5 Red Flags the CRA Looks for in Retirement Tax Returns

Retirement is a time to enjoy the fruits of decades of hard work — but it doesn’t mean you’re off the radar of the Canada Revenue Agency (CRA). In fact, retirees are often audited for specific patterns and omissions that raise red flags. With multiple income sources like pensions, Registered Retirement Income Funds (RRIFs), Canada Pension Plan (CPP), rental income, and dividends, retirement tax returns can be more complex than many expect. Here are five warning signs that may catch the CRA’s attention.

1. Unreported investment income

Many retirees shift their savings into income-generating investments like Guaranteed Investment Certificates (GICs), mutual funds, and dividend-paying stocks. The CRA receives copies of T3 and T5 slips directly from financial institutions, so any mismatch with your filed return could trigger a review.

For example, if you hold a Canadian dividend stock like Fortis (TSX: FTS) — a utility company with a stable dividend that yields 3.8% currently — you’ll receive a T5 slip outlining dividend income. Fortis has a long history of increasing its dividend annually, making it a staple in many retirement portfolios. However, forgetting to report even a modest amount of dividend income can result in a reassessment and penalties.

2. Improper TFSA usage

Tax-Free Savings Accounts (TFSAs) are a powerful tool for retirees, especially for earning tax-free dividends, interest, and capital gains. But misusing them can raise red flags.

The CRA watches for:

• Over-contributions (which incur a 1% monthly penalty);
• Use of TFSAs for day trading (which may be considered carrying on a business); and
• Holding non-qualified or prohibited investments.

If you’re actively trading in your TFSA or frequently pushing the contribution limits, expect scrutiny. The CRA has cracked down in recent years on retirees using TFSAs as aggressive trading vehicles rather than long-term saving and investing accounts.

3. Pension-splitting that doesn’t match reality

Pension income splitting is a legitimate strategy that allows retirees to shift up to 50% of eligible pension income to a lower-income spouse, potentially saving thousands in taxes.

But the CRA is cautious when the split doesn’t align with the couple’s financial situation. Red flags include:

• Income splitting claimed despite divorce or separation;
• Discrepancies in reported income levels between spouses; and
• Missing signed joint elections (Form T1032).

Ensure you have the documentation to support any income-splitting claim, especially if your spouse or common-law partner has little or no reported income.

4. Claiming the age amount tax credit incorrectly

Retirees aged 65 or older can claim the age amount non-refundable tax credit, but it is income-tested.

The age amount begins to phase out once net income surpasses a certain threshold ($45,522 in 2025). If you mistakenly claim this credit while also reporting high income — perhaps from RRIF withdrawals, investments, or part-time work — you could face a reassessment.

Always double-check that you meet the eligibility criteria, and be especially careful if using tax software that auto-fills credits.

5. Large RRIF withdrawals

By age 71, RRSPs must be converted into RRIFs, which require annual minimum withdrawals. If you withdraw more than the minimum, your financial institution will withhold taxes at source.

Red flags may arise when retirees:

• Withdraw large amounts early in the year;
• Fail to set aside enough tax for April; or
• Don’t report additional income accurately.

Large unplanned withdrawals can affect Old Age Security clawback eligibility and bump you into a higher tax bracket. The CRA takes notice when RRIF income doesn’t align with reported total income or tax owing.

Retiree takeaway

Even in retirement, taxes require vigilance. The CRA isn’t trying to penalize retirees unfairly — but it does expect accurate, honest reporting. Avoid these five red flags, and you’ll reduce your risk of audits or costly reassessments. A tax-efficient retirement plan, guided by good records and a sharp eye on compliance, pays off in peace of mind.

The post 5 Red Flags the CRA Looks for in Retirement Tax Returns appeared first on The Motley Fool Canada.

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Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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