Retirement taxes explained: Withholding, clawbacks, and other surprises

Taxation in Canada

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

CPP

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. 

OAS

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.

RRSP/RRIF

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.