How to manage your tax withholding in retirement
Every spring, I tend to have a lot of conversations with retirees who are disappointed that they owe tax on their tax return, that the Canada Revenue Agency (CRA) has asked them to pay income tax in installments, or that their Old Age Security (OAS) pension has been clawed back.
If it makes you feel any better, it is not just you—lots of retirees are in the same situation. Why does this happen, and what can you do about it?
Income tax on retirement benefits
When you are an employee, your employer must withhold payroll tax at source. If you have no other income, deductions or credits, in theory, you should have no tax owing nor a tax refund when you file your tax return in April.
In practice, most people have tax deductions that reduce their taxable income, or tax credits that reduce their tax owing. Both lead to tax refunds, and this is why most Canadian taxpayers get money back when filing tax returns during their working years.
In retirement, the situation is different. For one, taxpayers tend to have multiple streams of income. If you have a defined benefit pension, for example, the tax withholding is based on the presumption that it is the only income source you have for the year. As a result, if you have other income from part-time work, rental income or taxable non-registered investments, the tax withheld on the pension will generally be too low.
In addition, some types of income do not have any withholding tax. For example:
- Canada Pension Plan (CPP): There is no withholding tax required for your CPP payments. If you want voluntary tax withheld, you can indicate this when you apply for CPP or later on as well. So, it is not a one-time decision.
- Old Age Security (OAS): As with CPP, there is no requirement for Service Canada to withhold tax from OAS payments, and you can ask for tax to be withheld. Some government benefits, such as OAS, are means-tested, and may be subject to a clawback. (More on this below.)
- Registered retirement income fund (RRIF): The minimum required withdrawals from your RRIF (and similar tax-deferred retirement accounts) do not have tax withheld. You can elect to have tax withheld, and if you take withdrawals beyond the minimum, the financial institution has to withhold tax ranging from 10 to 30% depending on the amount withdrawn.
As a result, most retirees end up owing tax.
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Why does the CRA ask for income tax installments?
If a taxpayer consistently owes tax, the CRA—and Revenu Québec for Quebec residents—may ask for prepayments of estimated tax owing.
For non-Quebec residents, if tax owing exceeds $3,000 in two consecutive years, this triggers a request for quarterly income tax installments. These are suggested payments of tax for the current tax year based on the two previous tax years.
For example, if you owe $10,000 of tax in 2023 and $15,000 of tax in 2024, you may be asked to pay $2,500 on March 15 and June 15, 2025, and $5,000 on Sept. 15 and Dec. 15, 2025.
The math is as follows:
- March and June installments are based on one-quarter of your tax owing for the second previous year (so, 2023, in the case of 2025 installments).
- September and December installments are based on your tax owing for the previous years (so, 2024, in the case of 2025 installments), minus your March and June payments, divided by two.
The result is you end up paying a formulaic estimate of your current year tax owing if you follow CRA’s installment requests. In reality, your tax owing could be much higher or lower.
For Quebec residents, the federal and provincial tax thresholds are both $1,800.
You do not have to pay your tax installments. They are suggested payments. But if you do not pay, and you owe tax, you can be subject to interest and penalties.
Retirees who want to eliminate their installment obligations can voluntarily increase the tax withheld on their income sources. They can try to estimate their average tax rate and base their withholding on that estimate by contacting the payors. If the tax withheld is too high, like any other taxpayer, they would then receive a tax refund when they file their tax return the next year.
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Why is there a clawback on OAS and other means-tested benefits?
There are a number of government benefits that are reduced or lost if a taxpayer’s income is too high. Three common ones are:
- Old Age Security (OAS): If an OAS recipient’s net income on line 23600 exceeds $93,454 in 2025, they may be subject to OAS pension recovery tax, also known as a clawback. OAS for the July to June period is clawed back based on net income for the previous tax year.
- Guaranteed Income Supplement (GIS): GIS is a government benefit program for low-income OAS pensioners. Like OAS, it may be reduced based on the recipient’s net income for the previous tax year. Different income thresholds apply depending on your marital status, and whether your spouse or common-law partner is receiving OAS or the Allowance.
- Canadian Dental Care Plan (CDCP): This new program is available to taxpayers who do not have dental insurance whose family net income is less than $90,000. The Canadian Dental Care Plan offers full dental care coverage for those with income of $70,000 or less and phased coverage for incomes between $70,000 and $90,000.
There may be other federal and provincial programs that are also income-dependent for seniors to consider.
Managing taxes in retirement
Retirees tend to owe tax because their income sources are often exempt from required withholding tax. For government benefits like OAS and CPP, or withdrawals from tax-sheltered accounts like RRIFs, you can request that tax be withheld, if you prefer. You cannot have tax withheld from non-registered income.
Low- and moderate-income taxpayers may qualify for government benefits that are reduced if their income on their tax return exceeds pre-determined thresholds.
Consistently owing tax tends to lead to quarterly income tax installment requests from the CRA and Revenu Québec.
These considerations are common for Canadian seniors. Many can be frustrated by managing tax issues in retirement. But hopefully this provides more clarity on why these tax issues tend to arise for retirees. Talk to your accountant or financial planner if you want help managing your retirement taxation.
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