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Hundreds of thousands of Canadians have RRSPs. When life is good and people’s finances are stable, they will generally invest in RRSPs. RRSPs are attractive because they enable you to plan for retirement and offer excellent tax incentives.

If you make an RRSP withdrawal from the financial institution holding your plan, before it is paid to you they will deduct income tax and may also take an administration charge and/or penalty. When you do your taxes at year-end it is common to find you owe yet more tax because the RRSP withdrawal pushed you into a higher tax bracket.

It is very common for people to make an RRSP withdrawal but not declare, either because:

  1. They are unaware that there will be a tax implication, or
  2. They really need the money and hope that the CRA won’t find out about it.

The problem is that, not only is there a tax implication, but failing to declare income is an offence under the Canadian Income Tax Act. Failing to declare income will result in penalties and interest and may even result in prosecution in severe cases.

When you make an RRSP withdrawal the financial institution withholds the tax. The rates vary depending on the amount of the RRSP. In Canada the rates are as follows:

  • 10% (5% in Quebec) on amounts up to $5,000;
  • 20% (10% in Quebec) on amounts from $5,000 to $15,000; and
  • 30% (15% in Quebec) on amounts over $15,000.

You see, when you make an RRSP withdrawal the institution that holds your RRSP will send a tax slip (called a T5) to the CRA. What will usually happen is, many years after the RRSP withdrawal was made and the non-disclosure occurred, the CRA will re-assess you. At the bare minimum penalties and interest can QUICKLY double the size of your tax debt.

If you decide to declare the RRSP withdrawal to the CRA before they catch you under reporting, you can avoid penalties and interest under the Voluntary Disclosure Program.

If the CRA is not aware and has not contacted you (including not having requested information from you) about any tax problems, if the RRSP withdrawal occurred more than one year ago, and if, when you disclose the RRSP withdrawal, your disclosure is complete, you may qualify for the Voluntary Disclosure Program.

If you have made an RRSP withdrawal or have cashed in your RRSP entirely and didn’t declare it on a return or were about to omit it on a return, seek professional guidance on the matter. There are solutions and programs that enable you to declare the income, minimize/mitigate penalties and interest and put your tax problem behind you – you just have to make the commitment to do it.

If you would like to deal with taxes triggered by an RRSP withdrawal or would like to see if you qualify under the Voluntary Disclosure Program, please call Tax Solutions Canada at 888-868-1400 or visit us online at