If you withdraw funds from your RRSP, not only will you have to pay tax at your marginal tax rate for the year of withdrawal on the amount withdrawn, but you will face an immediate withholding tax imposed by the RRSP trustee that administers the account. The amount required to be withheld depends on the dollar amount withdrawn. For withdrawals up to $5,000, the withholding amount is 10% (21% for Quebec), for amounts between $5,000 and $15,000 it's 20% (26% for Quebec) and for amounts over $15,000 the rate increases to 30% (31% for Quebec).
The withholding rules apply whether you withdraw cash or securities "in kind" from your RRSP, often referred to as "deregistering" a security. For example, if you want to deregister 100 shares of Apple from your RRSP, your RRSP trustee would still be required to withhold 30% of the fair market value of the shares and remit the proceeds to the Canada Revenue Agency.
Getting the fair market value for Apple is easy but let's say you're holding either an illiquid or private company share in your RRSP that you wish to deregister and there is no readily ascertainable fair market value on which the RRSP administrator can calculate the withholding tax. What value should be used? This situation came up last month in a case before the Ontario Superior Court in which an annuitant directed his RRSP trustee to deregister private company shares held in his RRSP and to remit the applicable withholding tax to the CRA from the remaining cash in his RRSP account.
The taxpayer provided the trustee with a copy of a recent offer by a third party to sell shares in the company at 50¢ per share so that the trustee could establish a fair market value of the shares and correctly calculate the amount of tax to withhold.
But since the company was private, "it was not readily possible to ascertain their fair value on the basis of recent stock exchange trades" and his trustee refused to deregister the shares unless the taxpayer could provide a letter from an officer of the company setting out the fair market value of the shares.
Unable to produce such a letter from the company, the taxpayer and his trustee were "[m]ired in this stalemate" and the taxpayer turned to the court for relief. The RRSP trustee insisted that in order to comply with the Income Tax Act, it was necessary for it to properly determine the fair market value of the shares and it is only after this information has been acquired that it would be "be in a position to determine the appropriate calculation for withholding tax."
The case was heard by Ontario Superior Court Justice Ted Matlow, who in a curious three-paragraph analysis ordered the shares to be deregistered without any deduction for withholding tax.
The RRSP trustee has appealed.