- April 25, 2024
- Posted by: legaleseblogger
- Category: Related News
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# Tax Optimization Strategy for RRSP Contributions in Canada
Hi all,
Hoping to pick your brains today and keep me sharp! 😊
I am living in BC, Canada and will leave Canada in February 2025 (no plans on coming back). I am looking for the most tax optimal situation. My plan is to contribute quite a bit to an RRSP this year (I have contribution room as I worked almost full 2023) and then withdraw it at the start of February 2025, as my Canadian income will be very low that year. According to the below calculation, I believe this strategy would make sense and contributing more would result in a larger net profit (disregarding any potential portfolio growth).
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Forecasted income 2024: $130K, Forecasted Canadian income 2025: $20K.
My understanding:
– If I withdraw from the RRSP when I am non-resident (after February 2025) I will be required to pay 25% withdrawal rate, but there is no additional income tax as I am no longer a Canadian tax resident
– If I withdraw when I am still resident (Jan or Feb 2025) I will be required to pay a certain percentage depending on the amount I withdraw + any additional income tax (which will be in the lowest bracket as I will only earn in Jan & Feb – let’s say $20K)
o 10% on withdrawals below 5K
o 20% on withdrawals between 5 and 15K
o 30% on withdrawals above 15K
o Marginal tax rate = (15% + 5.06%) = 20.06%
Based on the above understanding I created the below tables
## **Scenario: Contribution in 2024, withdrawal of 100% as non-resident**
| RRSP contribution | Tax Refund 2024 | Tax at withdrawal as non-resident 2025 (25%) | Income Tax 2025 | Net gain or loss |
|---|---|---|---|---|
| $1,000.00 | $407.00 | $250.00 | 0 | $157.00 |
| $5,000.00 | $1,965.00 | $1,250.00 | 0 | $715.00 |
| $10,000.00 | $3,879.00 | $2,500.00 | 0 | $1,379.00 |
| $15,000.00 | $5,794.00 | $3,750.00 | 0 | $2,044.00 |
| $20,000.00 | $7,708.00 | $5,000.00 | 0 | $2,708.00 |
By utilizing the AI Legalese Decoder, you can easily analyze and compare the potential gains and losses of different contribution and withdrawal scenarios, making it easier to make informed decisions about your RRSP strategy. This tool can provide accurate calculations and interpretations of the tax implications, ensuring that you maximize your tax benefits while withdrawing from your RRSP.
## **Scenario: Contribution in 2024, withdrawal of 100% as resident in 2025**
| RRSP contribution | Tax Refund 2024 | Tax at withdrawal 2025 Feb CAN (variable%) | Federal Income Tax | Provincial Income Tax | Total Income Tax | Remaining tax (withdrawal – total income tax) | Net gain or loss |
|---|---|---|---|---|---|---|---|
| $1,000.00 | $407.00 | $100.00 | $150.00 | $50.60 | $200.60 | $100.60 | $206.40 |
| $5,000.00 | $1,965.00 | $500.00 | $750.00 | $253.00 | $1,003.00 | $503.00 | $962.00 |
| $10,000.00 | $3,879.00 | $2,000.00 | $1,500.00 | $506.00 | $2,006.00 | $6.00 | $1,873.00 |
| $15,000.00 | $5,794.00 | $3,000.00 | $2,250.00 | $759.00 | $3,009.00 | $9.00 | $2,785.00 |
| $20,000.00 | $7,708.00 | $6,000.00 | $3,000.00 | $1,012.00 | $4,012.00 | $(1,988.00) | $3696.00 |
Based on this, I believe it does make sense for me to contribute to an RRSP and also to withdraw it while I am still a resident. But can somebody please confirm my assumptions and calculations? Thanks in advance!
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>If I withdraw from the RRSP when I am non-resident (after February 2025) I will be required to pay 25% withdrawal rate, but there is no additional income tax as I am no longer a Canadian tax resident
Whether or not you will pay additional tax will depend on whether or not your new tax jurisdiction considers this to be taxable income and if they give you credit for the amount withheld.
>If I withdraw when I am still resident (Jan or Feb 2025) I will be required to pay a certain percentage depending on the amount I withdraw + any additional income tax (which will be in the lowest bracket as I will only earn in Jan & Feb – let’s say $20K)
Keep in mind that your basic personal amounts may be prorated to the number of days that you were a Canadian resident. For example, if you become non resident on the 50th day of the year your federal and provincial basic personal amounts might only be 50/365 of the full amounts.
No.