Dear Expert:
Over the years I have invested in my spouse's RRSP. She is considered my dependant for tax purposes. We would like to cash in a $5,000 RRSP fund of hers. What is the net amount we will receive from the bank upon cashing it in? Since this amount will be considered her income for the year, do I lose my spouse/dependant benefit? If so, how much will this cost me? Expert Opinion:
When an amount is cashed in from an RRSP, the financial institution will withhold 10% of any withdrawal up to $5,000. (If you are a Quebec resident, 21% would be withheld.) Tax on larger withdrawals is withheld at a higher rate. The withholding tax on amounts over $5,000 up to $15,000 is 20% (30% in Quebec) and on amounts over $15,000, 30% is withheld (35% in Quebec).
You don't specify your province of residence. If you live outside Quebec, $500 of tax will be withheld on your $5,000 withdrawal; if you live in that province, the amount is $1,050. While you are correct in assuming the $5,000 RRSP withdrawal will generally be considered to be your spouse's income in the year of withdrawal, you should be aware of the income-attribution rule for spousal RRSP withdrawals. This rule states that any withdrawal during 2002 may be taxed to you—the contributor—if you made any contributions to any spousal RRSP during 2000, 2001 or 2002. Assuming you have not made any contributions to a spousal RRSP either this year or during the prior two years, the amount will indeed be taxed in your spouse's hands.
If the $5,000 withdrawal is your spouse's only source of income for 2002, this amount will be fully sheltered by her basic personal credit, and she will receive a refund of the $500 withholding tax ($1,050 if a Quebec resident) when she files her 2002 tax return. To the extent that your spouse has income, this will reduce the amount of the spousal credit to which you are entitled. The spousal credit is reduced when a spouse's income is over a minimum amount, which varies by province, but is generally, approximately $650. (In Quebec, there is no minimum amount). For an Ontario resident, the maximum value of this credit for 2002 (for combined Federal and Ontario purposes) is $1,432. The resulting tax credit in Ontario will now be worth approximately $475. For a Quebec or B.C. resident, the tax credit would now be worth approximately $500.
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