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RRSP tax system misrepresented

Re: Feb. 3 MoneyWise column, Some common RRSP mistakes to avoid

Most of the article by Talbot Boggs presents important and correct information. There is one section that perpetuates an erroneous concept that is believed by most Canadians. Many tell me that they think RRSPs are a government ripoff, because they are taxed when they withdraw the RRSP and again when they complete their taxes. Double taxation is the term I hear daily. Some of them refuse to put any money into an RRSP and others actually refuse to accept the employer’s offer to match any amounts put into an RRSP!

Please do not perpetuate this gross misunderstanding of a helpful tax deferral system. I have to correct this thinking hundreds of times each tax season.

When you withdraw money from your RRSP (e.g. $5,000), the government does not tax those dollars at the rates listed in the article. As a matter of fact, the government does not tax that money at any rate at all. What really happens is that the financial institution where you have deposited your RRSP withholds a percentage of money (e.g. $500), forwards it to your tax account at Canada Revenue Agency, and issues to you the tax form T4RSP, which records the gross amount of money withdrawn and the tax withheld.

When you file your tax return, you need to add the $5,000 as additional income received in the year, but also add the $500 to the tax deducted from your paycheques (shown in Box 22 on your T4). If the tax deducted from all sources, which Canada Revenue Agency holds in your tax account, is more than the tax you should pay for the income you earned, the extra money in that account is returned to you as a refund, If the amount in that account is not as much as you should pay, you need to send Canada Revenue Agency additional money.

For instance, if you withdraw $15,000 from RRSP with 20 per cent ($3,000) tax withheld, and that is the only income you have this year, the tax payable is almost zero. All $3,000 (or most of it) will be returned to you as a refund. If you earned $100,000 and also withdraw $15,000, your income is $115,000, with a nominal federal tax rate of 26 per cent. The 20 per cent tax withheld may not quite cover the additional tax owed, so you will need to pay the additional tax.

The tax withheld is simply not the tax on that withdrawal. It is withheld at source so you will not be faced with a large tax bill at tax time.

Hopefully this will assist in understanding the tax implications of RRSP withdrawals.

Ron Schroeder

Liberty Tax Service

Red Deer

 
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