RRSP Withholding Tax

There are significant tax implications for withdrawing money from your RRSP before you retire. As a result, it’s a good idea to be aware of the potential financial consequences before going ahead and making a withdrawal.

When you contribute money to an RRSP, you’re able to claim a deduction on your taxes for that amount. This lowers your taxable income, and may even result in you receiving a tax refund from the government.

However, just because you avoid paying tax on the RRSP contribution initially doesn’t mean that it’s exempt from tax forever. In fact, when you withdraw the money from the RRSP, it’s usually counted as ordinary income by the Canada Revenue Agency (CRA) and you have to pay tax on it.

There are two situations in which you can withdraw money and not be subject to tax:

  • If the money withdrawn is for a down payment on a home under the Home Buyers’ Plan (HBP).
  • If the money withdrawn is for you or your spouse/partner for education or training on a full-time basis under the Lifelong Learning Plan (LLP).

If you don’t take the money out for these purposes, the withdrawn money counts as income and tax must be paid.

How the RRSP withholding tax is paid

If you decide to withdraw funds from your RRSP and it’s not for the HBP or LLP, the financial institution where your RRSP is located will hold back a certain percentage and pay it to the government. This is what’s known as a withholding tax.

The withholding tax rate depends on where you live and how much you withdraw. Here are the rates:

Withdrawal amount Withholding tax rate (except Quebec) Withholding tax rate in Quebec
Up to $5,000 10% 5%
$5,000.01 to $15,000 20% 10%
$15,000+ 30% 15%

If you live in Quebec, there’s an additional 16% provincial tax that’ll be withheld. In all provinces and territories, you’ll also have to report any amount you withdraw as income so you may have to pay additional taxes on top of the withholding tax.

The effect of the withholding tax is that you don’t really get all the money you take out of your RRSP. For example, if you live in Ontario and withdraw $25,000 from your RRSP, you only end up with $17,500 ($25,000 - $7,500 = $17,500) after the withholding tax of 30% is applied. Depending on your income, you may need to pay additional taxes on top of the withholding tax.

Is there a penalty?

There’s no penalty for taking money out of your RRSP, aside from the tax consequences mentioned above.

How much additional tax will you have to pay?

Individuals who do withdraw money from their RRSPs are taxed at their marginal rates because the money counts as ordinary income. So it depends how much you earn (taking into account the withdrawal) and what province or territory you live in because the tax rates vary across the country.

Do you get the contribution room back?

Unlike tax-free savings accounts, you don’t get your contribution room back when you make a withdrawal from your RRSP (unless it’s for the HBP or LLP). For this reason, it’s best to avoid taking money out of your RRSP whenever possible.

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