In case individuals wonder how much of RRSP is taxable when they take money out, they should acknowledge that the answer changes in accordance with the residency status information as well as the size of the withdrawal.
When they withdraw funds from their RRSP, the full amount is included in taxable income for the year and taxed at the individual’s marginal rate. The withholding applied at withdrawal is only a prepayment against this final tax. It is correct that Canada applies a withholding tax at the time of withdrawal as segmented below:
These rates apply only as a withholding. The actual tax amount owed might be higher or lower naturally in parallel to the total income for the year. Quebec residents also pay a separate provincial withholding tax.
For individuals who have moved out of Canada, the scenario changes. RRSP for non-residents is subject to a flat 25% withholding tax, regardless of the amount withdrawn. However, this rate might be lowered if the country has a tax treaty with Canada. Under the U.S.–Canada tax treaty, this may be reduced to 15% for certain periodic pension-type payments, though lump-sum withdrawals typically remain at 25%.
For U.S. citizens or residents, it should be noted that RRSP withdrawals require special attention. Canada may withhold tax at the source, but the IRS will also tax the withdrawal as ordinary income. Under IRS Rev. Proc. 2014-55, growth inside the RRSP is not taxed annually in the U.S., only once funds are withdrawn. In order to prevent avoid double taxation, it is generally necessary to claim a Foreign Tax Credit (Form 1116) for Canadian tax withheld and comply with FBAR/FATCA reporting.
In a nutshell, the RRSP withdrawal tax rate can range from 10% to 30% for Canadian residents, and 25% for non-residents—unless reduced by treaty. The residency status and income level should always be considered before making a withdrawal. If you are not sure about these tax implications, contact Watter CPA for financial clarity.
