# Withholding taxes on rrsp



## christinad (Apr 30, 2013)

I just want to confirm that the withholding tax on withdrawing your rrsp is double taxation eg. You don't get a credit for it when you are taxed again subtracting the witholding tax from tax paid.


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## wendi1 (Oct 2, 2013)

No, it's not double taxation. You received a tax break equal to the amount of tax you would have paid on that income when you put the money in the RRSP. You will get credit for the withholding when you fill out your income tax return this year.

They ask for the withholding when you take out your money so that you won't be surprised by a big payment in February. Just be careful - the withholding does not necessarily cover all the income tax owing.


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## christinad (Apr 30, 2013)

I just read the other post but i'm still not entirely clear. Is it double taxation? If not it doesn't seem much worse to withdraw early if you are just having tax withdrawn earlier.


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## christinad (Apr 30, 2013)

Thanks for the reply. It seems to me if you were to withdraw money after you retire but before you collect the canadian pension plan and oas you could possibly be in a lower tax bracket and it may be worthwhile to withdraw a small amount per year.


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## wendi1 (Oct 2, 2013)

That is why they suggest that if you are a low-income earner, you are better off using the TFSA - the RRSP makes more sense if you are in a lower tax bracket when you take it out than when you put it in. 

Of course, it's more complicated than that - you also have years, decades maybe, of tax-free growth. But it's a pretty good rule of thumb.


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## Eclectic12 (Oct 20, 2010)

christinad said:


> I just read the other post but i'm still not entirely clear.
> Is it double taxation?


No ... it is not double taxation.

When the RRSP contribution was made, one deducts the contribution from income. There is no income tax paid on the RRSP contribution.

When the withdrawal occurs, the withholding tax will be taken by the financial institution on a set scale.
http://www.taxtips.ca/rrsp/withholdingtax.htm

This is similar to an employer withholding income tax from one's pay and sending to to CRA. 

The employer paid an income and withheld an estimated amount of tax so that one does not end up with a huge tax bill when filing the return for that tax year. When the tax return is filed, the final income numbers are known, the tax already sent is deducted from the final tax and depending on whether the tax amount already paid is enough, one may have a refund or bill.


In a similar way, the RRSP withdrawal is paid where the withholding tax is sent to CRA by the financial instituation.
When the final tax return is filed, one reports the RRSP withdrawal as income and as the link above says:


> Note that the above withholding tax amounts are only estimates, *which you will show on your tax return as taxes already remitted.*


It's exactly the same process ... the main difference I have noticed is that where people are used to an employer withholding taxes from their income - the RRSP withholding tax is seen as a second tax. 


To repeat ... there's no tax on the RRSP contribution, there's a set withholding tax taken from the withdrawal as a "downpayment" on one's tax bill and the tax return reconciles whether too much or too little tax was paid.




christinad said:


> If not it doesn't seem much worse to withdraw early if you are just having tax withdrawn earlier.


It's not bad or a second set of tax.

Another factor to consider is whether one's financial institution will charge a $50 to $150 fee per RRSP withdrawal. Paying such a fee a couple of times a year to keep the withholding tax low does not make sense IMO. One has a shot at getting the withholding tax back if too tax much was paid. The withdrawal fee is gone for good.

Now if one converts some or all of the RRSP to a RRIF ... then in a lot of cases, there's no withdrawal fee from the financial institution and where the withdrawal is up to the minimum withdrawal amount, there's no withholding tax sent to CRA.

Some may see avoiding the withholding tax as an advantage but they need to be aware that they will have to be prepared to pay the full tax on the withdrawn amount when the tax return is filed. Avoiding the withholding tax is really only changing the timing ... not the amount that is owed.


Cheers


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## My Own Advisor (Sep 24, 2012)

wendi1 said:


> That is why they suggest that if you are a low-income earner, you are better off using the TFSA - the RRSP makes more sense if you are in a lower tax bracket when you take it out than when you put it in.
> 
> Of course, it's more complicated than that - you also have years, decades maybe, of tax-free growth. But it's a pretty good rule of thumb.


+1.

Another reason to focus on the TFSA, max it out as much as you can, whatever the Libs or NDP will do to it


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