Non-residents of Canada will have either 15% or 25% tax withheld on a RRIF withdrawal, based on the tax treaty (or lack thereof) of their country of residence.
What are the withholding taxes for multiple RRIF withdrawals?
Here’s what the Canada Revenue Agency (CRA) says about withholding tax for Canadian residents who make a series of RRIF withdrawals: “It is the CRA’s longstanding position that, when qualifying lump-sum payments are split into multiple payments (i.e. monthly, quarterly, semi-annual instalments) and each payment is made in fulfillment of a single request by the annuitant [RRIF owner], the withholding rate is based on the total ‘elected’ portion requested and not on each individual instalment payment.”
If each payment is a separate payment, the lower rate of withholding tax applies to each. Using your example, Anne, if you request six extra payments of $1,100, the cumulative excess is $6,600 and the 20% withholding tax rate would apply. But if you made six individual requests for $1,100, there may only be 10% tax withheld at source.
CRA says that financial institutions can use their discretion, but if the total payments for the year are known in advance, it expects institutions to withhold the appropriate tax rate based on the total.
Here’s another thing to keep in mind, Anne: The withholding tax rate really only matters in the short run, from a cash-flow perspective. In the long run, RRSP and RRIF withdrawals are fully taxable, with any withholding tax credited towards tax payable. When you file your tax return, the CRA will determine the actual tax payable on the RRSP/RRIF income, and this may result in an additional balance owing or a refund. It all depends on your total income, tax deductions and tax credits for the year.
RRIF withdrawals and pension income splitting
It is also worth mentioning that if you are over 65, RRIF withdrawals are eligible for pension income splitting. Up to 50% of your RRIF withdrawals can be moved to your spouse’s or common-law partner’s tax return, regardless of their age, to minimize your combined tax. Not only does the income get allocated to your partner, but the withholding tax is allocated on a pro-rata basis, as well. So, if 20% tax is withheld on the pension income, 20% tax will be transferred from one spouse to the other on the split pension income.
In summary, Anne, you may qualify for the lower 10% tax withholding by taking your incremental RRIF withdrawals beyond the minimum as separate requests, but the tax owing on April 30 will be the same regardless of the tax withheld at source.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.