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RRSP & Withholding Tax in a proposal

When an RRSP is assigned over to a trustee in a proposal what happens to the withholding tax when it is cashed by the trustee? Are there taxes withheld when the trustee cashes the RRSP or does the withholding tax become part of the debt and the trustee gets the full amount.

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One Response to “RRSP & Withholding Tax in a proposal”

A licensed trustee said...

Bear with me – this is bound to be confusing.

The income tax act doesn’t address proposals, at least not proposals filed by individuals. As such, the Canada Revenue Agency (CRA) is “blind” to the fact that sometimes the terms of an individual’s proposal require the surrender of an RRSP.

In CRA’s view, regardless of how or why the RRSP was cashed out, they attribute the transaction to the person that owned the RRSP in the first place.

That means the bank or financial institution will apply the normal tax withholding rules when the RRSP is cashed out and in the following February or March they will issue a T4RSP to the owner. The owner is required to include the income received on their annual tax return.

Most trustees will do a quick estimate of the tax implications to the person filing the proposal when an RRSP is cashed out and then remit a portion of the proceeds to CRA as a tax instalment so that the person won’t owe any additional tax as a result. This is not a legal requirement and therefore trustees are not required to this – most trustees will do it simply because it is “fair” and makes sense.

If you are considering the inclusion of an RRSP in the terms of your proposal I suggest you discuss the tax implications with your trustee before you file to ensure you understand exactly what will happen.