It is that time of year when
taxpayers
cross their fingers and hope for a tax refund.
Canada Revenue Agency
(CRA) data for the 2026 tax-filing season through April 20 show about 62 per cent of tax returns filed resulted in a refund. The average refund was about $2,248. Taxpayers with a balance owed an average of $5,775.
Self-employed taxpayers, landlords and investors with non-registered investment accounts are more likely to owe tax. But a surprising category for chronic CRA debtors on April 30 is retirees.
If you are approaching retirement, the
tax angle
might be worrisome. So, why do
retired Canadians
owe so much tax, and
what can they do to plan for this
?
Withholding tax
Most Canadian workers are employees. During your working years, you receive a salary with payroll withholding tax. The tax withheld should result in neither tax owing nor a tax refund at year-end if you have no tax deductions or tax credits.
However, taxpayers tend to have both deductions and credits to claim. Contributions to a registered
retirement savings plan
(RRSP) or costs for child-care expenses are generally deductible and lead to refunds. Tax savings also result from donations as well as medical expenses beyond a minimum threshold.
When an employee transitions to retirement, the tax situation changes. With no employer to withhold an amount that can reduce taxes owed, and fewer credits and deductions, retirees can face a bigger amount owing than they are used to. Depending on sources of income, retirees can consider different tax strategies. Here are a few common income sources and what to expect.
Pensions
Pensions
are like salary in that there are payroll tables that payors are required to use to determine withholding tax. As a result, pensioners receive a deposit to their account of the net pension after tax.
If a retiree has only defined benefit pension income from a single employer, he or she may be tax-neutral at year-end. Most have other sources of income, however, and this tends to change the tax outcome.
Canada Pension Plan
(CPP) and
Old Age Security
(OAS) pensions, for example, have no required withholding tax. When you fill out your application with Service Canada, you can elect to have tax withheld. Most retirees see this section on the form and think, ‘Why would I want the government to take tax off my pension?’
When you file your tax return, your
CPP
and
OAS
is fully taxable income reported on T4A(P) and T4A(OAS) tax slips. If you receive CPP and OAS in addition to a workplace pension, it is likely you will owe tax when you file.
However, if you elect to have tax withheld when you apply for CPP and OAS, federal income tax will be deducted from your monthly payments, preventing a big tax bill when you file your return.
Registered accounts
When you take a withdrawal from a retirement account such as an
RRSP
, there are taxes withheld based on the amount of the withdrawal. Tax is as low as 10 per cent for withdrawals of up to $5,000 and hits 30 per cent for withdrawals of more than $15,000. The problem is these rates often understate a retiree’s marginal tax bracket on his or her tax return.
If you convert your RRSP to a
registered retirement income fund
(RRIF), which you must do no later than the end of the year you turn 71, there are minimum withdrawals that apply. Each year, you must take an increasing percentage of the account value at the end of the previous year as a taxable withdrawal.
If you take just the minimum amount, there is no withholding tax. Like CPP, OAS and pension income, this is fully taxable income, and tax payable is determined when you file your tax return. If you withdraw more than the required minimum, withholding tax applies only to the excess unless you elect to have more tax withheld.
Retirement tax planning
Most retirees end up in a position with little to no tax withheld on their sources of income. Once they owe tax that exceeds $3,000 ($1,800 in Quebec) in back-to-back years, the CRA or Revenu Québec start requesting quarterly income tax instalments. These instalments are a pre-payment of the estimated tax for the current tax year based on their previous two years of tax filings. Many retirees are frustrated about having to pay so much tax during their working years and still feeling the pinch of tax payable in their retirement ones.
If it is any consolation, retirees often pay a relatively low average tax rate, especially compared with their tax rate while working. And there are a couple of important considerations.
If retirees can elect to have a higher rate of tax withheld on pensions as well as their CPP and OAS and
RRIF
, at least most of the money going into their bank account actually belongs to them and they can reduce or eliminate quarterly tax instalments.
Note, though, that other income sources such as rental income or taxable non-registered investment income are not subject to withholding tax for Canadians, so will almost always give rise to a quarterly tax instalment requirement if substantial.
Choosing a higher withholding tax rate may provide little solace for retirees frustrated by their tax payable. But at least it makes cash flow planning easier and quarterly tax instalments less significant.
Retirement tax planning can help retirees pay less tax during their lives and from their estates upon their death if they use their tax brackets wisely. This can include taking early RRSP withdrawals, extra RRIF withdrawals, triggering capital gains strategically or other actions that result in more tax payable earlier in retirement. It may seem counterintuitive and even painful to consider, but in some cases, it can lead to less tax payable in the long run.
So, if cash flow planning is your primary goal, consider voluntary withholding tax. And if you really want to keep the government’s hand out of your pocket, focus on your lifetime tax instead of this year’s tax in isolation. For retirees, the real tax issue may not be when you pay your tax but how much you pay.
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. He can be reached at jheath@objectivecfp.com.
