RRSP Tax Liability

C

cigar7

New member
When filling in form 13.1, for a RRSP, there is an corresponding tax liability. RRSP withdrawals are classified as "other income".

Would it be appropriate to calculate the tax liability based on the total amount being pulled out in one year? If this method is not appropriate, what is the appropriate way to calculate the tax liability?
 
Generally lawyers will use 21% or 23% or so as tax on RRSP. This I believe flows from those amounts being approximately the overall tax rate on all income (and the assumption that RRSP withdrawals in retirement will form majority of your income).

That said, if your situation is different, it may be worthwhile to get an actuarial assessment to identify the tax rate applicable to your RRSPs. For example if you have significant pension (say expected to be around $50K or more) and significant RRSP assets that would result in your RRSPs being taxed at higher marginal tax rates then maybe there is a case to be made for tax liabilities being assessed at a higher rate.
 
I am 61, retired and getting CPP, and could start drawing another small pension. Both pensions are less than $12K per year.

RRSP is significant, and provides $30-40K per year and other investments provide $3k per year, and the balance comes from draw down of savings. The RRSP is being depleted faster than it is growing at this withdrawal rate.

What reasoning could justify a 40% - 50% tax rate?






Why
 
cigar7 said:
I am 61, retired and getting CPP, and could start drawing another small pension. Both pensions are less than $12K per year.

RRSP is significant, and provides $30-40K per year and other investments provide $3k per year, and the balance comes from draw down of savings. The RRSP is being depleted faster than it is growing at this withdrawal rate.

What reasoning could justify a 40% - 50% tax rate?

Why
Click to expand...

Defined Benefit pension plans (public sector and some private sector as well) can pay a pension that is upto 70% (some as high as 80% I believe) of the employee's employment income. In those cases, if someone is making say $80K a year, their pension could be at least $56K/year (likely higher with indexing).

In such cases, any RRSP withdrawals will be at the marginal tax rate. So that first $ of RSP withdrawal will be taxed at over 31% in ON & AB, and as high as slightly over 38% in QC. This is already much higher than the 21 or 23% tax rate that "the system" would use.

As your annual RRSP withdrawals grow (forced once you hit 71 and have minimum RRIF withdrawals), you could easily hit marginal rates of greater than 40%. For example, that person getting $56K in pension, if he/she withdraws another $34K from their RRSP, the tax rate on the last $100 would be around 43% in most provinces and as high as 45.7% in QC.

So it's not unreasonable that the overall tax rate that would apply to all RSP withdrawals would be in the high 30s or 40s. Perhaps even higher for really high income folks that make in excess of $100K and will therefore be eligible for annual pensions of $70K or higher.

That said, most people either have large pensions (because they worked all their lives at the same employer) and thus low RRSP room and hence smaller RRSPs or have very minimal pensions (CPP only perhaps) and large RRSPs. But there are cases of inbetweeners that may have worked in a non-pension place for several years at the start of their career building up half decent RRSPs and still having enough years of employment at pensionable employers to qualify for full pension. Its for these folks that I believe the higher net RRSP tax rate makes sense.
 
RRSP withdrawals are classified as "other income". If $50k was withdrawn from the RRSP, the marginal tax rate would be 31.15%. This tax rate doesn't include the Ontario health Premium, which must also be paid on taxable income above $20k. Would it be reasonable to put the tax liability as 32.35% of the total RRSP?
 
cigar7 said:
RRSP withdrawals are classified as "other income". If $50k was withdrawn from the RRSP, the marginal tax rate would be 31.15%. This tax rate doesn't include the Ontario health Premium, which must also be paid on taxable income above $20k. Would it be reasonable to put the tax liability as 32.35% of the total RRSP?
Click to expand...

No.
Only the last $10k or so would be taxed at 31%. The average tax on the $50k withdrawal would be around 19%. That's assuming no other income.
 
Last edited:
cigar7 said:
RRSP withdrawals are classified as "other income". If $50k was withdrawn from the RRSP, the marginal tax rate would be 31.15%. This tax rate doesn't include the Ontario health Premium, which must also be paid on taxable income above $20k. Would it be reasonable to put the tax liability as 32.35% of the total RRSP?
Click to expand...

Agree with dinkyface above.

As I said earlier, in your specific situation the tax rate that the legal system generally uses (low 20s) will make sense. If you wish to spend some $ and come up with an accurate number you can get an actuarial assessement of your specific case.
 
But a low 20's % assumes that the RRSP is withdrawn over an extended period, maybe 20-30 years. Could it be reasonably assumed the RRSP is withdrawn within a small period, perhaps 5 years?

Why would law determine what a person can withdraw within a period of time? Why can't the RRSP owner determine the withdrawal amount and timeframe?
 
You can withdraw however you like. But for the purposes of family law equalization/support calculations, you have to make some sort of assumptions that all can agree on.

Good luck convincing an ex that your rrsp is only worth 50% because you plan to withdraw in a short time frame and feed the CRA instead.
 
cigar7 said:
But a low 20's % assumes that the RRSP is withdrawn over an extended period, maybe 20-30 years. Could it be reasonably assumed the RRSP is withdrawn within a small period, perhaps 5 years?

Why would law determine what a person can withdraw within a period of time? Why can't the RRSP owner determine the withdrawal amount and timeframe?
Click to expand...

dinkyface said:
You can withdraw however you like. But for the purposes of family law equalization/support calculations, you have to make some sort of assumptions that all can agree on.

Good luck convincing an ex that your rrsp is only worth 50% because you plan to withdraw in a short time frame and feed the CRA instead.
Click to expand...

Here's a link that you may find helpful ... TaxTips.ca - Ontario 2015 and 2014 Personal income tax brackets and tax rates

For the first ~$40K of income your tax rate would be ~20% ... as you've already mentioned, even if you draw all other pensions, you would max out at about $12K. So at least the first ~$28K of RRSP withdrawals you make each year will only be taxed at that ~20% rate. That's why it doesn't make sense to use a higher rate in your case.

If you had guaranteed pensions (employment + CPP + OAS etc) that totalled say $70K / year, the same ~$28K of RRSP withdrawals would be taxed at percentages starting from 33% and going beyond 43%. Then you would have a case to make for a higher tax rate to be applicable.

As dinkyface mentioned above, the default systems are designed with general assumptions and are meant to work for most people. If you are a significant outlier because of your personal situation, you will have to spend some time and $ to utilize expert services that would convince your ex and their lawyer and most important a judge that you need to be treated differently.

Another point to note is that while you may make the case that you will be forced to withdraw larger sums ... there is no guarantee in the future that you actually will ... therefore the system will tend to use the defaults as much as possible.
 
I guess the best option is then to just equally divide the RRSP using T2220 to transfer to other party. This way the tax % becomes a non-issue. What do you think of this approach?
 
I agree that would be the simplest (i.e. requiring agreement on less assumptions) approach. Future tax liability % is only relevant when trading RRSP share for other assets.
 
You must log in or register to reply here.
Back
Top