When making the transition from your working years to retirement, a common concern or question that comes up is, “How do I pay my taxes in retirement?” I had this conversation with two clients recently as many retirees are unsure of how taxes work in retirement.
- As a retiree, you pay your income taxes during the year by:
- Withholding taxes on your income and/or
- paying installments to the CRA.
- Withholding tax means that part of your income is “withheld” and paid to the CRA. This is like when you were working and part of your income was deducted and submitted on your behalf as tax to the CRA.
- You will have to pay installments during the year if the tax owing is more than $3,000 for 2022, or either 2021 or 2020. Installments are paid quarterly (March 15, June 15, September 15 and December 15) and are often based on the tax amount outstanding the prior tax year.
- Income in retirement may have withholding taxes set as:
- The required minimum set by CRA,
- It is up to you to set the amount,
- For those sources that have a required minimum withholding tax, the amount of tax withheld does not take into consideration your entire taxable income for the year.
- You can set the withholding tax at any rate above the minimum required by the CRA.
- Non-registered investment income does not have any withholding taxes.
- Rental and self-employment income does not have any withholding taxes.
Sources of Retirement Income
Once you retire, determining the amount of tax you must pay can be challenging as you may have numerous sources of potential income such as:
- Old Age Security and Canada Pension Plan
- Company pension plans
- RRSPs, Locked-in RRSPs
- RRIFs, LIFs
- Tax-free savings accounts (TFSAs)
- Annuities and guaranteed income products
- Non-registered investment accounts
- Self-employment income
- Rental income
- HOLDCOs income
For many of the above sources, it is up to you to determine how much tax to have withheld (paid to the CRA during the year), and/or pay your taxes in installments during the year.
The Tax Puzzle
Paying taxes in retirement is like a puzzle in that various types of income are taxed differently. Unlike when working, the amount of tax that is withheld and paid to the CRA can be variable, resulting in retirees not paying enough tax during the year.
There are two ways to pay income tax during retirement:
- Tax withheld at source and/or
- Paying your income tax by installments.
Tax Withheld at Source
While working, when you were paid by your employer, taxes were withheld and sent to the CRA. At year-end, you received a T4 tax slip for employment income, and it showed your gross income as well as taxes you paid during the year.
In retirement, some sources of income (CPP/OAS, RRIF, etc.) may have tax withheld on the income you receive.
For investment income, self-employed income, and rental income, there is no income tax withheld. As a result, you may be required to pay installments during the year if you owe taxes when you file your income tax return.
You will have to pay installments if the tax owing is more than $3,000 for 2022, or either 2021 or 2020. Installments are paid quarterly (March 15, June 15, September 15 and December 15) and are often based on the tax amount outstanding the prior tax year.
If you must pay installments, that means you have not paid enough tax during the year and owe money when you file your income tax return. If you are required to pay installments and don’t pay enough, a penalty may occur.
If your income declines in retirement, and you need to change the amount of installments, you can use this FORM to help you.
How your Income is Taxed in Retirement
|Source of Income||Tax Receipt Issued||Type of Income||Can Tax be Withheld?|
|CPP/OAS||T4A||100 % income||Yes|
|Pension Income||T4A||100% income||Yes|
|RRIF/LIF Income||T4RIF||100% income||Yes|
|Annuities||T4A||100 % income (some may be tax-free income for non-registered)||Yes|
|Non-Registered Investments||T5, T3||Variable: interest, dividends, and capital gains income earned||No|
|Non-Registered Investments||T50008||Variable: realized capital gains/losses from selling||No|
|Non-Registered Segregated Funds||T5||Variable: interest, dividend, and capital gains income||No|
|Rental Income||None||Net income is taxable||No|
|Self-Employed Income||None||Net income is taxable||No|
What are the Withholding Taxes on Each Type of Income?
Canada Pension Plan and Old Age Security (CPP/OAS)
- The withholding tax is up to the retiree to decide. You can contact Service Canada and set the withholding amount.
- The withholding tax rate for pension income is normally based on the CRA tax rate, taking into consideration your pension income only, and does not include other sources of income. You can contact your pension administrator to have the taxes increased. You may have to use a form TD1
The tax rules for RRIF and LIF income can be confusing.
- For the RRIF/LIF minimum required amounts each year, there are no requirements for tax to be withheld.
- For amounts over the required minimum, tax is withheld based on the projected income for that specific RRIF/LIF only, according to the following:
|Withholding Rates||Canada, except Quebec||Quebec Only|
|Up to $5,000||10%||5%|
|$5,001 to $15,000||20%||10%|
|$15,001 and over||30%||15%|
You can Increase the Withholding Rate if required:
- You can increase the amount of tax you wish to have withheld with the RRIF/LIF administrator. To do this, you will have to contact your financial institution or your Financial Advisor.
Income Sources with No Withholding Taxes
Non-Registered Investment Income
- For income received for non-registered investments, there is no tax withheld or paid to the CRA.
- You may receive a T3 and/or a T5 for income earned (interest, dividends, and capital gains) and a T50008 for realized capital gains throughout the year.
- With non-registered income, the taxable amount each year can change dramatically.
- This type of income is often why retirees must pay installments.
Non-Registered Segregated Funds
- For income received for non-registered segregated funds, there is no tax withheld or paid to the CRA.
- You may receive a T3 and/or a T5 for income earned (interest, dividends, and capital gains, and realized gains/losses) throughout the year.
HOLDCO – Corporate Assets
- If you have a HOLDCO with investments and withdraw income as dividends, there is no tax withheld and paid to the CRA.
- See HERE for other strategies on how to withdraw income from a HOLDCO.
Self Employed & Rental Income
- If you earn rental income, or have some self-employment income in retirement, there is no tax withheld on the income you earn.
Tax-Free Income Sources:
Tax-Free Savings Accounts (TFSAs)
- You do not pay tax on the income earned within a TFSA, or when you withdraw it.
Return of Capital
- If you simply use your own capital for income there is no tax as it is a return of your original investment. Any amount that is an increase above the original capital is taxable income.
- In retirement, you will want to forecast your family’s taxable income for the year and then set the withholding taxes so that you will have the correct amount of taxes withheld, and/or pay the appropriate income tax installments.
- Many retirees forget about this in the first year of retirement.
1. Do an income and tax projection
- Do an income tax projection each year. If you have a large non-registered portfolio, this can be a bit more complicated as you may have to project the income, dividends, and capital gains for the year.
2. Review your current withholding taxes and installments
- Review your current withholding taxes and installments to determine if you are on track. If you think you may end up owing taxes when you file your return, you can increase the withholding taxes/installments.
- If you are required to pay installments and do not pay enough, you may have to pay a penalty.
3. How to increase your withholding taxes
- To increase the withholding taxes, you can contact as indicated below to have your taxes increased:
- OAS/CPP: Service Canada
- RRIF/LIF Income: Your financial advisor or financial institutions
- Penson: Your pension administrator
- Annuity Income: Your financial advisor or financial institutions
4. Review annually.
- This can be more complicated with sources of income that don’t have the option for withholding taxes, and/or your income changes from one year to the next.
- You will want to review with your accountant and CFP® professional to determine if you are on track for your taxes each year.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
For your FREE retirement review CLICK HERE
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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