Canadian RRSP Withdrawal Rules for Non-Residents
Access your Canadian RRSP funds as a non-resident. Understand the key tax considerations, from withholding tax to foreign tax credits, to avoid double taxation.
A Registered Retirement Savings Plan, or RRSP, is a savings and investment vehicle designed to help Canadians save for retirement with tax advantages. Individuals may contribute to these plans during their working years and later withdraw funds. When a person becomes a “non-resident of Canada for tax purposes,” the rules governing these withdrawals change significantly. This status is not determined by citizenship but by severing residential ties with Canada, such as selling a home, moving family, and establishing residency elsewhere. For non-residents with capital remaining in an RRSP, understanding the specific regulations for accessing these funds is a financial concern.
Canadian Non-Resident Withholding Tax on RRSP Withdrawals
When a non-resident withdraws funds from an RRSP, the Canadian financial institution holding the account is required to withhold a portion of the funds and remit it directly to the Canada Revenue Agency (CRA). This is a non-resident withholding tax, governed by the Income Tax Act. The default tax rate applied to the gross withdrawal amount is a flat 25%.
The amount of tax withheld can be lower if Canada has a tax treaty with your new country of residence. A strategy to access these lower rates involves converting the RRSP to a Registered Retirement Income Fund (RRIF) before withdrawals begin. While lump-sum RRSP withdrawals are subject to the 25% tax even if a treaty exists, periodic payments from a RRIF may qualify for a reduced rate, often 15%, under the terms of a specific treaty.
This reduction is not automatic. To benefit from a lower rate on RRIF payments, you must provide proof of your residency in a treaty country to your Canadian financial institution before the withdrawal is processed. Without this proof, the institution is obligated to withhold the standard 25%.
For example, on a $20,000 lump-sum RRSP withdrawal, the 25% withholding tax would be $5,000. If that same $20,000 were taken as periodic payments from a RRIF by an eligible resident of a treaty country, the withholding tax could be reduced to 15%, for a tax of $3,000. The financial institution is responsible for sending the withheld amount to the CRA.
The Process for Withdrawing RRSP Funds
To initiate a withdrawal from your RRSP as a non-resident, the first step is to contact the Canadian bank or investment firm that administers your account. They will guide you through their specific procedural requirements, which involve verifying your identity and confirming your account details. You will need to provide clear instructions regarding the amount you wish to withdraw and how you would like to receive the funds.
Proving your eligibility for treaty benefits involves specific documentation. You will need to prove your residency in a country that has a tax treaty with Canada. The primary document for this purpose is Form NR301, “Declaration of eligibility for benefits under a tax treaty for a non-resident person.” This form is a formal declaration to your financial institution that you are eligible for the reduced withholding tax rate.
You can obtain Form NR301 from the CRA’s website. Completing it requires your personal information, Canadian Social Insurance Number, your new address, and your foreign tax identification number from your country of residence. Submitting this completed form to your financial institution before they process the withdrawal authorizes them to apply the lower treaty rate.
Post-Withdrawal Canadian Tax Reporting
After your financial institution has processed your RRSP withdrawal, they will issue a specific tax slip, the NR4, “Statement of Amounts Paid or Credited to Non-Residents of Canada.” The NR4 slip reports the gross amount of the withdrawal and the total amount of non-resident tax that was withheld and remitted to the CRA. You will receive this slip in the year following the withdrawal.
While the withholding tax is often considered the final tax obligation to Canada, non-residents may have an optional filing choice known as the “Section 217 Election.” This allows a non-resident to file a Canadian tax return and elect to have their eligible Canadian-source income, including RRSP withdrawals, taxed at marginal rates. This can be advantageous if the tax calculated on the return is less than the amount that was withheld at the source.
Making a Section 217 election could result in a tax refund. Eligibility for this election depends on your income. To qualify, the RRSP income and other qualifying Canadian-source income must represent at least 90% of your total world income for the year. Filing this election is completely optional; if you choose not to, the withholding tax reported on your NR4 slip fulfills your Canadian tax duty.
Tax Obligations in Your Country of Residence
Your tax responsibilities do not end with the Canadian withholding tax. As a resident of another country, you are taxed on your worldwide income. This means the RRSP withdrawal must also be reported on the tax return in your country of residence. For instance, a U.S. resident must report the gross amount of the RRSP withdrawal as taxable income to the Internal Revenue Service (IRS).
To prevent the same income from being taxed by both countries, tax treaties include provisions for relief. The primary mechanism for this is the Foreign Tax Credit (FTC). The Canadian non-resident tax you paid, as shown on your NR4 slip, can be claimed as a credit against the tax you owe in your home country on that same income. This credit directly reduces your domestic tax liability.
In the United States, the FTC is claimed by filing IRS Form 1116 with your annual U.S. tax return. This form requires you to calculate the allowable credit based on the foreign income received and the foreign taxes paid.