RRSP Withdrawal When Leaving Canada: Before or After?

RRSP withdrawal before or after leaving Canada: how is each taxed?

The date of the withdrawal decides the tax. Money taken out of an RRSP while you are still a resident is ordinary income on your departure-year return, taxed at your marginal rate. Money taken out after your departure date is a payment to a non-resident: the plan withholds 25% of the gross, and that is usually your final Canadian tax (CRA; T4058).

Neither timing is lower for everyone. Your case needs a closer look if the RRSP is large, you also owe departure tax, the plan is held in Quebec, it is a spousal RRSP, or you are moving to the US (where the US side has its own rules).

Gather: your exact departure date, the RRSP balance and plan type (spousal or not, and any spousal contributions in the last three years), any unpaid Home Buyers' Plan or Lifelong Learning Plan balance, your expected Canadian income and any departure-tax gain for the departure year, and the country you are moving to.

Do I have to cash out my RRSP when I leave Canada?

No. An RRSP is one of the properties excluded from the deemed sale on emigration, so leaving does not trigger tax on it and it can stay invested in Canada (CRA). It also does not go on Form T1161. Canada taxes it only when money comes out. For new contributions after you leave, see contributing to an RRSP or TFSA after leaving Canada.

Withdrawing an RRSP before leaving Canada: what is withheld and what do I owe?

The full withdrawal is added to your income for the departure year and taxed at your marginal rate. The plan withholds tax up front on a sliding scale outside Quebec (CRA):

For funds held in Quebec the federal rates are lower and Quebec provincial tax is also withheld. The withholding is a prepayment, not the final tax. The CRA warns it may not cover the tax at your bracket, so a large withdrawal can leave a balance owing on the departure-year return.

The trap is stacking. On that return the withdrawal sits on top of your pay up to your departure date and any gain from the departure deemed sale. A large withdrawal in the same year can push much of it into the top brackets. Splitting the withdrawal over two resident years only works if you are still resident in both. See leaving Canada for the full departure return.

RRSP withdrawal after leaving Canada: what is the non-resident withholding tax?

Canada charges Part XIII tax at 25% on the gross RRSP payment to a non-resident (Income Tax Act, paragraph 212(1)(l)). The plan withholds it, you do not report the payment on a Canadian return unless you elect under section 217, and the withholding is generally your final Canadian tax (T4058).

A treaty may lower the rate, but often not for a cash-out. Under the Income Tax Conventions Interpretation Act, an RRSP payment counts as a pension, but a payment before the plan matures, or a commutation (cashing out all or part of the plan as a lump sum), is not a "periodic pension payment". Many treaties give their lower rate only to periodic pension payments, so a lump-sum RRSP withdrawal often stays at 25% (IC76-12R8). Check the treaty for your new country; see non-resident tax rates in Canada and, for example, moving from Canada to the UK or moving back to China.

Before vs after: what decides which costs less in Canada?

Compare your combined federal and provincial marginal rate on the withdrawal as a resident with the non-resident rate. The non-resident withholding is generally your whole Canadian tax on the payment, with no provincial tax added. Four things move that comparison:

These are tendencies, not a result; the real comparison needs your departure-year figures and the treaty for your new country, which is the second layer of tax (covered below).

Spousal RRSP: before you leave, a withdrawal may be taxed to the spouse who contributed, if they contributed in that year or the two before it. That rule does not apply when either spouse is a non-resident at the time of the payment (Income Tax Act, subsection 146(8.7)). If you leave on different dates, see spouses leaving Canada on different dates.

Can a section 217 return lower the tax on an RRSP withdrawal after leaving?

Sometimes. RRSP payments are among the "Canadian benefits" a non-resident can report on a Canadian return under section 217, so the payment is taxed at regular graduated rates instead of the flat withholding (Income Tax Act, section 217). The CRA applies the election only if it helps you (CRA). It tends to help when the Canadian payments are modest and your world income that year is low: the tax is worked out at the graduated rate your world income would reach, and personal credits are limited unless almost all your income is Canadian. The return is due by June 30 of the following year. Mechanics, including Form NR5, are in section 217 returns for pension and RRSP income and lowering withholding on Canadian pensions abroad.

Does splitting the withdrawal over years, or converting to a RRIF, lower the rate?

Splitting a lump-sum cash-out over several years after you leave does not change the 25% rate by itself, though smaller yearly amounts can make a section 217 return more useful. Converting to a RRIF and taking regular payments can matter more: RRIF payments within the limits in the Interpretation Act definition can be periodic pension payments, which many treaties tax at a lower rate. See converting an RRSP to a RRIF as a non-resident. Locked-in plans follow other rules; see unlocking a LIRA after leaving Canada.

How does my new country tax the RRSP withdrawal?

Your new country may tax the full withdrawal under its own law, and the treaty may give it the right to. Whether it credits the Canadian tax depends on that country's rules, so a withdrawal is not tax-free just because Canada's tax is final. For a move to the US, see RRSPs and TFSAs after leaving Canada. Check that a treaty is in force with Finance Canada's list.

What about an unpaid Home Buyers' Plan or Lifelong Learning Plan balance?

An unpaid balance must be repaid within 60 days of becoming a non-resident, and before you file the departure-year return, or what is left is added to your departure-year income. That inclusion stacks with any RRSP cash-out made before you leave. See Home Buyers' Plan balance when you leave Canada.

How do I get the treaty rate and the NR4 slip after withdrawing as a non-resident?

Give the plan issuer Form NR301 before the payment. The payer uses it to decide whether a reduced treaty rate is appropriate; without it, expect the full 25% (CRA). If the plan withheld more than the treaty rate, ask the CRA for the excess on Form NR7-R, generally within 2 years after the end of the calendar year the payer sent the tax in (T4058). Tell the issuer your new address and non-resident status, and your exact date you became a non-resident. After the year, the issuer sends an NR4 slip showing the gross payment and tax withheld; you need it for your new country's return and any section 217 return. See the NR4 slip.

Example

All figures are in Canadian dollars, round and illustrative only.

C$40,000 withdrawn in March, departure in August

Outside Quebec, the plan withholds 30% on a single C$40,000 withdrawal, C$12,000. On the departure-year return, the full C$40,000 is added to salary earned January to August. The return works out the real tax at the person's marginal rates; the C$12,000 counts as a payment toward it, so the result can be a refund or a balance owing.

The same C$40,000 withdrawn after the August departure

The plan withholds 25%, C$10,000, as non-resident tax. The departure-year return is still filed for the January to August salary, but this payment stays off it, and the C$10,000 is generally final. A section 217 election is unlikely to help this year, because the salary counts toward world income; it tends to help in a later year with little other income. The new country may tax the C$40,000 too.

Compare: Canada's tax here is C$10,000; before departure it is whatever the C$40,000 adds at the person's combined marginal rates on top of the salary, which is more than C$10,000 in high brackets and can be less in low ones.

C$200,000 RRSP left in place

The holder does not need the money soon. The RRSP sits outside the departure deemed sale either way; leaving it invested means Canada taxes nothing until money comes out. Years later the holder converts to a RRIF and takes yearly payments; if those are periodic pension payments and the treaty for the new country lowers the rate on them, Canada may withhold less than the 25% a lump sum would often face.

Different for you?

• Large RRSP, or departure tax in the same year: the timing choice changes the departure-year bill, and both options need working out on your own numbers before you withdraw; see individual tax services.
• Moving to the US: the US taxes the RRSP its own way; see RRSPs and TFSAs after leaving Canada and cross-border tax services.
• Low world income after leaving: see section 217 returns for pension and RRSP income.
• Want regular payments at a treaty rate: see converting an RRSP to a RRIF as a non-resident.
• Unpaid Home Buyers' Plan or Lifelong Learning Plan: see Home Buyers' Plan balance when you leave Canada.
• Spousal RRSP or spouses leaving on different dates, a Quebec plan, or two countries taxing the same withdrawal: these need a review of both returns; see individual tax services or cross-border tax services.