How RRSP withdrawals are taxed in Canada

Withdrawals are income, whatever is withheld

Income earned inside an RRSP is usually exempt from tax while it stays in the plan, but you generally pay tax when you cash in, withdraw or receive payments. The deduction you claimed when you contributed was a deferral, not a permanent saving. When you withdraw, the amount is added to your income for that year and taxed at your rates, along with your pay, pension and any other income.

If the plan is locked in, you generally cannot withdraw from it. If you are not sure, ask the issuer. A direct transfer from one RRSP to another is treated as a transfer, not a withdrawal, so no tax applies.

The withholding rates

When you withdraw, your financial institution withholds tax and sends it to the CRA on your behalf. For residents of Canada outside Quebec, the CRA lists these rates: 10% on amounts up to $5,000, 20% on amounts over $5,000 up to and including $15,000, and 30% on amounts over $15,000. Quebec has lower rates, with provincial withholding added. For non-residents, withholding is 25% unless a tax treaty reduces it.

The rate depends on the size of the withdrawal, so a single large withdrawal can be withheld at a higher rate than the same money taken in smaller pieces. Ask your issuer how it applies the tiers to a particular request, including multiple withdrawals in the same year, before you submit it. Withholding does not change how much tax you owe; it only affects when part of it is paid.

Why you may still owe tax

The CRA notes that the tax withheld may not be enough for your tax bracket, so you may owe more when you include the withdrawal on your return. The reverse can also happen: if your income for the year is low, withholding may exceed your tax and you may get some back as a refund.

As an illustration, assume you withdraw $4,000 and your combined federal and Ontario tax on that extra income is 30%, which is an assumption, not a published rate. The issuer withholds 10%, or $400, while the tax is $1,200, so about $800 would be owing when you file. The point is the gap, not the figures. Your actual rate depends on your other income and on Ontario’s tax brackets.

How it is reported: the T4RSP

Your issuer reports the withdrawal on a T4RSP slip, Statement of RRSP Income. You report the income on line 12900 of your return for the year the money was withdrawn, and you claim the tax withheld, shown in box 30, on line 43700. Annuity payments, commutation payments and amounts deemed received when a plan stops being an RRSP appear in other boxes but also go on line 12900.

Check the slip against your own records. If you withdrew in December and the money reached you in January, confirm which year the issuer used. Keep the confirmation of each withdrawal for your accountant.

Withdrawals that are not taxed the usual way

Home Buyers’ Plan and Lifelong Learning Plan withdrawals are not included in income and the issuer does not withhold tax, but the amounts must be repaid to your RRSP, and for the LLP that is generally over 10 years. Amounts not repaid when due are included in income. Contributions made within 89 days before such a withdrawal may not be deductible if the RRSP’s value after the withdrawal is less than those contributions.

A direct transfer from your RRSP to your FHSA, using the CRA’s transfer form (RC720) given to your institution, has no immediate tax consequences, but it is not deductible and must stay within your FHSA participation room. If you instead withdraw the money yourself and contribute it, the withdrawal is taxable. You can also withdraw unused contributions without withholding using Form T3012A if you meet the CRA’s conditions, and you may be able to claim an offsetting deduction, but the conditions are strict, so ask before relying on it.

Spousal RRSPs and the contribution timing rule

If your spouse or common-law partner contributed to your RRSP, some of what you withdraw may be taxed in their hands rather than yours. The CRA’s tip is to make sure the contributing partner has made no contributions to any of your RRSPs in the year of the withdrawal or the two preceding years. Otherwise, the contributor will probably have to include the withdrawal in income.

The annuitant fills out Form T2205 to calculate each person’s share. The slip is generally issued in the annuitant’s name, but the income is reported according to that calculation. Decide before withdrawing, because the calculation depends on past contributions you cannot undo.

Choosing when and how much to withdraw

Because the withdrawal is taxed at your rates for the year, timing matters. A year with lower income, such as parental leave, a gap between jobs or an early retirement, may be a lower-tax time to withdraw than a year of full earnings. Spreading a large withdrawal across more than one year may keep more of it in lower brackets, but check withholding on each piece. Remember that extra income can also reduce benefits and credits calculated from your net income.

Do not assume the contribution room comes back after a withdrawal. Your RRSP deduction limit is shown on your notice of assessment, so confirm it against your own figures before planning to put the money back. At 71 the options change, including moving the funds to a RRIF or buying an annuity; direct transfers to a RRIF or annuity have no withholding.

What to bring to your accountant

Bring the T4RSP slips, withdrawal confirmations, your latest notice of assessment and any spousal RRSP contribution history. Ask how much tax the withdrawal is likely to add, whether the withholding will cover it, and whether a transfer, the HBP or the LLP fits the purpose. If a big withdrawal is planned, ask before you place the request, because the withholding is taken at the time of payment.