RRSP Dividends | Are They Taxable?

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Death, taxes and the Toronto Maple Leafs will disappoint me every year – these are guarantees in life that I have come to grips with.

But, unlike the other two certainties, registered investment accounts such as the RRSP have given Canadian investors some level of control over the amount of tax they pay on their investments. 

As dividends are one of the most popular forms of investment income, Canadian’s often wonder how, if at all, they are taxed within their RRSP.

Here’s the thing,

Dividends generated within an RRSP are not taxable until they are withdrawn from your account. Additionally, dividends generated from American companies won’t be subject to a withholding tax due to a tax treaty between Canada and the US. In other words, as long as the dividends remain in your RRSP, you won’t be subject to any dividend tax.

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For example, let’s say Chelsea invests $10,000 into Company XYZ within a non-registered investment account.

Company XYZ pays her a healthy 5% dividend throughout the year which increases her account value by $500. ($10,000 x 5%)

Regardless of what Chelsea decides to do with this $500, she has to pay taxes on it. 

Not only that, but as a Canadian investor, Chelsea will have to pay a 15% withholding tax on any dividends generated from US companies. So, before these dividends even touch Chelsea’s investment account, boom, 15% gone – Assuming company XYZ is based on American soil.

On the contrary, Jane also invests $10,000 into Company XYZ but she does it within her RRSP. 

As long as she doesn’t make a withdrawal, Jane’s $500 dividend income is not taxable and it can grow at a pre-tax rate.

Additionally, because of the Canada and US tax treaty, Jane’s $500 dividend income isn’t subject to the 15% foreign withholding tax that Chelsea’s dividends were.  

So, if you are saving for retirement as a Canadian, you need to take advantage of an RRSP. 

Not only can you defer paying income taxes on your returns, but your dividends won’t be immediately slashed by a 15% withholding tax. 

This tax sheltering allows your investments to grow tax free, which, over time, will drastically increase your overall returns.

Okay, so now that we know RRSP dividends are not taxable until they are withdrawn.

But there’s still more to unravel here as the next logical question would be – well what are the tax consequences for withdrawing dividends from an RRSP?

Are Dividends Taxed When Withdrawn from an RRSP?

Before I get into this section of the article, I want to make one thing clear, it is a bad idea to regularly withdraw dividends from your RRSP.

In fact, regardless of the type of investment income you generate within your RRSP, it is a bad idea to regularly withdraw money from this account.

RRSPs are investment accounts designed to help you save for retirement, not for regular dividend payments during your working years.

None the wiser, let’s talk about how dividends are taxed when withdrawn from an RRSP account….which you will never do!

In other words, you don’t have to indicate what type of investment returns you are withdrawing because the CRA only looks at the dollar amount.

If you’re a little confused by what I just said, I don’t blame you, I am a terrible writer, but allow me to try and clarify this with an easy example.

Adam invested $20,000 into his RRSP that earned him 3% interest income for the year – Adam invested in bonds.

Kevin invested $20,000 into his RRSP that earned him 3% but in the form of dividend income – Kevin invested in dividend paying stocks.

At the end of the year, they both decided to withdraw their $3,000 additional income (terrible idea), and they wondered if they would be taxed differently based on their separate investment types?

As mentioned above, the CRA taxes your RRSP withdrawals based on the amount of your withdrawals and where you live –  not on what type of investment returns you are withdrawing. 

Long story short, Kevin and Adam won’t be taxed differently based on their investment types. 

However, depending on what type of income they both earn, one could end up paying more in taxes than the other – which we will further explain in the next section

All this to say, if you decide to withdraw dividends from you RRSP, you will be taxed on them.

Similar Financial Geek Article: TFSA Dividends | Are They Taxable?

RRSP Withdrawals | How Much Tax Do You Pay?

Okay, now you know that any withdrawals made from your RRSP are not categorized or taxed differently based on the type of investment income –  the money is taxed based on the dollar amount you withdraw.

With that said, it is no longer necessary to wonder how much taxes you’ll have to pay if you withdraw dividends from your RRSP. 

You should just wonder how much in taxes you will have to pay for RRSP withdrawals, period, end of story. 

Because again, it doesn’t matter, a withdrawal is a withdrawal, it’s all about the dollar amount.

If you’re wondering how hard the taxman will come down on your RRSP withdrawals, here is your answer.

RRSP withdrawals are first subject to a withholding tax which will be withheld by your financial institution.

Quick Note #1 – This withholding tax is not the same as the foreign withholding tax I spoke about earlier in the article, while it is the same concept – they are two different kinds of tax.

Here Are The Withholding Tax Rates:  

Withholding Rate (%)	Amounts ($)
10% (5% Quebec)	$0 – $5,000
20% (10% Quebec)	$5,001 – $15,000
30% (15% Quebec)	$15,001 +

So if we go back to the example of Adam and Kevin, their $3,000 RRSP withdrawal is already reduced down to $2,700 ($3,000 x 10%) because of withholding tax. (Assuming they don’t live in Quebec).

That’s not all though! They still may have to pay even more taxes if the withholding amount doesn’t account for the total additional taxes they owe based on the additional taxable income they’ve generated.

All very confusing I know, so just decide that you’re not going to withdrawal any money from your RRSP and forget about all this tax vomit.

Wealthsimple has a great article here on how tax brackets work and how you can calculate your provincial and federal income tax.

You could legitimately end up giving back over half of what you withdraw. I am not an expert, but I know giving back half of your money is a bad idea!

Related Financial Geek Article: How to Open a RRSP with Wealthsimple | Step by Step Guide

Two Exceptions | Avoiding Taxes on RRSP Withdrawals

Believe it or not, there are a few exceptions to these tax rules where you can withdraw money from your RRSP without paying taxes. 

While I won’t go into great detail in this article about how to avoid taxes on RRSP withdrawals, I can’t leave you without briefly mentioning them.

Home Buyer’s Plan (HBP) – The Home Buyers’ Plan (HBP) is an initiative by the Canadian Government that allows first time home buyers to borrow up to $35,000 (as of 2020) from their RRSP tax free.

This money does not have to be added to your taxable income and it is not subject to withholding tax. However, you do have to repay this money over a 15 year period. 

The Home Buyers Plan  can be a good solution for some, but it does have some notable disadvantages that should be considered before making any decisions, as outlined in my article here.

Lifelong Learning Program (LLP) – The Lifelong Learning Plan (LLP) allows Canadians to withdraw up to $20,000 of their RRSP to fund educational pursuits – tax free. 

Similar to the HBP, there are strict rules associated with the LLP as to what constitutes “education”. So if you are considering this avenue, it is important to do your research beforehand.

Conclusion

Okay, we unpacked a lot here, so let me try and clarify everything stated above in some really short and easy to understand sentences.

Any dividends generated within your RRSP are not taxable – as long as they remain where they belong, IN YOUR RRSP.

If you do withdraw dividends from your RRSP, the fact they are dividends doesn’t matter as you will be taxed on the dollar amount you withdraw, regardless of where it came from.

Depending on how much you withdraw, you will have to pay an initial withholding tax (see chart above) PLUS income tax which is dependent on what your marginal tax rate is.

Lastly, remember that there are a few ways to withdraw money from your RRSP in a tax-free manner.

1. Home Buyers Program.
2. Lifelong Learning Program.

I personally don’t love the idea of taking money out of an RRSP for any reason whatsoever, even if the withdrawals are part of either of these 2 programs. But hey, who cares what I think, do what you want!

If you are still a little confused, then I must be terrible at explaining things, and I am really sorry for that.

But here’s the bottom line – any dividends generated within your RRSP are not taxable until they are withdrawn. End of story.

I guess I could have just mentioned that at the beginning and then moved on, hey?

Geek, out.