Determining Market Value for RRSP Withdrawals
When clients request RRSP withdrawals, they’ll have to include those amounts in their incomes at that year’s marginal tax rates. Also, they’ll face immediate withholding tax.
For withdrawals up to $5,000, the combined federal/provincial withholding amount is 10% (21% for Quebec); over $5,000, up to and including $15,000, it’s 20% (26% for Quebec); and for withdrawals over $15,000, the rate increases to 30% (31% for Quebec).
The withholding rules apply even if the client decides to withdraw, or deregister, securities from an RRSP. For example, if you deregister 100 shares of Apple from your RRSP, the trustee is still required to withhold 30% of the fair market value and remit the proceeds to CRA.
Getting the fair market value for Apple is easy. But let’s say your client holds an illiquid or private company share in her RRSP that she wishes to deregister, and there is no ascertainable fair market value to calculate withholding tax.
This situation came up in April 2014 before the Ontario Superior Court (Iskander v BMO Nesbitt Burns Inc. et al, 2014 ONSC 2536).On December 25, 2013, Iskander directed BMO Nesbitt Burns (Nesbitt) to deregister 66,667 common shares of Dominion Voting Systems Corp. (Dominion), which were held in his RRSP, and to remit applicable withholding tax to CRA from the remaining cash in his RRSP account. The Dominion shares were from a private company, so there was no quotable market price. Iskander provided Nesbitt with a copy of a third-party offer to sell shares in the company at $0.50 per share so Nesbitt could establish a fair value and correctly calculate the amount of withholding tax.
Nesbitt refused to deregister the shares unless Iskander could provide a letter from a Dominion officer setting out the fair market value. Unable to produce such a letter, the taxpayer and Nesbitt were “mired in this stalemate” and Iskander turned to the court for relief.
Nesbitt argued that in order to comply with the obligations under the Income Tax Act, it was necessary to properly determine the fair market value of the shares. Further, only after this information had been acquired would the court be “in a position to determine the appropriate calculation for withholding tax.”
The case was heard by Ontario Superior Court of Justice Ted Matlow, who doesn’t hear many cases on tax law.
In a short, three-paragraph analysis, which I consider deeply flawed, he ordered the shares to be deregistered without any deduction for withholding tax. Ian MacLeod, a litigator with Lenczner Slaght Royce Smith Griffin LLP, acting for Nesbitt, has appealed the decision on behalf of his client.