Focusing most of your capital on investing in a TFSA can significantly reduce your overall taxable income and reduce how much of your pensions you might need to repay in taxes.

Substantial tax savings through tax-free investment returns

Investing in a TFSA can let you save big on taxes and on the repayments you would otherwise have to make. Using the right investments in your TFSA can help you earn a lot of income. You need to look for high-quality income-generating assets that you can add to your TFSA dividend income portfolio for substantial and reliable returns.

Bank of Montreal (TSX:BMO)(NYSE:BMO) could be an excellent asset to use as the foundation for such a TFSA portfolio. BMO began paying its shareholders their dividends in 1829. The Canadian bank has continued sharing a part of its profits with investors every year since. This centuries-long dividend-paying streak has survived through several financial and geopolitical crises, including the pandemic.

The bank has a significant presence in the U.S., providing investors with good exposure to revenue from the American economy. Its wealth management and capital markets operations provide BMO with a balanced revenue stream, along with its personal and commercial banking business units.

Foolish takeaway

Staying invested in the bank for the long run could effectively help you generate substantial tax-free income that will not affect your overall retirement income calculated by the CRA for taxes, significantly reducing your tax bills. With tax-free withdrawals from your TFSA, you can reduce your out-of-pocket expenses during tax season by using your TFSA earnings to pay the tax bills.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Stocks to Hold for a Reliable Source of Passive Income

Are you looking for a way to produce a reliable source of passive income? Hold these three stocks!

Read more »

worry concern
Dividend Stocks

3 Stocks to Buy if You Are Worried About a Recession

There are a lot of safe investments that can help your portfolio remain afloat during a recession and the market…

Read more »

Two colleagues working on new global financial strategy plan using tablet and laptop.
Dividend Stocks

2 Canadian Dividend Stocks I Just Bought During the Selloff 

There are plenty of high-quality investments to consider today, but these two Canadian dividend stocks are easily among the best.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Top 3 Utility Stocks for Stability and Consistent Income

These utility stocks could continue to return cash, irrespective of the volatility in the market.

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Tradeoff: Lower Home Prices for Higher Debt Burden

Buyers welcome lower home prices but more rate hikes will increase their financial burdens.

Read more »

Dividend Stocks

1 Top REIT to Buy Amid Housing Price Cooldown

Consider investing in this Canadian REIT if you want to capitalize on the housing price cooldown right now.

Read more »

stock analysis
Dividend Stocks

TFSA Passive Income: 2 Oversold Dividend Stocks for Self-Directed Investors

These top TSX dividend stocks look cheap right now.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

3 Under-$20 Dividend Stocks to Boost Your Passive Income

Given their stable cash flows and high dividend yields, these three under-$20 Canadian stocks can boost your passive income.

Read more »