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RRSP Withholding Tax Rates & RRIF Implications

Withholding taxes on RRSPs may come as a surprise to some. Let’s start by covering the basics of what an RRSP is.

A Registered Retirement Savings Plan (RRSP) is an investment account to save for retirement. It allows Canadians to earn tax-deferred savings on income and investments, which can help reduce the amount of taxes they owe when filing their tax return. Contributions are also deductible from taxable income, reducing a person’s current tax liability.

Contributions to an RRSP are possible until the current year tax deadline, that is to say Dec 31 of the year that an individual turns 71. Most commonly, withdrawals from the plan are subject to income tax when taken out. They are triggered upon retirement or other circumstances such as a change in the plan holder’s marital status or death.

RRSPs may be used to save for a variety of long-term goals, including financial independence after retirement. Contributing to an RRSP can also provide significant tax savings in the present and help build up a nest egg that you can use during retirement.

The amount of money an individual can contribute to an RRSP each year is limited by their income for the preceding year. Any withdrawals from the plan must be reported as taxable income on that person’s annual tax return. This is where the withholding tax comes in.

What Are The Percentage Of Withholding Taxes Charged To Canadians On RRSPs?

The answer to this question depends on where you live. Everywhere except Quebec gets the following rates:

  • 10% for up to $5,000;
  • 20% for $5,000 up to $15,000;
  • 30% for $15,000 or more.

For people living in La Belle Province, the federal rates for the same amounts are: 

  • 5% for up to $5,000;
  • 10% for $5,000 up to $15,000;
  • 15% for $15,000 or more.

There is also a flat 15% provincial tax on the amount, whichever bracket it is in.

Can I Split RRSPs In Multiple Payments To Avoid Withholding Taxes?

The Federal government states in its Q&A that : “It is the CRA’s longstanding position that, when qualifying lump-sum payments are split into multiple payments (i.e. monthly, quarterly, semi-annual instalments) and each payment is made in fulfillment of a single request by the annuitant, the withholding rate is based on the total ‘elected’ portion requested and not on each individual instalment payment”. 

It is therefore not a long term tax savings tactic to break amounts in multiple smaller ones. Your financial institution needs to know in advance and needs to charge you the right withholding tax before you make your yearly plans.

As mentioned above, withdrawals are reported as taxable income. This means that withheld tax will count as “paid for” tax when you do your tax return. Of course, the withdrawals gross of withheld tax will count as income.

RRIF Withholding Taxes Vs. RRSP Withholding Taxes

When an RRSP becomes a RRIF, the tax implications depend upon how and when you access your funds. Generally speaking, any withdrawals from a RRIF are taxed as taxable income in the year they are received. However, if you start collecting regular payments (withdrawals) from your RRIF at more than the minimum RRIF amount for the year, then only that part of the withdrawal may be withheld. The amount that is taxable will depend on the amount withdrawn and your personal marginal income tax rate for that particular year.

In addition to the regular tax implications of withdrawals, it is important to note that any unused contribution room in an RRSP is lost when converted into a RRIF. This means you may no longer be able to contribute additional funds on a tax-deferred basis and therefore future growth of your savings would not benefit from tax deferral.