RRSP Withdrawals are subject to Withholding Taxes

Whenever you make a withdrawal from your RRSP there will be a withholding tax applied. Actually, it would be better to say that financial institutions "WITHHOLD tax" and remits it to the government on your behalf. The way the terminology is used makes it sound like a special type of tax – but it isn’t: it’s income tax!

MagnifyingGlassOnPrint.jpgThe reason your financial institution will withhold tax and remit it to the government is because when you take money out of your RRSP it is considered taxable income – just like you earned it in salary for example. If you remember, the tax reduction you get when you make an RRSP contribution is generated because the government lets you deduct it from your earned income for that year. Well, when it comes out again it then becomes taxable. Just as a Mountie always gets his man – the CRA always get their taxes!

Your financial institution is required to withhold the following amount of tax on a withdrawal from your RRSP:

Amount of Withdrawal        Amount of Withholding Tax

         $0 – $5,000                                 10%

     $5,001 – $15,000                             20%

   $15,001 and above                            30%

(The percent withheld is half of the above listed rates if you live in Quebec.)

So if you requested that $5,000 from your RRSP be withdrawn and transferred to your chequing account, only $4,500 would show up since $500 (10% of $5,000) was withheld and remitted to the government on your behalf. (If you needed $5,000 to spend, make sure to tell your financial institution to transfer $5,000 NET as opposed to GROSS.)

Think of the tax withheld on an RRSP withdrawal as being like the tax withheld on your pay cheque. The reason they do this is so that you won’t have such a nasty surprise when it comes time to file your taxes – i.e. owe them lots of money instead of getting a refund. You’ll note that the amount of tax withheld may not correspond to your marginal tax bracket – so you may still end up owing money nonetheless, especially if you are in a higher tax bracket than the withholding tax bracket:

Let’s say that Sharon earns $150,000 from her job as the CEO of a company and is in the 46.41% marginal tax bracket. If she had to make a $5,000 withdrawal from her RRSP she would have to include $5,000 on her income for the year – on top of her $150,000 salary. While she was paying tax on $150,000 through payroll-deducted taxes – she will have to pony up at the end of the year because her actual earned income is $155,000. Applying a 46.41% marginal tax rate on $5,000 shows that she would owe $2,320.50 in income tax on this extra $5,000. But her financial institution only withheld $500. She will therefore have tax owing after filing her income taxes of $1,820.50 ($2,320.50 tax owing – $500 already withheld).

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 13 comments
  • KS

    What if you had no other income that year, and you withdrew $5000 from your RRSP, would the financial institution still hold 10%? Would you get that 10% back when you filed your taxes?

  • Preet

    Yes, the financial institution would still withhold 10% and remit to the Government on your behalf.

    And Yes, you would get that back once you filed your taxes assuming no other income for that year.

    As a disclaimer, you should always check with your tax advisor to confirm. :)

  • Sammy

    I have $5,200.00 in my and $5,200.00 my wife’s RRSP account. We both earns $22,000/year.[$44,000 combined and our ages are 54(mine) and 51(my wife)]. I am going to move from Canada to US in 5 years from now. So I am thinking of taking out my money. What is the most efficient ways of doing it so I save the most?

  • April

    You do know there is a CRA form that allows you to apply to withdraw from you RRSP account with no withholding tax? There are a set list of conditions that must be met, but it is possible:
    http://www.cra-arc.gc.ca/E/pbg/tf/t3012a/t3012a-07e.pdf

    Of, course, the standard disclamer is you should alway consult your financial advisor before doing anything you have questions about. Any funds you withdraw from your RRSP do become taxable income for that year and you may end up owing taxes. The “nasty surprise when it comes time to file your taxes – i.e. owe them lots of money instead of getting a refund” that Preet mentions above comes into play here.

    The goal of the tax payer should be to come as close as possible to net $0 tax owing come tax time. This means you’re contributing the “just right” amount of tax to the government for your income level, while not overpaying them your money that ends up getting refunded to you when you could have utilized those funds the previous year for your own purposes instead of asking the government to “hold onto it for you” only to give it back to you in May with no interest.

  • Preet

    @April – thanks for the link to that form, and you are right, there are some conditions that need to be met, so if anyone is looking to use the form, read it through.
    @Sammy – I’m so sorry I didn’t see your comment from March – you should check with an accountant or other qualified advisor for specific recommendations, but at $22,000 of income your marginal tax rate in Ontario is 21.05% – so if you withdrew $1,000/year you would be paying $210.50 in tax every year to do so. If you had a lower income year coming up (if you’re not on a fixed income), you might consider waiting to make a larger withdrawal until then (when your marginal rate is lower). That is only one suggestion – I have an upcoming post on cross-border taxation and retirement in the works. (Again, sorry for not seeing your question earlier!) :(

  • Mike

    Hello Preet, Like many Canadians I have myself in bit of a jam-financially. I have been sitting on $20k in my RSP and have watched it gain nicely. However, now I look at as a way to loosen my debt load. I have been looking at the CRA website regarding what I feel is a loosely run Home Buyers Plan program. I know my situation will improve in a year, and from what I have read I have up until October of the year after the withdrawal to pay it back if the deal falls through *nudge nudge*. This way I can avoid witholding tax, and use my money for about 1.5 years.

    Another option is purchase my parent’s house for lets say $20k *wink wink* and add my name to title or completely change the title into my name. I appreciate any thoughts you have on the matter.

  • Addy

    The questions and statements I am about to write are wayyyy out of the range of the documents here – but here it is – yes there are ways to get around paying the taxes when you are employed and want to access your RRSP funds, so let me through a wrnech in this tory and I’d like to see the response –
    I’m on Ontario Disability Pension – making just over $16,000.00/yr, and no treatments or therapies are covered – my injuries stem form a work related motor vehicle accident in Alberta, while I am in Ontario(because I needed help at first- WCB doesn’t pay that quickly)for two years I had 0 income – the third yr. I had just over 5G from Ontario Works, after another yr, in late Oct, I was transfered to disability – so the third year was, just over 10G, now full time disability give me just over 16G, and I am now of 50 and have the right to unlock 50% of my pension which is now only 46G because the bank make a bad investment with my LIRA and I lost 6G, so, unlocking the 50% gives me 23G and change, but I can’t touch it withought paying taxes, I was told if I put it in an RRSP, I would not pay taxes, so that’s what I did, now when I need the money for medical, the governement want 30% of it, when I needed that plus anotehr 10G to do what I have to. I feel cheated by a government that promised to take care of me if I payed my taxes, well I was making 100G or close for 5yrs, and 60/70G a year most years – and to think I gave them all that money – when I need it now to get better health care – what can you suggest ?
    wheelchair bound – by Canadian blood hounds (government)

  • Lisa

    Thank you. Great article, and you explained it very clearly. I was in the unfortunate situation of need ing to withdrawl from my rrsp last year, and for me I was in the exact opposite situation of the “CEO” making $150.00. I left a job for h & S reasons and it wasn't much money to begin with. As a result of this, I used some money from my rrsp for job training in my field, since my situation did not qualify for a life long learning plan. My total income for 2009 was dismal even with the rrsp withdrawl taken into account. My taxes for 2009 will therefore, be lower, and I will not be taxed again. In addition I have business deductions that exceed my business income from 2009.

  • Lisa

    whoops! I meant to say CEO making $150,000. :-) I don't understand how a CEO would have a need to deduct from her RRSP in the first place, but still, you illustrated the point very well of an example of a high income earner having to pay tax twice because the rrsp withdrawl put her in a higher tax bracket.

  • prasad

    I inverted in rsp 15000. As a first time buyer I withdraw 5000 from my rsp to pay off my initial down payment. For this transaction TDCANADA charged me 50$ as a withdrawal fee.

    I submitted my first time home buyers form (HBP). Still TD says you have to pay 50$ as a withdrawal fee.

    Is it right what TD is doing?

    Because I have another 10000 of my rsp account and 15000 on my wife rsp account. They say you have to pay 50$ per each withdrawal per person per transaction.

    It means I have to pay 150$ as total withdrawal fee. Which is really waste of money?

    Is this withdrawal fee is true, if so, can we avoid this fee.

    Thank you

  • Kevin

    By withdrawing 20000 (5000 at a time over 4 weeks), will the bank withhold $ based on the 4 5000 withdrawls or on the total accumulated amount of 20000 (which is taxed at a higher rate)?

  • Hanu

    Lets say, if we withdraw money from RRSP for some emergency, is it possible to repay after some time in the same year or next year? How it will impact the RRSP contribution limit?

    Thanks in advance

    • Preet

      Unless the withdrawal is part of the Home Buyer’s Plan, or the Lifelong Learning Plan, you can’t re-contribute to your RRSP without using up RRSP contribution room. There is no way to increase RRSP contribution room other than through generating it based on 18% of the previous year’s income (subject to limits). Mind you, if you are not maximizing your RRSP contribution, it’s a moot point. Hope that helps!