Income-tested benefits such as the Old-Age Security can be clawed back, creating an additional tax balance as the amount must be repaid.Space_Cat/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
Some taxpayers may have been surprised to find themselves with a hefty income tax bill this year after receiving refunds in previous years. According to data from the Canada Revenue Agency, 23 per cent of taxpayers had a balance owing on their 2023 income tax returns, with an average amount of $7,134. The results were tabulated for returns processed up to May 13.
Mark Walhout, certified financial planner (CFP) and investment fund representative at Walhout Financial and Investia Financial Services Inc., tends to notice income tax surprises occurring with first-year retirees and employees in specific situations.
Here are nine specific situations leading to taxes owing:
1. Not deducting taxes from CPP and OAS benefits
Service Canada does not withhold income taxes from their Canada Pension Plan (CPP) and Old Age Security (OAS) entitlements automatically, Mr. Walhout says.
Rather, the retiree must directly make a request through Service Canada by filling out the Request for Voluntary Federal Income Tax Deductions form. Doing so may avoid the ding come tax season for retirees collecting these benefits, he says.
Jason Watt, a financial educator in Edmonton, notes that OAS payments increase 10 per cent once the retiree is 75 years old – translating into a bit more taxes paid, which requires planning. He also says that if retirees consistently owe a tax balance of more than $3,000, the CRA may make them pay in instalments.
2. Foreign pensions
Pensions received from another country are taxed as pension income on a Canadian tax return. But there’s often a discrepancy between taxes paid in the foreign jurisdiction and the amount of taxes owed when this pension income is added to the return, Mr. Walhout says. Some foreign taxes that are withheld can be claimed as a tax credit but it may not be enough to offset the client’s overall tax bill.
3. Clawbacks
Income-tested benefits such as OAS can be clawed back, creating an additional tax balance as the amount must be repaid. Mr. Walhout provides the example of a retiree’s income spiking above the OAS threshold ($90,997 for 2024), perhaps due to a large, one-time capital gain on an investment or other significant asset.
4. Alimony
Alimony payments are tax-deductible for the payor and taxable to the recipient, says Morgan Ulmer, CFP with Caring for Clients in Calgary.
5. Change in marital status
Retired clients who are married can split some retirement income, such as pensions, which lowers the overall family tax bill. But losing a spouse either to death or divorce means losing the ability to split income, leading to higher taxes.
“With just one person claiming all of that income, that can push them up into a higher marginal tax rate, and that can cause a surprise, especially that first year,” Ms. Ulmer explains.
6. Renewed interest in GICs and HISAs
In the past couple of years, guaranteed investment certificates and high-interest savings accounts have paid out higher interest rates – as much as 6 per cent in some cases. Now, clients are receiving T5 slips reflecting those interest amounts. “They didn’t get them before because they won’t send them out for [interest] amounts of less than $50,” Ms. Ulmer says.
7. Stock options
People who own shares in their employer can run up a tax balance. Mr. Walhout provides the example of those who have restricted stock units. When the shares vest, the client pays the tax bill but may continue to hold a portion of those shares in a regular brokerage account. If those shares go up in value, there will be more taxes on capital gains payable when the client eventually sells.
“Some clients get confused because they correctly believe they already paid taxes,” he says. “But as the shares went up in value from that point between the vest and when the shares were later sold, there’s now a capital gain that would trigger a taxable event.”
8. RRSP withdrawals
Sudden withdrawals tend to occur with younger people who need money fast and have already depleted funds in a tax-free savings account or another emergency account, Mr. Walhout says. A registered retirement savings plan withdrawal means declaring the amount as income. A 10- to 30-per-cent withholding rate will apply at the time of withdrawal, but depending on the amount and other circumstances, more taxes may be payable when that withdrawal is totalled up with other income at tax time.
9. Capital gains in non-registered accounts
Most clients understand they pay capital gains taxes on investments. But some struggle with the concept of receiving T3 and T5 slips on investments when they haven’t been withdrawing from their non-registered account, Mr. Walhout says.
“If those clients set up their account where interest or dividends are to be reinvested, then they’re going to be getting income tax slips,” he explains. “Investment income that wasn’t withdrawn doesn’t mean that the income didn’t occur. It just means that it was simply reinvested back into the account.”
Sometimes, fund managers buy and sell securities within the investment fund itself, which can also trigger a taxable event for the unit holder. Mr. Walhout acknowledges that can be frustrating for clients.
In the case of those withdrawing from their accounts, some may not have had enough tax losses available to offset the gains, Mr. Watt says.
To avoid tax shocks, Mr. Walhout conducts mid-year tax projections with clients during regular client review meetings. He tries to anticipate clients’ needs and what they expect to occur in the coming year. “The idea is to plan for it now so that it doesn’t become a surprise in April.”
For more from Globe Advisor, visit our homepage.