Situations can arise when individuals may decide to make an RRSP withdrawal prior to retirement.
Before making pre-retirement RRSP withdrawals it is crucial to be aware of the related tax implications as you can be lead to paying a hefty tax bill. Following are the tax implications of the various withdrawals:
Home Buyer's Plan (HBP)
HBP allows you to withdraw from RRSP up to $35,000 tax free to fund the down payment for your home purchase. In order to qualify for HBP one of the following conditions must be met:
- You have not occupied a home owned by you, your spouse or common-law partner during the four years preceding the withdrawal for HBP, or
- You are buying or building a home for a disabled person
Keep in mind that HBP is considered a loan and government requires that it be repaid within 15 years with equal annual payments. The repayments are to start no later than the second year following the year of withdrawal. If an annual repayment equal to 1/15 of the amount borrowed is not made it will be included in taxable income.
Lifelong Learning Plan (LLP)
LLP is a plan that allows Canadian residents to borrow up to $20,000 to cover the cost of further full-time education. The education costs can be for yourself, your spouse or common-law partner. The money can be withdrawn without tax consequences and without the loss of contribution room. In order to be eligible for LLP withdrawal you have to be a full-time student enrolled in a qualified educational program and at a designated educational institution (post-secondary institution).
In order to avoid tax on LLP, repayment must be completed within 10 years. You are required to repay an annual amount equal to 1/10 of the amount borrowed. Any repayment that is less than this amount is included in your income whereas any overpayments will reduce the amount you will have to pay in the future.
Withdrawal for any other purpose
If you make a withdrawal from your RRSP for expenditure other than HBP or LLP you will have to pay an immediate withholding tax and possibly additional tax when you file your tax return. Withholding tax rates for all provinces except Quebec are as follows:
| Amount Withdrawn | Tax rate |
| Up to $5,000 | 10% |
| Between $5,001 and $15,000 | 20% |
| More than $15,001 | 30% |
For professional advice contact Alpha Accountzy, Accounting & Tax Solutions.
