How to determine 15% or 25% RRIF withholding rate?

[WA96]

I understand that Canada generally will impose a withholding tax of 25 percent on "lump" distributions to non-residents and 15% for "periodic" payments, such as a RRIF. I'm a U.S. resident that will retire in 2021 at age 61. I will convert my RRSP account to a RRIF and would like to draw down on a monthly basis at a rate that is higher than the 3.45% minimum annual amount for a 61 year old called out in the 2020 RRIF Minimum Withdrawal Rate Table. What can I withdraw on a monthly (periodic) basis without triggering the higher 25% withholding rate?

[nelsona]

The term "periodic, for treaty purposes, does not refer to how often the RRIF is paid out, but rather to how much is taken in a year. You are allowed TWICE your minimum or 10% of the value at the beginning of the year.

So, be careful: in the year you start the RRIF, you have NO minimum, and your beginning of year value in 0. So, if you were to, say, start a RRIF today, in December, you could take out 10% of its Jan,1, 2021 value, and be taxed at 15%. But if you start it in January, 2021, you can only take out money in 2022 to benefit from the 15% rate.

And the 15% rate is in effect until you exceed the 10%. So, say on Jan 1, 2022, your RRIF is worth $110K, meaning you could take out $10K at 15%. You could do this in one lump or take it monthly. If you took $1K a month, your first 10 withdrawals would be taxed at 15%, and then the last 2 would be taxed at 25%, since you would have then exceeded your 10% allowance for it to be considered periodic.

[nelsona]

..Twice your minimum or 10%, whichever is Larger.

Once your minimum reaches 5% (at 70), then it is simply twice your minimum.

Btw, the new "minimum" is optional for this year, if you were over 70, you would double the normal minimum to determine your amount.

[nelsona]

So, you might want to create your RRIF this year -- this month --, if you want to start withdrawing in 2021.

[WA96]

Super helpful. Thanks so much.

[ajtobin]

I am a non-resident Canadian, with an RRSP and LIRA in Ontario. Reading this thread, I see the comment about the year I start a RRIF... that there is no minimum established. I am going to start a RRIF now, and do want to take periodic distribution this year. Does this mean that anything I withdraw in 2022 will be subject to a 25% withholding - regardless of the amount?

[nelsona]

that has been my understanding and my experience. If you start the RRIF this year, you can only benefit from the15% on the first 10% beginning next year.

[ajtobin]

Hi @nelsona. My RRIF is now set up, and will take a distribution this year at the 25% withholding rate. My RRIF is at Scotiabank/Scotia Wealth Management. They have come back to me saying they will use the 25% rate next year as well - though I reiterated to them that I had understood it to be a 15% rate if I limit 2024 (and beyond) to either 10% of year beginning value or 2 times the RMD. I want to point them to Article XVIII of the US/Canada tax treaty, that speaks of the 15% rate, though not the specifics of the withdrawal limit subject to the 15%

I'm basing my interpretation of my eligibility of the 15% withholding tax on these assumptions: now that I've moved my RRSP and LIRA to a RRIF, all withdrawals from the RRIF are considered periodic payments, and therefore I'm entitled to the 15% withholding tax on the amount of the withdrawal that is covered by the 10% / 2x calculations. My intent is to withdraw more than that amount each year, so am assuming I would be subject to the 25% withholding for the withdrawal amount over and above the amount subject to the 15% tax.

For transparency, I did have a consultation a few days ago, and was told I would always be subject to the 25% withholding on the full yearly RRIF withdrawals. So, I would appreciate your thoughts. If my assumptions are incorrect, I'll stop pursuing this with Scotibank.

[nelsona]

The ITCIA section 5, on the definition of a periodic pension withdrawal is quite clear.

Google and Show them that.

[nelsona]

If they overwithhold, you would then need to submit a form to get the other 10% back. the next tax year.

[nelsona]

Your withdrawals UP TO your limit, should be 15%, and THEN 25%. Of course if you take an initial withdrawal for the year of more than your limit, the entire amount is withheld at 25% with no recourse to reduce.

[nelsona]

https://taxca.com/blog-2016-35/