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.

Monday, February 23, 2015

RRSP Withdrawals – Two Tax Traps

I may be old school, but I still believe in Registered Retirement Savings Plan (“RRSPs”). I say old school, as lately it has become fashionable to bash RRSPs, because of the deferred tax liability upon retirement. As result, some people have stopped contributing to their RRSPs (using TFSAs) and others are withdrawing from their RRSPs.

Today, I will not get into the argument of whether RRSPs are good or not, nor discuss when you should contribute to a TFSA in lieu of a RRSP (that is a blog post for another day). What I will speak about is the tax traps for those of you who have withdrawn or will withdraw from your RRSP this year.

In my opinion, RRSPs should only be withdrawn under four scenarios:

1. To utilize the Home Buyers’ Plan (“HBP”); a plan that allows first-time home buyers to withdraw up to $25,000 from their RRSPs to purchase or build a principal residence (although, as Rob Carrick discusses in this article, it is questionable whether housing should come before retirement).

2. To utilize the Lifelong Learning Plan (“LPP”); a plan that allows you to withdraw amounts to finance full-time training or education for you or your spouse.

3. Financial need.

4. Income smoothing (you cash part of your RRSP to take advantage of a tax year in which your marginal tax rate is lower than you expect in future years).

Regardless of the reason you tap your RRSP, you should be aware of the following two tax traps.

Withholding Rates Are Lower than Your Marginal Tax Rates

When you withdraw money from your RRSP for reasons other than the HBP and LPP, the amount of tax the financial institution withholds depends upon the size of your RRSP withdrawal. For RRSP withdrawals up to $5,000, the rate of withholding is 10%. For RRSP withdrawals of $5,001 up to and including $15,000 the rate of withholding is 20%. Finally, for RRSP withdrawals of more than $15,000, the rate of withholding is 30%.

The tax trap is that your marginal tax rate is most likely in excess of the income tax withheld. For example, say you withdraw $50,000 (30% tax is withheld) from your RRSP in 2015 and your income from other sources will be $85,000. The marginal tax rate attributed to the extra $50,000 RRSP withdrawal will be approximately 43% depending upon the province you live in.

Thus, in the above scenario, you would owe approximately $6,500 ($50,000 x 13% [43%-30% withheld]) in April, 2016. You would not believe how many times in my career I have had clients withdraw money from their RRSPs (usually without asking my opinion) who are shocked that they owe substantial amounts at tax time because of the marginal rate trap.

When a client speaks to me beforehand, I calculate the income tax shortfall on the withholdings and inform them how much to put aside for their additional income tax payments. If you have withdrawn money from your RRSP in 2014, you may be in for a "tax shock". If you have withdrawn money in 2015 or plan to do so this year, I suggest you determine online, or with your accountant, how much more your marginal rate is than the statutory withholding and put that money aside.

The 20% Matching Penalty

I have written about the matching penalty several times. Quick recap: under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. Yes, that is income not reported, not tax underpaid!

I have been contacted on my blog by several people who have incurred substantial matching penalties when they are caught not reporting their RRSP withdrawals. Now I know you are saying, “Mark, who the heck does not report their RRSP withdrawals?” It is not that hard to do. In a typical situation, someone has withdrawn from their RRSP earlier in the year, and either forgotten about it or assumed they have already paid the tax and are not overly fussed about it. When this forgetfulness or blissfulness is combined with lost mail or an address change such that they do not receive their T4RRSP, a very expensive tax trap may happen.

Let’s assume the same $50,000 withdrawal example as above, but that the RRSP withdrawal was made in 2014, not 2015. Let’s also assume that the person missed reporting a tax slip in one of the three prior years (to rub salt into the wound, say it was for a T5 slip for only $50) and misses reporting the RRSP withdrawal on their 2014 tax return.

Firstly, they will be assessed the $6,500 in income tax noted above because of the marginal rate trap, but they will also be assessed a penalty of $10,000 ($50,000 x 20%) under the matching program. Remember, I said the penalty is based on the income not reported, not the tax owing. (Note: If the RRSP had not been reported in one of the three preceding years and the T5 slip is missed in 2014, the penalty would only be $10, a strange result).

If you have made, or plan to make a RRSP withdrawal in 2015, please ensure you set aside the proper amount of income tax to cover any marginal rate “gap”. If you withdrew money from your RRSP in 2014, ensure you receive your T4RRSP tax slip. If you do not receive it, call the financial institution for a copy and don’t get caught with a matching penalty.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. When determining how much taxes will be owed on RRSP withdrawals should you use your marginal rate or your average tax rate?

    I've also wondered the same question when determining your tax liability on your RRSP account when figuring out ones net worth! Should you be adding a entry in your liability column using your expected marginal tax rate during retirement or your average tax rate?

    Thanks for the post!

    1. Hi Anon

      Good question. IMHO you would use your marginal rate, as your RRSP withdrawals are additional income at your marginal rate to your other retirement income and the initial RRSP contributions saved you money at your marginal tax rate, so you are matching.

      However, you could argue it is all one retirement pot of income and use an average rate, but I think marginal is more appropriate.

      I like your idea of a tax on withdrawal column and if you read series on How Much Money Do I Need to Retire, I deal with that cost that is for some reason often ignored.

  2. How severe is the CRA about that 20% matching penalty?
    With banks paying so little interest on savings accounts, I am sure a lot of people will have <$50 in interest, so no T5 by the bank, but this should be reported.
    Are they going to just sit on you not reporting minor amounts until you do forget one time with a larger amount and jump on you?

    1. Hi aB

      The penalty can be very severe. I have never seen an adjustment by the CRA for bank interest if a Tslip was not issued and missed.

    2. So the CRA would make an adjustment to your return, and then if next year you forget something then they can apply penalty? So the adjustment is a 'warning'?

      [I think I am asking this ..] So if there was no adjustment for bank interest last year, and if I do miss something accidentally this year, the most will be an adjustment?

      [I don't plan on forgetting reporting income, I just don't want a forgotten account somewhere causing a penalty.]

    3. If the CRA did not issue a reassessment for missing information in the past three years, then if you miss something this year, it only starts the clock ticking and is a "warning".

  3. In 2009, I invested in Strip bonds. I never got any slips from the bank for the interest income , I made. How should I report the interest income from strip bonds

    1. Here is a great link

  4. I made a mistake by withdrawing from my rrsp.I withdrew $9000. It is costing me $1500. Is there a way out of this,

  5. I have over $3m in my rrsp and I’m 60. I am retired and rely on my rrsp for income. ($80k per year after tax)
    The question is - What is the best tax saving strategy over the next 25 years?

    (I am aware of riff and the mandatory % withdrawals at 71)

  6. Hi Anon

    The answer is personally specific given your other income and personal circumstances, so I cannot provide an answer. Given the quantum of your RRSP, I would engage an financial planner to assist you with this if you already do not have one.