Retirement is different. In retirement, you tend to have income from multiple sources, and some do not require any withholding tax at all. For example, the Canada Pension Plan (CPP) and Old Age Security (OAS) generally have no tax withheld unless you elect to have it withheld optionally. One exception with OAS is if your income exceeds the clawback threshold, in which case, an OAS recovery tax may apply. For 2023, the income recovery threshold begins at $86,912. Income over this amount may lead to a withholding tax on OAS for the July 2024 to June 2025 payment period.
Minimum registered retirement income fund (RRIF) withdrawals do not require withholding tax either. Non-registered investment income is generally not subject to withholding tax. One exception is foreign income like U.S. dividends, which typically has 15% tax withheld (this can be claimed as a foreign tax credit on your tax return).
Why most retirees have taxes owing
This lack of withholding tax tends to lead to tax owing for most retirees. If you owe tax in multiple years, you may end up being asked by the Canada Revenue Agency (or Revenue Quebec for Quebec residents) to remit quarterly tax instalments.
I see what you tried to do, LT, by requesting the 20.05% withholding tax on your pension. That happens to be the lowest marginal tax rate in the province of Ontario. However, everyone is entitled to a federal and provincial basic personal amount that results in at least some of their income being tax-free before the lowest tax rate applies.
Federally for 2023, the amount is $15,000. Provincially, the basic personal amounts range from $8,481 to $21,003. Once you add in other tax deductions or credits, like the pension income amount and age amount you mentioned, LT, you may have even more things reducing your tax payable.
When you receive a defined benefit pension plan payment from your former employer, they have to follow the payroll tables and withhold tax accordingly. However, these tables assume that you have no other income. If you have a lot of other income, the withholding tax can end up being too low. If your income is low, and you have deductions and credits, the withholding tax may be too high.
How to fix a withholding tax issue
Both can be rectified, LT. You can request additional tax be withheld voluntarily to avoid a balance owing when you file your tax return. This can help you avoid spending money that you should instead put aside over the year because too little tax was withheld. You can also submit federal and provincial TD1 forms to the pension plan payer to reduce withholding tax based on your standard tax credits. If you have other extraordinary tax deductions or credits like spousal support payments or large medical expenses or donations—to name a few examples—you can submit T1213 Request to Reduce Tax Deductions at Source to the CRA for approval.
Should you request more tax be withheld?
Most taxpayers prefer to get a refund over owing tax, and in fact, the majority of taxpayers get a refund when they file their return. That said, when you have to wait all year to get your refund, it is like giving an interest-free loan to the government.