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[OP]
Newbie
Oct 26, 2018
35 posts
13 upvotes

RRSP Withholding Tax

I'm a little confused about withholding tax, is the withholding tax in addition to the tax you'd pay on income. So if I withdrew 5k from my RRSP id pay a a $500 withholding tax and 5k would be added to my income?

I ask because my wife was laid off and is eligible for the commuted value of the pension

The options are receive full CV amount in cash less with withholding

Or transfer tax exempt cv amount into RRSP and then recieve remainder in cash less withholding

I'm not sure what the best option is

Thanks
10 replies
Deal Addict
Oct 24, 2010
2441 posts
2292 upvotes
Ottawa
The withholding tax is to cover the income tax you'll have to pay when you file your taxes next spring. Sometimes it isn't enough; sometimes it is.

For your $5k example - when you file your taxes in the spring, you'll report $5k in income related to the RRSP withdrawal. You'll also report $500 in withholding tax that will help to offset the income tax due on that $5k in additional income as a result of the RRSP withdrawal. But for now, you'll only get $4.5k deposited into your bank account.

Which option you choose will depend entirely on your wife's income for this year, I think. It might make sense to take the full CV now if her income this year will mean she ends up paying little to no income tax on it, rather than taking the RRSP transfer and deferring that tax to retirement, when her income may be higher than it is in her current state of layoff.
[OP]
Newbie
Oct 26, 2018
35 posts
13 upvotes
so the withholding tax isn't an addional tax? So my understanding now is if we took 100% in cash less withholding and then contributing half to rrsp it would work out the same as transfering the tax exempt portion? this is all very confusing to me
Sr. Member
User avatar
Dec 18, 2008
982 posts
93 upvotes
Think of withholding tax the same as the taxes your employer takes off your paycheck.
Member
Jan 21, 2012
297 posts
541 upvotes
VANCOUVER
hobbes778 wrote: Think of withholding tax the same as the taxes your employer takes off your paycheck.
To expand, the withholding tax is like an installment payment -- it is credited to your CRA account and applied against your actual tax liability in your tax return, and can result in an over or underpayment (i.e. refund or balance due when you file). If it is too much or too little, the impact is just a timing difference.

Your tax liability is based on the amount you withdraw, which is taxed as income. The withholding has no effect on your tax liability, it is just an estimated advanced payment (essentially).

Unfortunately I think a lot of sources (including some more credible ones... banks, etc.) conflate these concepts and make it seem like the withholding tax represents the tax liability itself, as opposed to a payment towards that liability.
Deal Addict
User avatar
Feb 1, 2012
1945 posts
3244 upvotes
Thunder Bay, ON
itsgettinglate23 wrote: I'm a little confused about withholding tax, is the withholding tax in addition to the tax you'd pay on income. So if I withdrew 5k from my RRSP id pay a a $500 withholding tax and 5k would be added to my income?
Consider withholding to be a down payment on the tax you would owe at tax time on that RRSP withdrawal. Per your example a $5k RRSP withdrawal would have a 10% withholding tax, or $500. But if your actual marginal tax rate (MTR) was 30%, then you would owe an additional 20% or $1000 when you do your taxes for the year. With a 30% MTR, then a $5k withdrawal would incur $1500 tax, of which $500 is withheld when you withdraw, and the rest due when you do your tax for the year. Plus remember the tax deduction you got when contributing to the RRSP, so the tax on a RRSP withdrawal is just the current value of the tax you deferred when contributing.

I ask because my wife was laid off and is eligible for the commuted value of the pension

The options are receive full CV amount in cash less with withholding

Or transfer tax exempt cv amount into RRSP and then recieve remainder in cash less withholding
It sounds like she was not in the pension very long, since normally the CV would have to go into a Locked-in Retirement Account (LIRA) which is like an RRSP except the money is locked in until retirement age.

This is pension money so it should be intended for creating retirement income. RRSP is its proper home.

If she takes the entire amount in cash then the entire amount is taxable for the tax year it is received. You did not say how much (and I'm not asking) but if it is a large amount there could be a large amount of tax due. Transferring the tax exempt amount into an RRSP enables you to defer paying tax on that amount until it is withdrawn. If it is withdrawn when she retires then she will probably have a lower tax rate therefore there will be tax savings.

TaxTips.ca has good info on tax rates:
https://www.taxtips.ca/marginaltaxrates.htm
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Newbie
Oct 26, 2018
35 posts
13 upvotes
So just as a theoretical if I had zero income for a year there would be no reason for me not to withdraw from my RRSP? To at the very least contribute to a TFSA?
Deal Addict
Mar 3, 2018
2957 posts
3308 upvotes
GTA
itsgettinglate23 wrote: So just as a theoretical if I had zero income for a year there would be no reason for me not to withdraw from my RRSP? To at the very least contribute to a TFSA?
For a single person that works. But if a married person with no income takes an RRSP withdrawal it will reduce the spousal amount claim by the other spouse. Basically offsetting any benefit to withdrawal. It would even reduce the Canada Child benefit if applicable by that RRSP income. You could be worse off.
Deal Addict
Jul 21, 2005
2006 posts
1057 upvotes
Alberta
itsgettinglate23 wrote: So just as a theoretical if I had zero income for a year there would be no reason for me not to withdraw from my RRSP? To at the very least contribute to a TFSA?
Correct statement. If you have 0 income, you could withdraw up to the maximum allowed, which is something like 12k or whatever, it's called the basic personal amount
EDIT: Late to the party, but yah, only applies to a single individual.
Deal Addict
User avatar
Feb 1, 2012
1945 posts
3244 upvotes
Thunder Bay, ON
When you withdraw from a RRSP that contribution room is lost forever (except for a few specific situations like the home buyers plan).

If you envision a time in the future when both RRSP and TFSA are maxed out, then if you had additional savings you would have to use a non-registered account. Dividends are taxed every year in a non-registered account, plus realized capital gains are taxed when you sell anything. Say your non-reg portfolio has a 4% dividend yield and your dividend tax rate is 25%. That means 1% of your non-reg account value is lost to taxes every year, compared to an RRSP or TFSA. After 25 years, 0.99^25 = 0.78 so 22% of the account value is taxed away. Then more capital gains tax when you sell. 25 years might seem like a long time, but it's not if you are saving for retirement then spending down in retirement.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.

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