Withholding Tax on Payments from a Registered Retirement Income Fund (RRIF)

Introduction

Under this type of arrangement

  1. a predetermined minimum amount must be withdrawn from the plan every year. This minimum is determined by a formula provided in the Income Tax Act and is determined at January 1 of each year.
  2. the annuitant can also elect to have any amount in excess of the minimum paid to him or her in the year and may change this election at any time during the year.
  3. income tax must be withheld at source on amounts in excess of the minimum using the lump-sum withholding tax rates. No withholding is required on minimum amounts.

Payments subject to withholding

In general terms, a payment from a RRIF in excess of the "minimum amount" is subject to tax deductions at source using the lump-sum withholding rates noted below.

The withholding amount is normally computed on the excess portion of each individual lump-sum payment. However, if withdrawals are in the nature of instalments made in fulfillment of a single request by the annuitant, it is CRA's position that the rate of withholding on each individual payment should be based on the total sum requested and not on each individual payment. In these situations, the CRA considers these periodic payments to be blended payments (i.e. part minimum amount and part instalment or excess). Accordingly, the latter portion would be subject to withholding tax at the rate that would apply had the annuitant ‘elected' to receive one lump-sum payment in the year equal to the amount by which the total instalment payments in the year exceed the minimum amount for the year.

In a situation where an annuitant receives monthly instalment payments and submits a request for an additional amount during the year, the CRA views this as a separate request and only requires withholding on the excess portion of that specific payment regardless of the amount of the ongoing instalment payments. However, where it appears that an annuitant is making separate requests in order to minimize the income tax withheld, for example, where a series of requests are made in a short period of time, it is our position that the withholding rate should be determined as if there was one request equal to the total of all amounts requested. Thus, a higher withholding rate could apply. We suggest payers use their discretion since it is sometimes difficult to apply these rules in these situations.

Note: It may be advantageous to the annuitant's overall tax liability if the tax rate applicable to the aggregate of the payments for the year is used rather than the lower rate determined on the additional withdrawal.

Use the rates listed under the heading "Withholding Rates."

Payments not subject to withholding

Payers are not required to deduct income tax from a lump-sum payment (including RRIF amounts) where the taxpayer's reportable income from "all sources" indicates there will not be a tax liability when their personal income tax return is filed. Taxpayers may complete Form TD1 Personal Tax Credits Return certifying their total eligible tax credits will be more than their taxable income for the year and provide it to the financial institution or carrier of the plan.

Withholding Rates

Use the following withholding rates for lump-sum payments:

  • 10% if the payment is not more than $5,000;
  • 20% if the payment is more than $5,000 but not more than $15,000; and
  • 30% if the payment is more than $15,000.

We wish to emphasize that these rates are only estimates. Since no tax is withheld at source on the minimum amount, annuitants of these plans are required to pay the tax attributable to such payments no later than April 30 of the year following the year in which they are received, unless they are required to make instalment payments.

Annuitants may exercise their discretion and request the payer increase withholding tax in order to reduce or eliminate a future tax liability. Form TD1 Personal Tax Credits Return is used for this purpose.


Questions and Answers

1. We have recently been advised that the CRA has changed its position on how we are to charge withholding tax on systematic withdrawals from a RRIF. The industry standard is to charge withholding tax based on the gross amount of each individual withdrawal. For example: in addition to the minimum amount, an annuitant has elected to receive instalment payments of $1,500 per month for an annual amount of $18,000 in excess of the minimum. We currently charge 10% tax withholding on each withdrawal of $1,500. Under the new rules, the payments would be charged a rate of 30% per instalment based on of the single request of $18,000. Can you please advise if this is correct?

You are correct. A 30% tax rate will apply to each instalment payment. It is the CRA's longstanding position that, when qualifying lump-sum payments are split into multiple payments (i.e. monthly, quarterly, semi-annual instalments) and each payment is made in fulfillment of a single request by the annuitant, the withholding rate is based on the total ‘elected' portion requested and not on each individual instalment payment.

2. If a client has a RRIF and has requested 12 monthly payments, then I understand they would be taxed at the withholding rate applicable to the total amount. If, however, the client decides during the year to request an additional withdrawal of $4,000, can you confirm whether the payment would be taxed at 10% or at the higher rate based on the total amount for the year?

In the situation where an individual is receiving 12 monthly payments and then decides part way through the year to request an additional $4,000, we would view the additional $4,000 as a separate request and only require a withholding of 10% on the excess portion of that specific withdrawal.

3. Say the RRIF withdrawals for the year would be $14,500 and we deduct 20% withholding tax from each payment. In June, the client requests an additional $4,000. Would we charge 30% withholding tax on the $4,000 and would we then have to change our system to automatically accommodate 30% tax on the remaining RRIF payments?

The response provided in Question 2 would be applicable to this situation as well. We would view the additional $4,000 as a separate request and only require a withholding of 10% on the excess portion of that specific withdrawal.

4. An annuitant has requested that an annual amount of $7,200 be paid in monthly instalments. Each monthly payment of $600 includes a $100 minimum amount. Which method below is correct?

  1. No withholding on the January and February excess payments of $500 because they are less than the $1,200 RRIF minimum for the year. For the March through December payments withhold 10% of the $500 payment since each instalment payment is $5,000 or less.
  2. No withholding on the January and February excess payments of $500 because they are less than the $1,200 RRIF minimum for the year. For the March through December payments withhold 20% of the $500 payment because the instalment payments for the year will total $6,000.
  3. For each of the 12 months withhold 10% of the $500 excess payment every month because each monthly instalment payment is $5,000 or less.
  4. For each of the 12 months withhold 20% of the $500 excess payment every month because the annual instalment payment equals $6,000.

Method 4 is correct. The $7,200 is a single request by the annuitant; therefore, the lump-sum withholding tax rate of 20% will apply to the excess portion of each monthly instalment payment.

5. A client requested a payment of $7,800 from his RRIF be split into 12 monthly instalments. Each monthly payment of $650 includes a $50 minimum amount. We are currently withholding tax at 20%. After receiving six payments, our client now wishes to reduce his payments for the remaining six months to $100 per month in excess of the minimum, effectively changing the yearly amount subject to tax withholding to $4,200 calculated as follows:

six months @ $600/month = $3,600 ($600 excess x 6)
six months @ $100 month =

$600

($100 excess x 6)
Revised annual figure =

$4,200

 

What tax rate do we use for the balance of the year?

  1. Change the lump-sum tax rate to 10%?
  2. Leave the lump-sum tax rate at 20%?

The correct answer is 1 based on the revised annual figure of $4,200.

CRA is of the opinion that the revised payments are simply a continuation of the annuitant's initial request (one lump-sum amount split into instalments) and not a separate payment. Therefore, the payer should:

  • recalculate the revised annual figure to determine if there is a change to the tax rate; and
  • determine the amount of tax required on the remaining payments in the year while taking into account the tax that has previously been deducted.

In this example, sufficient tax was already deducted on the payments the annuitant received during the first six months of the year. Therefore, no further withholding is required on the remaining payments as shown by the following calculation:

Tax required on the revised annual figure
($4,200 x 10%)
-$420
Less: tax withheld on the first six months
($3,600 x 20%)
- ($720)*
Difference (overpayment) - ($300)**

* Alternatively, the payer may apply the new withholding rate without taking into account the previous amounts withheld.

** Any tax discrepancy due to the change in withholding rates will be determined when recipients file their personal tax return. Where such a discrepancy will result in an overpayment, annuitants will receive a refund of the excess tax.

6. A client requested that a payment of $4,200 from his RRIF be split into 12 monthly instalments. Each monthly payment of $350 includes a $50 minimum amount. We are currently withholding tax at 10%. After receiving six payments, our client now wishes to increase his payments for the remaining six months to $800 per month in excess of the minimum, effectively changing the yearly amount subject to tax withholding to $6,600 calculated as follows:

six months @ $300/month = $1,800 ($300 excess x 6)
six months @ $800 month =

$4,800

($800 excess x 6)
Revised annual figure =

$6,600

 

What tax rate do we use for the balance of the year?

  1. Change the lump-sum tax rate to 20%?
  2. Leave the lump-sum tax rate at 10%?

The correct answer is 1 based on the revised annual figure of $6,600.

CRA is of the opinion that the revised payments are simply a continuation of the client's initial request (one lump-sum amount split into instalments) and not a separate payment. Therefore, the payer should:

  • recalculate the revised annual figure to determine if there is a change to the tax rate; and
  • determine the amount of tax required on the remaining payments in the year while taking into account the tax that has previously been deducted.

As shown by the following calculation, the increase to the monthly payment will result in a higher overall tax liability. This will be reduced by the income tax previously deducted but will still leave the annuitant with a balance owing when their personal income tax return is filed.

Tax required on the revised annual figure
($6,600 x 20%)
- $1,320
Less: tax withheld on the first six months
($1,800 x 10%)
- ($180)
Less: tax required on remaining six months
($4,800 x 20%)
- ($960)
Difference (shortage) - $180*

* Any tax discrepancy due to the change in withholding rates will be determined when recipients file their personal tax return. Where such a discrepancy will result in a liability, annuitants may choose to increase the monthly withholding amount.

7. What amount of withholding tax should be deducted for withdrawals that are made on five (for example) consecutive days? If each withdrawal were a separate request, would the lower withholding tax rate apply? Taking this a step further, what is the CRA's position with respect to separate requests made on the same day? We have clients that either through the Internet or the call centre are requesting two or three separate withdrawals on the same day. In some cases, the person processing the withdrawal knows that another request has been made so we have been deducting at the higher rate.

Where the recipient makes a series of requests in a short period of time with the intent of minimizing the amount of withholding tax, it is our position that the lump-sum rate applicable to the total should be used. Moreover, in the situation where a number of requests are received on the same day, the CRA would view these as one request and determine the withholding rate based on the total.

We agree that it is difficult at times for payers to determine the appropriate lump-sum tax rate to apply in situations where different individuals within your organization process the requests. However, where the other requests are known at the time we expect the higher withholding rate to be applied.

Payers will have to use their discretion. Ultimately, the tax liability will fall to the individual when filing his or her personal income tax return.

For more information, call 1-800-959-5525 for service in English or 1-800-959-7775 for service in French.