I’ve talked about how to think about taxes in retirement before (and I re-read my post, it still holds up) but maybe something that isn’t clear how it differs from when you collected a steady paycheque.

The paycheque withholds tax et al at the source; retirement, maybe not

I think this is well understood. The government likes getting taxes all year round, not just in April. And so part of your paycheque is remitted to the government — taxes, yes, but also CPP/EI contributions and all that stuff that no longer applies when you stop collecting a paycheque.

Withholding tax is an excellent example of the “pay yourself first” principle popularized by The Wealthy Barber. You never see the money, so you sort-of forget it’s yours. Anyway, all things being equal, the withholding amounts should be pretty close to correct, but there are all kinds of things that can throw off the calculation: bonuses, charitable giving, and RRSP contributions are the main ones. I never quite understood people who were happy to get a tax refund. That’s your money you’re getting back, and you’ve given the government an interest free loan.

Anyway, in retirement, this may not be the case:

• If you pay yourself RRIF minimum (as I do) then there is no tax withheld at source. Of course, you can take MORE than RRIF minimum, in which case you will experience withholding tax, just like the bad old days when you were working.
• If you pay yourself from non-registered investments (as I do), you’re likely creating taxable income if you’re selling assets that have increased in value. And that taxable income contributes to (surprise, surprise) your tax bill. Now it bears repeating that only half of your capital gains attract the CRA’s attention: the other half, and the money you put in, are all yours to keep, tax-free.
• And of course T-slip capital gains, interest income and dividend income isn’t taxed at the source either. All of it must be accounted for at tax time.

The implication of all this is that you have to be ready to pay some of your retirement salary back to the CRA. I have a special Wealthsimple savings account¹ that I contribute to monthly; I “self-withhold” about 15% of my salary, fully expecting to drain this account come tax time².

You care less about marginal tax rates, and more about overall tax rates

In case you weren’t aware, not every dollar you make is taxed the same way. Canada has tax brackets; each tax bracket has its own tax rate. Thanks to taxtips.ca, you can get a combined federal/provincial look for how your income is taxed:

This table (and most tables like it) are showing marginal rates. The marginal rate is the tax rate charged on the income that sits above the floor of the tax bracket. Lots of people mix up the idea of marginal rates versus overall tax rates. Let’s take a simple example of someone who is drawing a salary or getting their income from a RRIF: both are taxed as “other income” in the table above:

• Net income: $50,000³. Tax bill: 19.05%*$50000=$9525. In this example, there is no difference between your marginal rate and your overall rate.
• Net income: $55,000. Tax bill: $9525 on the first $50,000⁴, and 23.15%*$5000=$1,157.50 on the remainder. Your total tax bill in this case is therefore $9525+$1157.50=$10,682.50. Your marginal rate is 23.15%, but your overall rate is much lower: $10682.50/$55000=19.4%.

My financial advisor I hired pre-retirement suggested I should target a 15% marginal tax rate, blended between my spouse and I. That’s not easy to do on RRIF payments alone, but then of course you have to consider other income sources like capital gains and dividends.

Non-registered investments can pay a salary; but tax treatment is quite different

So I look for my non-registered investments to generous returns — whether those are capital gains or dividends is unimportant. From a tax perspective, capital gains are especially weird because when you’re paying yourself by selling assets, you are typically earning MORE than “just” the capital gain (i.e. the part that is taxable) part. An example may help.

Let’s say you bought $10000 of XEQT in January 2023. As of today (October 22), it would be worth $20000⁵:

And say you sold it all on October 22m — you’d have $20000 in your bank account. Hooray. CRA would say you made a capital gain of $10000. So if that represented your whole taxable 2026 income, that would attract a tax bill of 9.53%*$10000 =$953.00. Thinking about overall rather than marginal tax rates, you’d therefore have an overall tax rate of $953/$20000 = 4.7%! Pretty sweet.

If instead that $20000 was a RRIF withdrawal, and you had no other taxable income, CRA would present you a tax bill of 19.05%*$20000=$3,810.00, an overall tax rate of 19.05%,

Maybe you’re counting on your non-registered investments generating $20,000 of dividends instead. This generates an overall tax credit in this case⁶!

Retirees are obsessed with how much tax they pay

Since taxes tend to be your single biggest expense in retirement, I understand why. I try to be smart without going to extreme lengths; as I learned managing my parents’ estate, there’s either going to be a tax bill while you’re alive, or a much larger one when you’re dead. Taxes you avoid in the early years of retirement are either going to come due once you start collecting CPP/OAS⁷, or when you’re dead. RRIFs⁸ and non-registered accounts are considered liquidated on the day of death, attracting all the income/capital gains in one calendar year, and hence the highest possible tax bracket.

1. This account does NOT factor into my net-worth calculations. I’ve already, in effect, written it off. ↩︎
2. And in my case, this I expect will start to be every quarter as I’ll shift to paying tax in instalments. Oh well. ↩︎
3. Net income is lower than your salary, since everyone has (at least) the personal deduction. ↩︎
4. using the calculation above ↩︎
5. And doubling your money in less than 4 years is an excellent argument for holding equities. (Of course, you’ll all be crowing when the floor eventually falls out, but equities do outperform over time…) ↩︎
6. If you’re in a lower tax bracket, it’s hard to beat dividends. They start to become less efficient as you climb the brackets, especially if you’re collecting OAS since grossed up amount of dividends are use to test eligibility for OAS. ↩︎
7. OAS clawback is a particular obsession of the retired. ↩︎
8. Unless you declare your spouse as a successor annuitant; you’ve already done that, right? ↩︎