The impact of your marginal tax rate
It's important to clarify, Ken, that if you have a small amount of RRIF withdrawals with no tax withheld, that doesn't mean the income is tax-free. If you report your RRIF and other sources of income on your annual tax return, you may still owe taxes.
Canada has progressive tax rates so that higher income levels are taxed at higher rates. For example, in Ontario, the first $12,000 or more you earn is tax-free. The next $3,000 is taxed at 15%. And the next $36,000 of income after that is taxed at a rate of 20%. The type of income you receive may change these rates, as will tax deductions and credits. But if we continue to go to higher wages, there will be an increase in the tax rate.
If you have a high income, all income is not taxed at the higher tax rate. Progressive tax rates result in income being taxed at different rates as you move up the tax bracket.
This is why retirees tend to have tax liabilities. If you have a $10,000 pension, you may have no withholding tax. But if you have $60,000 in other income, you may owe 30% tax on that pension.
Going forward of tax installment requests
If you owe more than $3,000 in tax over two consecutive years (or $1,800 in tax over two years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will start asking you to prepay your tax for the following year. This is called a quarterly income tax installment request.
Annuities—and OAS clawbacks—are often the two cursed tax problems for retirees.
You can lower your installments by claiming higher withholding tax from your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax deduction may be good if you prefer not to owe tax or prefer to limit your installment requirements. If you can get your withholding tax rate calculated accurately, you may be able to make better use of the money that comes into your bank account because it's all yours, and doesn't accrue a tax liability.
The choice is yours
Many retirees do not have enough tax withheld by default. Thus, quarterly tax installments are common at that stage of life. But the tax you owe does not have to be given if you choose to increase your withholding tax.
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