RRSP (Registered Retirement Savings Plan) is an investment account in Canada designed for retirement.
Investment gains and profits in an RRSP are tax-free. RRSP contributions are tax-deductible and can lower your taxable income. On the other hand. RRSP will eventually be taxable at withdrawal. RRSP withdrawals have to be declared as taxable income when filing taxes.
In a few scenarios, RRSP withdrawals can be tax-free, which will be discussed towards the end of this article. However, these few RRSP tax-free exceptions require funds to be repaid eventually to an RRSP.
RRSP Withdrawal Taxes
RRSP withdrawals are taxable income. Additional taxable income from RRSP withdrawals is taxable at your marginal tax rate, which can range between 20% to 55%.
RRSP withdrawals have to be declared as taxable income when filing taxes.
Federal Tax Rates in Canada
| 2022 Federal Marginal Tax Rate | Total Taxable Income |
| 15% | First $50,197 |
| 20.5% | Portion of taxable income over 50,197 up to $100,392 |
| 26% | Portion of taxable income over $100,392 up to $155,625 |
| 29% | Portion of taxable income over 155,625 up to $221,708 |
| 33% | Over $221,708 |
Provincial tax rates in Canada range from 5% to around 20%. The total combined tax rate in Canada is between 20% to 55%.
Since RRSP withdrawals are taxable, RRSP withdrawals when you have a high income will result in high tax rates. On the other hand, RRSP withdrawals when you have a low total taxable income (which occurs typically during retirement) will result in a lower tax rate.
For example, RRSP withdrawals while you also have an employment income of $120,000 may result in a high marginal tax rate of more than 40%. Thus, a $10,000 RRSP withdrawal will result in more than $4,000 in taxes.
On the other hand, RRSP withdrawals while your total taxable income is less than $30,000 will likely have a low marginal tax rate of around 20%. Thus, an RRSP withdrawal of $10,000 on a low-income tax rate may result in taxes owing of around $2,000.
RRSP withdrawals have no age requirements. You can withdraw from an RRSP anytime as long as you are not on a locked-in plan. RRSP withdrawals are often recommended during retirement since taxable income is generally lower in the absence of employment income.
How do I withdraw from RRSP with less tax?
To withdraw from an RRSP with less tax, withdraw when you have a low total taxable income (usually during retirement). A low taxable income will have a lower marginal tax rate and thus, less tax on an RRSP withdrawal.
RRSP Withholding Taxes
For every time you withdraw, RRSP withholding taxes are automatically deducted. RRSP withholding taxes are down payments of taxes to the government. In a sense, withholding taxes are similar to the taxes automatically deducted from your paycheck since RRSP withdrawals are also taxable income.
For example, a withdrawal of $3,000 (outside Quebec) will have an RRSP withholding taxes of $300 (10%). Thus, you will just receive $2,700 in cash.
Assume tax season comes and the taxes owing from employment and other sources of income are $5,000. The tax owing will be $4,700 since the $300 is already paid through the RRSP withholding taxes.
RRSP Withholding Tax Rates (All Provinces except Quebec)
| RRSP Withdrawal Amount | Withholding Tax Rate (Except Quebec) |
| $0 to $5,000 | 10% |
| $5,000 to $15,000 | 20% |
| More than $15,000 | 30% |
RRSP Withholding Tax Rates (Quebec)
| RRSP Withdrawal Amount | Withholding Tax Rate (Quebec) |
| $0 to $5,000 | 5% |
| $5,000 to $15,000 | 10% |
| More than $15,000 | 15% |
Since RRSP withholding taxes are pre-payment of taxes, it is possible to have a tax refund. A tax refund may be issued when you already paid more taxes through the RRSP withholding taxes than your total tax owing.
A tax refund may occur when RRSP withdrawals are your only source of income, or when you have little other taxable income.
For instance, an individual may have taxes of $3,500 from the total taxable income. Assuming $5,500 are already deducted as RRSP withholding taxes, a $2,000 tax refund may be issued after filing taxes.
RRSP Tax Deduction
Contributions (deposits) to RRSP are tax deductible. The tax savings from RRSP contributions is your marginal tax rate. A higher taxable income will result in higher tax savings from RRSP contributions.
For example, RRSP contributions of $10,000 can lower the taxable income from $120,000 to $110,000. Assuming a marginal tax rate of 40%, the RRSP contributions essentially resulted to a tax savings of $4,000 (40% x $10,000).
RRSP tax deductions may not be optimal when income is a bit low. For instance, RRSP contributions of $5,000 can lower the taxable income from $35,000 to $30,000. However, the tax brackets may be lower. Assuming a tax bracket of 20%, the tax savings will be $1,000 (20% x $5,000).
At the same time, RRSP investments grow tax-free. Investing in an RRSP can still have its benefits even when income is not high.
Should you expect more to earn in the future, waiting until then before contributing can be an option so you can have more tax savings (high income = high tax bracket)
RRSP tax deductions are limited up to your RRSP contribution limit.
RRSP has a contribution limit which is 18% of your previous year’s income, up to about $29,000. In addition, unused RRSP limits from previous years will carry forward indefinitely. Deposits above your RRSP contribution limit are not tax deductible and are subject to a 1% penalty per month.
The RRSP contribution limit amount can be found on your most recent tax assessment, or your CRA My account.
Related Article: How to Maximize RRSP Tax Deduction
(Insert How to Maxime RRSP Tax Deduction)
RRSP Dividend Tax
RRSP dividends are not taxable. Any dividends received, whether from a stock investment in the United States or Canada, are not taxable on an RRSP. RRSP will be taxable when the money is withdrawn.
Dividends on an RRSP are tax-free for years or decades until it is withdrawn. Withdrawals from RRSP have to be declared as taxable income when filing taxes.
RRSP Capital Gains and Interest Taxes
Capital gains and interest earned on an RRSP are tax-free until withdrawn. Investments in RRSP can grow tax-free as long as the money is left on the RRSP. RRSP will eventually be taxable when withdrawn.
Most investment assets such as stocks, ETFs, and mutual funds in the United States and Canada can be invested in an RRSP.
Is RRSP taxed as income or capital gains?
Capital gains and income on RRSP are tax free as long as the funds stay on RRSP. RRSP will be taxed on withdrawal. Withdrawals from RRSP are taxed as income and are added to your other kinds of taxable income such as employment income.
RRSP Tax Deferrals – Tax Free RRSP Withdrawals (but have to be paid back)
RRSP withdrawals can be tax-free with the Homebuyers’ Plan (HBP) and Lifelong Learning Plan (LLP) plan. However, funds have to be paid back on these two plans. Essentially, these two plans allow you to borrow from your RRSP account.
LPP allows you to withdraw from RRSP tax-free up to $10,000 in a calendar year, up to a total of $20,000 to finance full-time training or education for you or your spouse or common-law partner.
CRA (Canada Revenue Agency) may have criteria for you to qualify for HBP. Visit the CRA page about HBP for more details. For more details about LLP, visit canada.ca.
Tax-free RRSP withdrawals through LLP need to be paid back within 10 years. CRA recommends repaying a tenth (1/10( of the amount every year until the LLP balance goes to zero. (Source)
HBP gives you the option to borrow up to $35,000 from your RRSP towards a down payment of your first home. Repayment must start the second year after you withdraw the funds and you have up to 15 years to repay the full amount. (Source)
How much tax do you pay on RRSP?
Investment gains and dividends on an RRSP can grow tax-free. RRSP will eventually be taxable when you withdraw investments. RRSP withdrawals count as taxable income, to which marginal tax rates of between 20% to 55% may apply.
How much RRSP can be withdrawn without paying tax?
RRSP withdrawals are generally taxable, but RRSP can be withdrawn without paying tax through the two tax deferral exceptions: Homebuyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). However, funds have to be paid back to RRSP. These two are methods of borrowing from your RRSP.
How much tax do you pay on RRSP withdrawals in Canada?
A tax rate of between 20% to 55% may apply to RRSP withdrawals in Canada since RRSP withdrawals are essentially taxable income. Canada has marginal tax rates where the portion of the higher income will have a higher tax bracket. A high total taxable income year may result in high tax rates on RRSP withdrawals.