How to plan for taxes in retirement in Canada

Retirement works differently. Some sources of income have no tax withheld. And if you have income from a variety of sources, the withholding tax rate tends to be too low. A small pension, for example, may have little to no tax withheld. If you have many other income sources, the tax withheld from that pension will end up being too low. As a result, you may owe tax after filing your return.

Withholding tax on pension income

Your Canada Pension Plan (CPP) income, Ken, does not have any required withholding tax. You can elect to have Service Canada withhold tax when you apply for your CPP retirement pension or request tax withholding at a later time. You can do so by signing into your My Service Canada Account or completing the Request for Voluntary Federal Income tax Deductions CPP/OAS (ISP3520CPP) form.

Old Age Security (OAS) does not have required withholding tax either, and the same optional tax withholding can be requested. There’s a nuance with OAS, though, if your income is relatively high. If your net income for 2024 exceeds $90,997, your OAS pension for July 2025 to June 2026 will have a recovery tax (or clawback) for 15 cents of every dollar beyond this threshold. The recovery tax acts like withholding tax, because you claim it on your tax return along with reporting the OAS income.

Pension income, Ken, is like a salary. Tax is withheld as if the pension is your only income for the year. As a result, it tends to be too low if you have other sources of income. You can ask the pension plan to withhold more tax if you are so inclined.

Withholding tax on RRSP and RRIF withdrawals

RRSP withdrawals always have withholding tax, applied at the following rates.  

• 10% on withdrawals of up to $5,000  
• 20% on withdrawals between $5,000 and $15,000
• 30% on withdrawals exceeding $15,000

These rates are the same across Canada, except for Quebec, which applies 5%, 10% and 15% federal tax at the same withdrawal intervals, plus 14% in provincial tax (for a total of 19%, 24% and 29% withholding tax).

Withdrawals from registered retirement income funds (RRIFs) are taxed differently. Retirees often convert their RRSPs to RRIFs, which can be done at any point, with a requirement to convert your RRSP by December 31 of the year you turn 71. The government has required minimum withdrawals based on your account value as of the previous year-end and a percentage withdrawal that increases each year.

If you take just the minimum RRIF withdrawal from your account, there is no withholding tax required. Withdrawals in excess of the minimum are subject to the same thresholds and rates as RRSP withdrawals above.

The impact of your marginal tax rate

It’s important to clarify, Ken, that if you have a minimum RRIF withdrawal with no tax withheld, that does not mean that income is tax-free. When you report your RRIF and other income sources on your tax return for the year, you may still owe tax.

Canada has progressive tax rates so that higher levels of income are taxed at higher rates. For example, in Ontario, the first $12,000 or so you earn has no tax. The next roughly $3,000 has 15% tax. And the next $36,000 of income after that has about 20% tax. The type of income you earn may change these rates, as will tax deductions and credits. But if we kept going to higher incomes, there would be incremental increases in tax rates.

If you have a higher income, your entire income is not taxed at the higher tax rate. Incremental tax rates lead to income being taxed at different rates as you move up through the tax brackets.

This is why retirees tend to have tax owing. If you have a $10,000 pension, you may have no tax withheld at source. But if you have $60,000 of other income, you might owe 30% tax on that pension income.

Getting ahead of tax installment requests

If you owe more than $3,000 of tax in two consecutive years (or $1,800 in tax for two years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will start asking you to prepay your tax for the following year. This is called a quarterly income tax installment request.

Installments—along with OAS clawbacks—tend to be the two cursed tax issues for retirees.

You can reduce your installments by requesting higher withholding tax on your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax withholding might be preferable if you would rather not owe tax or prefer to limit your installment requirements. If you can get your withholding tax rate estimated accurately, you may be able to better spend money coming into your bank account because it is all yours, and not accruing a tax liability.

The choice is yours

Many retirees do not have sufficient tax withheld by default. So, quarterly tax installments are common at that stage of life. But owing tax does not have to be a given if you prefer to increase your optional withholding tax.

Read more about taxes in retirement:

• What to know about withholding tax in retirement
• How to have the most tax-efficient retirement income plan
• U.S. withholding tax in an RRSP for Canadians
• Using whole life insurance for tax-free income in retirement

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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