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During your working years, you may receive tax refunds due to the withholding tax on your paycheque—but things change in retirement. Find out how.
Many working-age Canadians wonder what the impact of retirement will be on their tax situation. As you save and build wealth, it is important to plan for the eventual tax treatment of your retirement assets and income as you approach that transition.
When you are working, your employer calculates the payroll deductions to come off your paycheque based on Canada Revenue Agency (CRA) payroll tables. If you have no other sources of income, nor any tax deductions or tax credits, you should probably have no tax owing and no refund at year-end.
In retirement, it works differently. Since you may have different sources of income with different withholding tax rates—or lack of tax withheld—it can make for an uncertain income tax outcome. Often, retirees end up owing tax. It is important to plan for this.
That said, the overall tax rate that a taxpayer pays tends to be lower in retirement. So, despite owing tax, the overall level of tax per dollar of income is typically less than when you are working.
Learn more: How to manage your tax withholding in retirement
When you apply for your Canada Pension Plan (CPP) retirement pension, you have the option to elect for a voluntary income tax deduction. You can select a dollar amount or percentage of your pension when you submit your initial application.
The reason that this voluntary tax deduction is suggested is because by default, there is no withholding tax on CPP. As a result, when combined with other income sources, the standard 0% withholding tax rate tends to result in tax owing.
You can ask Service Canada to begin to withhold tax on your pension after your initial application, as well.
Old Age Security (OAS) has the same voluntary tax deduction election that is available on your initial application or afterwards; however, there is also an involuntary pension recovery tax, often referred to as OAS clawback.
Unlike CPP, the OAS pension is a means-tested pension. Low-income recipients with very little income may qualify for an additional Guaranteed Income Supplement (GIS) that tops up their OAS pension.
High-income retirees whose income exceeds $93,454 in 2025 will find that some of their pension is subject to the pension recovery tax. The clawback applies at a rate of 15% of every dollar above the threshold.
The relevant income considered for the OAS clawback is net income on line 23600 of your tax return. The threshold is indexed annually to inflation.
Registered retirement savings plans (RRSPs) are always subject to withholding tax on withdrawals unless you take a withdrawal under a program like the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP). The withholding tax rate increases on larger withdrawals, and is 30% on withdrawals of more than $15,000.
Most retirees convert their RRSP to a registered retirement income fund (RRIF) by no later than December 31 of the year they turn 71—but you can do so earlier, and it often makes sense if you are taking regular withdrawals.
There is a minimum withdrawal that you need to start taking each year starting the year after your RRSP is converted to a RRIF. This minimum withdrawal is a percentage of the account value on December 31 of the previous year and rises as you age.
There is no withholding tax on the minimum withdrawal, but this does not mean it is not taxable. Like CPP, OAS, and other income sources, your actual tax owing is calculated when you report this income on your tax return.
The lack of withholding tax on your minimum RRIF withdrawal often means you end up owing tax when you file as a result. You can voluntarily have tax withheld on your RRIF withdrawals as well by requesting it from your financial institution.
A defined benefit (DB) pension has tax withheld in much the same way as salary. The payor uses CRA payroll tables to determine the applicable withholding tax and pays the net pension by monthly direct deposit.
But the payroll tables do not factor in other income sources. Since it is common to have other income in addition to a DB pension in retirement, the withholding tax rate from the pension payor often ends up being too low. This leads to tax owing when you file your tax return.
One positive aspect of pension income is it can be split with your spouse or common law partner. Up to 50% of your eligible pension income can be moved to your spouse’s tax return. This happens retroactively when you file your tax return so you can determine the ideal allocation to minimize combined tax.
In addition to DB pension income after age 55, RRIF withdrawals after the age of 65 also qualify as eligible pension income. So, for anyone taking RRSP withdrawals who does not have other eligible pension income, this is a reason to consider converting an RRSP to a RRIF by age 64.
Taxable investment income in a non-registered account generally does not have withholding tax. The exception is foreign dividend income.
Foreign dividends— like those paid by US stocks—have at least 15% withholding tax at source. Some stocks from other countries may have higher withholding tax rates, but it depends on the tax treaty between Canada and that foreign country.
If you have US stocks at a Canadian brokerage, they will take care of the withholding tax automatically. The financial institution is obligated to withhold at least 15% withholding tax. In fact, the default withholding tax rate is 30% for US stocks.
The Canada-US tax treaty allows the lower 15% withholding tax rate, but a Canadian tax resident must submit Form W-8BEN to their financial institution to declare their Canadian tax status and qualify for the lower rate.
Tax free savings accounts (TFSAs) are tax-free—plain and simple. Foreign dividends are subject to withholding tax within a TFSA, but that happens automatically at the brokerage.
Otherwise, all income, capital gains, and eventual withdrawals from your TFSA are completely tax-free.
When you sell your home, it is generally tax-free. Canada has a principal residence exemption whereby a taxpayer or a couple can have a home that they regularly occupy exempt from capital gains tax on sale.
Although a cottage or vacation property—even in another country—can qualify as your principal residence, practically speaking, most people claim the exemption on their home. This is because their home tends to be their most valuable real estate, and the capital appreciation and potential tax is generally the highest on this property.
When you sell a secondary property or a rental property, there is generally capital gains tax. This tax rate can be more than 25% in a high-income year.
Rental property investors who claim capital cost allowance (CCA), which is depreciation for tax purposes, are also subject to a recapture of all the past CCA they claimed since purchasing the rental property. This is taxable at rates that can exceed 50%.
When you sell real estate in Canada, there is no withholding tax for a resident of the country, so you must plan for tax payable on your subsequent tax return accordingly.
When you sell real estate in a foreign country, there is often withholding tax in that foreign country that the local lawyer submits to the foreign tax authorities. There is often a requirement to file a foreign tax return that year, as well. Canada taxes its residents on worldwide income, so foreign real estate capital gains are taxable. There is a foreign tax credit mechanism to allow a taxpayer to claim foreign tax paid as a credit against the Canadian tax otherwise payable. The intention is to avoid double taxation.
A US citizen in Canada may be surprised to know that their principal residence may be subject to US tax. US citizens must file a tax return every year no matter where they live, though those resident in Canada often pay no tax since Canadian tax rates are generally higher.
There can be income mismatches, and a valuable principal residence is a good example. The Internal Revenue Service (IRS) allows a $250,000 US exemption for the capital gain on a primary residence. As a result, US citizens who live in expensive cities or who have owned their homes for a long time may need to consider strategies to reduce potential US capital gains tax exposure on their homes.
If you owe more than $3,000 of tax in two consecutive years (or $1,800 as a Quebec resident), the CRA will ask you to pay quarterly income tax installments.
Installments are a pre-payment toward your anticipated tax owing for the current year. They are estimated based on the tax owing over and above the tax withheld at source for the previous two years.
Retirees are often put off by having to pay installments. Once you understand the lack of withholding tax or the understated tax rate on some of the income sources mentioned above, these tax liabilities make a little more sense.
If a retiree becomes a non-resident of Canada, they will continue to have some tax obligations in Canada—though they can be quite minimal.
CPP, OAS, and pension income is typically subject to as little as 15% withholding tax. In some cases, residents of certain countries—especially those with no tax treaty with Canada—may be subject to a higher withholding tax rate like 25%.
Lump-sum RRSP withdrawals are often subject to 25% withholding tax, but periodic RRIF withdrawals for most non-residents are eligible for a lower 15% withholding tax rate. Again, the country of residency dictates the rate.
Mutual fund and exchange traded fund (ETF) distributions, as well as stock dividends, are generally subject to between 15 and 25% withholding tax. Interest is sometimes exempt from withholding tax but can have up to 25% withholding tax, as well.
Withholding tax is the responsibility of the payor or the financial institution. Non-residents receiving these sources of income do not generally file a Canadian tax return. The income may or may not be taxable in a foreign country depending on the tax rules there.
The most common reason a non-resident would continue to file a Canadian tax return would be for a rental property. Rental income is subject to tax in Canada for non-residents. It requires withholding tax to be submitted to CRA by an agent in Canada, as well as the filing of a special tax return for that rental income each year.
The sale of real estate by a non-resident is also subject to capital gains tax. Notably, taxable non-registered investments that are held in a Canadian brokerage by a non-resident and sold by a non-resident are not subject to withholding tax, nor is a Canadian tax return required.
A retiree can give assets to family members. The act of gifting itself does not trigger tax—at least in Canada. US citizens must contend with the potential assessment of US gift tax. But for Canadian residents who are not US citizens, gifting is not a taxable event.
What can trigger tax is a disposition. If you transfer an asset that has appreciated in value to a family member, you may have a deemed disposition. This includes taxable stocks in a non-registered account, private company shares, or real estate.
Some people think they can circumvent the tax by gifting real estate for $1 or some artificially low value. But transfers between family members generally occur at the fair market value, regardless, resulting in tax payable.
When someone dies, they are deemed to sell all their assets. RRSPs and RRIFs are considered to be cashed in and fully taxable. Stocks, private company shares, or taxable real estate have capital gains triggered based on the fair market value, resulting in tax on the appreciation.
A common exception to this tax event is when these assets are left to your surviving spouse. Tax can generally be deferred until the second death for spouses or common law partners.
A taxpayer’s highest tax year is often the year they die. As a result, there can be benefits to planning tax payable during retirement to take advantage of low tax brackets annually (if possible), smooth income and tax throughout life, and minimize tax payable on death. Doing so can lead to a larger estate value for your beneficiaries.
Tax is a lot easier when you are working. When you retire, there are significant differences, frequent balances owing, and the requirement to plan proactively for taxes.
The earlier you prepare for this, the better transition you will have to retirement—and the easier it will be to plan your retirement cash flow.
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