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Kevin Greenard: Withholding taxes, explained

Financial advice: Tips on withholding income tax in Canada

While no one likes to give the Canada Revenue Agency more money than necessary, you will eventually have to pay up.

As outlined in our article on income tax instalments, if you owed more than $3,000 in taxes in the year and either of the two previous years, the result will be that you are asked by CRA to pay income tax instalments, otherwise you may be subject to interest and penalties if you owe more than $3,000 for that year too.

For those retired workers who earned employment income, withholding taxes were remitted with each paycheque throughout their working life by their company’s payroll department (this excludes those who earned business income).

In retirement, however, retirees may have multiple streams of income, from sources such as public or private sector pensions, Canada Pension Plan (CPP), Old Age Security (OAS), Registered Retirement Income Funds (RRIFs), rental income and non-registered portfolio investments.

While some of these sources may withhold tax on your behalf (for example, pension income, RRIF withdrawals above the minimum withdrawal amount), many do not, or may withhold the incorrect amount for your specific tax situation. The result is many retirees have to pay income tax instalments.

This can be prevented by ensuring you are voluntarily withholding the correct amount of tax from those income sources that you can. For example, the default for CPP and OAS is to have no income tax withheld; however, taxpayers can elect to voluntarily have a portion of their CPP and OAS withheld, which we will discuss below in further detail as well as withholding taxes on RRIF withdrawals and employer sponsored pensions.

When we first begin working with clients, we obtain Level 1 (read only) CRA access in order to view relevant tax information online through CRA MyAccount that helps us provide proactive service. Part of being proactive is viewing client’s tax instalment requirements and assisting them in paying those instalments on their behalf directly from their non-registered investment account, where applicable.

In our experience, unless there was a one-time transaction resulting in a large increase to income, steps can often be taken to stop the need to pay future instalments. Below we will look at how withholding tax on different sources of income works, followed by an example of the steps taken to help Mr. Smith’s withholding tax situation.

Withholding tax on registered plan withdrawals

When funds are withdrawn from registered plans (except for Tax Free Savings Accounts), those funds are considered fully taxable and are brought into your income in the year they were withdrawn.

When you withdraw from a Registered Retirement Savings Plan (RRSP) or RRIF, you will receive a T4RSP or T4RIF slip, respectively, from your financial institution. The details on this slip will include the gross (total) amount withdrawn, and how much tax was withheld. This slip must be reported in filing your year-end taxes. Although an amount was withheld for tax, the actual amount of tax owing will differ and may be more, or less, depending on your actual income tax bracket for that tax year.

There is a key difference between RRSPs and RRIFs when it comes to withholding taxes. For RRIF accounts, withholding tax is mandatory only on amounts above the minimum annual required withdrawal. On the other hand, for lumpsum RRSP withdrawals, withholding tax is mandatory no matter how much you withdraw.

RRIF withdrawal withholding taxes 

Amount withdrawn above minimum required RRIF withdrawal ($) 

Required withholding taxes (per cent) 

$0 to $5,000 

10 per cent 

$5,001 to $15,000 

20 per cent 

$15,001 and above 

30 per cent 

If, for example, an individual is 80 years of age, and the previous year-end closing balance of their RRIF was $500,000, their minimum required RRIF withdrawal is $34,100 ($500,000 x 6.82 per cent required RRIF withdrawal at age 80).

Even if that individual had zero other sources of income, the required tax payable on that amount (assuming only the basic personal tax credit is claimed) is $4,053. This amount already exceeds the $3,000 threshold to require tax instalments, without factoring in any other sources of income.

While withholding tax is not required on minimum annual RRIF payments, we always recommend clients withhold tax at the appropriate rate for their current tax situation.

To illustrate how RRIF withholding taxes work, say the same individual wanted to withdraw $50,000 from their RRIF. This represents $15,900 above their minimum annual RRIF payment ($50,000 - $34,100). In these circumstances, withholding taxes can be calculated on the amount which is more than the minimum annual RRIF payment. The minimum required withholding tax would then equal $4,770 (30 per cent x $15,900).

RRSP withdrawal withholding taxes 

Amount withdrawn ($) 

Required withholding taxes (per cent) 

$0 to $5,000 

10 per cent 

$5,001 to $15,000 

20 per cent 

$15,001 and above 

30 per cent 

On a different note, say an individual is 60 and has an RRSP. They have no other income for the year and decide to withdraw $34,100 from their RRSP. They would have 30 per cent tax withheld, or $10,230 ($34,100 x 30 per cent), and receive a net withdrawal of $23,870 ($34,100 - $10,230).

However, the actual tax payable on the withdrawal (assuming only the basic personal tax credit is claimed) will end up being $4,053. This individual will receive a refund come tax time of $6,177 ($10,230 - $4,053). In this instance, the 30 per cent withholding tax is too much, but this is what is required.

Form ISP3520, Request for Income Tax Deductions

The default for CPP and OAS is to have no tax withheld. If you are receiving the maximum monthly CPP amount, you will receive $15,043 in 2022, and if you are receiving the maximum OAS amount, you will receive $8,802 in 2022. If age 75 and over, the maximum OAS amount is 10 per cent more, or $9,682.

Depending on your income tax bracket, these could result in substantial taxes owing. When this is the case, we recommend that clients complete Form ISP3520, Request for Income Tax Deductions, and send it to Service Canada for processing. The request can also be made over the phone by calling 1-800-277-9914. In completing this form, we recommend selecting a percentage amount, rather than a set dollar amount, because CPP and OAS are indexed annually to inflation.

Employer sponsored pension

Most employer sponsored pensions will withhold tax as if your pension income was the only income you will receive in the year.

This is similar to employees earning a paycheque. The employer looks to the tax rate tables to determine the appropriate amount of withholding taxes for each paycheque, but if an employee has income from other sources (such as rental income, investment income, a second job, etc) then the amount of tax their employer is withholding may not be sufficient.

The same goes for retirees earning a pension. The pension plan administrator will not be aware of the types or amount of other income that retiree is earning, so it is up to the retiree to complete and provide a completed Form TD1, Personal Tax Credits Return, to the pension plan administrator.

On page two of the form, there is a section titled “Additional tax to be deducted” and it outlines how you may wish to have additional tax deducted from each payment. A dollar amount must be given here, and the amount can always be updated at a later date by completing the form again.

Not all income sources can withhold tax

When determining how much income tax you owe, it is important to note that not all types of income can have taxes withheld. Certain types of income such as self-employment income, investment income, capital gains, and rental income cannot have taxes withheld. As a result, each taxpayer must assess what level of income they will earn annually which will not have withholding taxes, and factor this in to determining how much tax to withhold from other sources of income where it’s possible to withhold taxes.

Bringing it all together: an illustration

Mr. Smith is 80 years old this year and recently transferred his investment accounts to us. He has $500,000 in a RRIF account and $1,000,000 in a non-registered account, and his Tax-Free Savings Account (TFSA) is fully maximized. His minimum annual RRIF payment for 2022 is $34,100 which is calculated as the previous year-end plan value multiplied by the required payment per cent ($500,000 x 6.82 per cent).

He has historically earned dividends, interest and capital gains which has resulted in an increase of $40,000 to his taxable income from his non-registered account. He receives the maximum amount of CPP ($15,043 annually for 2022), as well as $48,000 annually in pension income from an employer sponsored pension plan. His previous employer currently withholds taxes of $7,027 annually as they assume that this pension is Mr. Smith’s only source of income. Mr. Smith’s annual income from all these sources is $137,143.

This example assumes that Mr. Smith’s OAS is completely clawed back, so we have not included it in his taxable income. Since Mr. Smith is 80, he would receive the extra 10 per cent OAS; therefore, his OAS is fully clawed back at $136,920 for 2022.

After obtaining Level 1 CRA access, we can see that the CRA has sent him instalment notices and has requested that he remit taxes quarterly. After further discussion, we learn that Mr. Smith has not previously withheld any tax on his minimum annual RRIF payment or his CPP. He has $7,027 of tax withheld on his employer sponsored pension plan. Here are the steps we took to help Mr. Smith reduce his instalment payments by increasing the income tax withheld on his RRIF withdrawals, CPP and OAS, and employer sponsored pension.

As noted above, Mr. Smith earns income of $137,143 ($34,100 minimum annual RRIF payment + $40,000 taxable investment income + $15,043 CPP + $48,000 pension income). Assuming Mr. Smith only receives the basic personal tax credit, his taxes payable for 2022 would equal $36,590, which equals an average tax rate of 26.68 per cent ($36,590 / $137,143). Since Mr. Smith has not voluntarily had any tax withheld, other than $7,027 which is deducted from his pension, he is short $29,563 ($36,590 - $7,027). In order for Mr. Smith to not pay income tax instalments, he must have this tax withheld from his other sources.

While Mr. Smith’s average tax rate is 26.68 per cent, his investment income of $40,000 cannot have any income tax withheld, which must be factored in. We map out a plan with Mr. Smith, as follows:

Income source 

Income amount ($) 

Suggested withholding tax per cent (per cent) 

Withholding tax amount ($) 

RRIF withdrawal 


40 per cent 




35 per cent 


Employer sponsored pension 


35 per cent 


Taxable amount of investment income 


Not applicable 






By completing the above, this would result in Mr. Smith remitting $35,705 in taxes throughout the year, compared to the required taxes owing of $36,590. This would result in a small balance owing of $885 after Mr. Smith files his taxes ($36,590 - $35,705), which is something that we can easily pay to the Receiver General on his behalf from his non-registered investment account.

Once the above is set up, it is easy to tweak and refine the per cent of tax withheld on each type of income based on the taxpayer’s individual tax situation each year.

For example, if Mr. Smith had a significant amount of capital gains in a year, he may want to increase his withholding tax to 40 or 45 per cent on all sources of income to ensure he doesn’t owe income taxes by instalment in the following year. This could then be reduced back to the above suggested withholding tax per cent for subsequent years.

Alternatively, Mr. Smith could elect to have more tax withheld on his RRIF withdrawals to make up for this difference.

As you can see, this process is flexible and there are many ways to achieve the desired outcome. There are different ways of paying your ultimate tax bill — both withholding tax and quarterly tax instalments will get you to the same place at the end of the tax year; however, ease, simplicity, and personal preference will guide what is best for you. We recommend speaking with your Portfolio Manager and tax adviser to determine what the right course of action is for your specific tax situation.

Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at Call 250-389-2138, email [email protected], or visit