FILE 108 / DOSSIER C · RRSPs & RRIFs
/ 5 MIN READ
What withholding tax takes from an RRSP withdrawal
The bank keeps 10, 20 or 30 per cent of a lump-sum RRSP withdrawal outside Quebec. That is a deposit against the tax bill, not the bill itself.
Ask a bank for $10,000 from an RRSP and the deposit that follows is smaller. The difference has not disappeared into fees. It has been sent to the Canada Revenue Agency on your behalf, as withholding tax, and it will appear on a slip the following winter. The amount held back follows a simple scale. The tax you finally owe on the withdrawal does not.
That gap between what is withheld and what is owed is where most surprises come from, especially for people drawing on an RRSP for the first time in the early years of retirement.
The withdrawal that arrives short
An RRSP is tax-deferred, not tax-free. Contributions were deducted when they went in, and the money is taxed as income when it comes out. To collect some of that tax at the time, the financial institution withholds a percentage of each lump-sum withdrawal and remits it to the government.
The withdrawal and the tax withheld are reported on a T4RSP slip. On the tax return, the full withdrawal is included in income and the amount withheld is credited against the tax owed, like tax deducted from a paycheque.
The three rates
For residents of Canada outside Quebec, the Canada Revenue Agency sets the withholding rates on lump-sum RRSP withdrawals at:
| Amount withdrawn | Outside Quebec | In Quebec (federal) |
|---|---|---|
| Up to $5,000 | 10% | 5% |
| Over $5,000, up to and including $15,000 | 20% | 10% |
| Over $15,000 | 30% | 15% |
The rate is applied according to the amount withdrawn. Splitting one large withdrawal into several smaller ones can change how much is held back at the time, but it does not change the tax owed on the return; it only moves more of the payment to April.
Quebec works differently
For residents of Quebec, the federal withholding rates are half of those elsewhere: 5%, 10% and 15%. The CRA notes that for funds held in Quebec, provincial tax is withheld as well, under Quebec’s own rules. Quebec residents file a separate provincial return, so the provincial side of the reconciliation happens there.
A deposit, not the bill
The CRA says it directly: the tax that was withheld may not always be enough to account for the tax you owe at your tax bracket. Withholding is a flat rate based on the size of one withdrawal. The real tax depends on total income for the year, including CPP, OAS, any workplace pension, investment income and other withdrawals.
Someone with modest other income may find the withholding was more than enough and receive a refund. Someone with a workplace pension and CPP may find the 10% held on a small withdrawal was well short of the rate that applies to that extra income.
An illustrative set of withdrawals
The table below applies the withholding rates outside Quebec to three withdrawals, then compares them with an assumed combined marginal tax rate of 30%. The 30% is a stand-in for illustration only; real marginal rates depend on province and income.
| Withdrawal | Withheld | Deposited | Tax at 30% | Still owed |
|---|---|---|---|---|
| $4,000.00 | −$400.00 | $3,600.00 | $1,200.00 | $800.00 |
| $10,000.00 | −$2,000.00 | $8,000.00 | $3,000.00 | $1,000.00 |
| $20,000.00 | −$6,000.00 | $14,000.00 | $6,000.00 | $0.00 |
The smaller the withdrawal, the larger the shortfall relative to it, because the lowest withholding rate is the furthest from a typical retiree’s marginal rate. People who draw small amounts several times a year are often the ones who meet the largest April balance.
What else a withdrawal touches
- Contribution room is not restored. Money taken out of an RRSP does not create new room to put it back later, apart from the specific home-buyer and education programs.
- No pension income amount. Lump-sum RRSP withdrawals are not among the income the CRA lists as eligible for the pension income amount. RRIF income at 65 or older is, which is one reason some people open a RRIF before they have to.
- OAS. A withdrawal raises net income for the year, which can increase the OAS recovery tax for higher-income retirees; see the form that can lower OAS clawback deductions.
- Income-tested benefits, such as the Guaranteed Income Supplement, use income from the previous year, so a withdrawal can affect them later.
Before you withdraw
- What is my total expected income this year, and roughly what bracket does it put me in?
- Will the withholding cover the tax on this withdrawal, or should I set aside more?
- Would a RRIF, with income eligible for the pension credit and splitting from 65, suit regular withdrawals better?
- Am I already receiving CPP or OAS with nothing withheld? If so, see how to ask for tax to be taken off CPP and OAS.
The short version
Outside Quebec, a lump-sum RRSP withdrawal has 10%, 20% or 30% withheld depending on its size; in Quebec the federal rates are halved and provincial tax is added. That withholding is a deposit against the tax, not the tax itself. The full withdrawal is income for the year, and the balance, up or down, is settled on the return.
- Canada Revenue Agency — Tax rates on withdrawals — 10%, 20% and 30% (5%, 10% and 15% in Quebec); withholding may not cover the tax owed.
- Canada Revenue Agency — Line 31400, pension income amount — which RRSP and RRIF amounts are eligible.
- Canada Revenue Agency — RRSPs and other registered plans for retirement (T4040) — how withdrawals are taxed and reported.
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