One thing salaried employees take for granted is the automatic deduction of taxes “at source.” They receive their regular paycheque with “net” or after-tax deposits that go directly into their bank accounts. The consolation is that come tax time there should be no unpleasant surprises in the form of hefty tax bills.
But the situation can be quite different once you’re retired. New retirees are often dismayed when they learn they may have to come up with extra tax payments. RRIFs (Registered Retirement Income Funds) are famously taxable: Once you reach the end of your 71st year, you are required to take an ever-rising minimum percentage payment from your RRIF, and those payments (also referred to as withdrawals) are taxed like earned income or interest. Aaron Hector, a financial planner with Calgary-based Doherty & Bryant Financial Strategists, says there is no mandatory withholding tax on RRIFs, unlike the 10%, 20% or 30% tax that must be withheld at source on RRSP withdrawals (which rises with the amount withdrawn.)
Fortunately, you can ask your financial institution to deduct tax at source every time you make a RRIF withdrawal. Or you can wait till age 71 to start a RRIF but choose to withdraw money from your RRSP* as you need money in your 60s. Here, the problem is the minimum withholding tax required from an RRSP withdrawal may not adequately cover your total tax owing if you take out small chunks of cash at a time. Withdraw $5,000 chunks or less and the 10% withholding tax is unlikely to be sufficient once you file your annual return. A better approach is to withdraw $5,001 to $15,000 at a time, which results in 20% withholding tax. Better yet, make the withdrawals more than $15,000 and pay the 30% withholding tax. (Note that in Quebec, the applicable rates are 5%, 10% and 15% federal tax, with 16% provincial tax withheld regardless of the amount withdrawn.) Don’t fret that this may be “too much” tax; if so, any overpayments will be rectified once you file your return. (You can find a summary of RRSP withholding rates at this Government of Canada website.)
Hector says RRIF withdrawals in excess of the minimum annual required payment are treated the same as regular RRSP withdrawals for withholding tax. So if your minimum RRIF payment one year is $50,000 but you withdraw $100,000, the extra $50,000 is taxed at 30% on withdrawals; come tax time, you pay tax on the entire $100,000. You can elect to have taxes withheld at source on the minimum RRIF payments as well.
This situation is aggravated by the fact non-registered investment income is taxable. I’m not aware of a way to have taxes withdrawn at source as dividends or interest is paid out. You must accrue for this, estimating liability by consulting your last tax return. Beyond mandatory withholding tax on foreign dividends, which are claimed as foreign tax credits, little can be done to pay tax as you go on your investment income, Hector says. You may have to pay quarterly installments (see below for more on this option).
But you can choose to deliberately overtax yourself on many common sources of retirement income. If you receive corporate or Government pensions (CPP, OAS), you can set things up to mimic the “taxed at source” setup employees have. While this is not mandatory, pension administrators will deduct whatever percentage of tax you wish.
Personally, I set 30% as my withholding on pensions, 25% on OAS and eventually will set the same amount for CPP. While small pensions don’t have to be taxed at source if they are less than the Basic Personal Amount that is tax-free to everyone ($11,809 in 2018, and $12,609 in 2019), it may be wise to arrange to tax them at source, too, if you have significant taxable investment income.
The alternative is to pay quarterly tax installments. Retired advisor Warren Baldwin says the CRA sends notices for payments based on previous years’ taxes. So if 2017 was a high-income year and you had a high tax liability on filing, CRA will request large payments in March and June of 2019. “If income and the liability declines in 2018/19, then you might have overpaid and need to wait until spring of 2020 for the refund.”
Baldwin agrees it may be better to boost withholding tax on RRIF or pension income to offset the need for quarterly installments. But it may make sense to calculate and pay the installment tax once a year, after the current tax return is completed and filed. “Calculate and file the 2018 return; then, based on that liability, estimate your 2019 installments, and pay in a lump sum total for the 2019 installments.”
Annuities are an interesting case, Hector says. There is withholding tax at source on annuities purchased directly from a Registered Pension Plan, but no withholding tax if purchased as a non-registered annuity, RRIF or RRSP* funds. In those cases, taxes will ultimately be due—and while it’s not a requirement, you can request that withholding tax on the annuity income be applied.
Ideally, it all balances out at tax-filing time. If you went overboard taxing yourself at source, you may get a refund; if you underestimated taxes due, you may have to cut another cheque to Ottawa. Some object to giving the CRA an “interest-free” loan by overpaying upfront but, personally, I’d rather receive a small refund than have to pay still more at tax time.
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