My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Friday, March 4, 2011

Confessions of a Tax Accountant - Week One-Income Tax Withholdings on RRSP's and Termination Payments

In this weeks edition of Confessions of a Tax Accountant, I  will provide some initial perspective on my tax season and discuss an income tax issue that arose.

I will be responsible for approximately 230 personal income tax returns, which are due in most cases by April 30th. In addition, I have numerous other corporate and proprietor year ends that require corporate income tax returns and/or financial statements, which typically need to be completed during this busy time. To date, I have only received four personal income tax returns.

From a hourly workload, working for a mid-size firm is definitely a benefit. In my younger days I used to work seven days a week often until after midnight. Nowadays, if no special assignment occurs during tax season, I will typically work six days a week until April, at which time I will then usually work seven days a week. As I have a large staff to delegate to, suffice to say I don't work the crazy hours I once did.

This year I stopped preparing US personal income tax returns, as the IRS regulations and penalties have become overwhelming, extremely punitive and not worth the effort and risk.

Most of my personal income tax returns are very complex. I have several CEO-types, very successful business owners and well paid employees with everything from foreign investments, rental properties, limited partnerships, commodity trading, etc. If there is something to be invested in, these people invest in it. Besides being complicated, these returns present timing issues as I discussed in an earlier blog “Personal Income Tax Filing Tax Delays" in that most of these returns will not start coming in until the first week of April as my clients await the arrival of T5013 and T3 slips and these slips will not arrive  until the end of March and in many cases, as late as mid-April.

Okay, that is it for perspective, onto a tax issue that arose this week.

Statutory Income Tax Withholdings on RRSP's and Lump Sum Payments

A common income tax issue that arose this week was in respect of RRSP withdrawals. A client withdrew money from their RRSP back in January 2010, which is now over 13 months ago. My client asked me if they were going to receive a tax refund this year. I told them "my staff has to input all the slips, but I can tell you right now, you will not get a refund and will most likely owe at least 16% of your total RRSP withdrawal in tax.” My client was stunned as I explained that 10% is withheld on RRSP withdrawals up to $5,000, 20% is withheld on withdrawals between $5,000-$15,000 and 30% is withheld on withdrawals greater than $15,000.

This issue is very common and problematic. Clients assume that the income tax withheld on RRSP’s and retiring allowances (often called severance pay) at source are the proper income tax withholdings. However, these withholding rates are only statutory and in my client’s case, with their employment income putting them in the top marginal rate, the income tax rate applicable to their RRSP withdrawal will be 46.4%, not 30%, hence a 16 point shortfall.

The Canada Revenue Agency even states the following on their website in respect of lump sum payments like RRSP's and retiring allowance payments: "Recipients and employees may have to pay additional tax on these amounts when they file their returns. To avoid this, if a recipient or an employee requests it, you can deduct more tax".

This is a very hard planning issue. Many personal tax clients do not call me before they withdraw monies from an RRSP and they assume the income tax deduction will be sufficient. Where a client has had their employment terminated, they typically call me because they usually get a letter outlining options from their former employer suggesting they speak to their advisors. In those cases I can calculate the income tax shortfall on the withholdings and can inform them what to put aside for their additional income tax payments.

In any event, if you collapse a RRSP or have a retiring allowance, you always need to be cognizant of the fact the income tax withholdings will probably be "lite".

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise and are general in nature, but I may still embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.


  1. Obviously, you would know your clients situation better than I but its not a forgone conclusion that he would owe additional taxes. It would largely depend on how many other sources of income he had and also what other tax had already been deducted. And, if he had any particular circumstances that would allow him extra tax credits or deductions, that would also be a factor.

    For example, if he withdrew $100k from his RRSP, had 30% withheld and had no other sources of income for that year and no other withholdings, he might be due for a small refund. I know it doesn't happen often and I know your point is that the withholding doesn't necessarily match the tax owed, but at the same time, people often quote the marginal tax rate as being the effective tax rate and that's just wrong (because our income tax is progressive).

  2. Aleenator, you are absolutely correct, the mismatching of rates is dependant upon an individuals various sources of income and their income tax deductions. However, while I understand your point about effective vs. marginal rates, it really is almost always a marginal tax rate issue.

    The vast majority of people will have had their effective tax rates kick in as part of their salary deductions, thus, each extra dollar is really for all intents and purposes being taxed at their marginal rate (i.e.: If your salary is $50k, you would have had $9,600 in income tax withheld from your salary, an effective rate of 19.2%, yet the next dollar is taxed at 31.15%). If you do not have income from employment taxed at source, then your example may make sense. In my example I clearly state my client was in the top marginal rate, so I knew their tax rate was 46.41%.

    Keep in mind the maximum 30% withdrawal rate is exceeded in Ontario at approximately $41,500 of taxable income assuming no other significant deductions. Therefore, many average Canadians would already be short a couple percent and if they made $78,000 or more, they would already be around 10% short.

    Finally, my experience is that many Canadian’s try and withdraw in smaller “chunks” to access the lower 10% & 20% withholding rates, which even in lower income cases can cause an issue.

  3. Yes, I agree, in most cases (and in the particular case you cite) there will almost always be taxes owing. My contrived example was just to show that the marginal rate is not the same as the effective rate and that there could be situations where the amount withheld does in fact cover the tax liability on the withdrawal

  4. Agreed, there could be cases where the tax withheld does cover the income tax liability. But as someone who has prepared thousands of tax returns over the years, at least in my high net worth client practice, most often not the case.