I sold stocks in my RRSP account and my bank immediately withheld the government taxes. Upon filing my income tax, I was charged again on the remainder of that stock sale. So, in effect, I paid taxes twice on the amount of the sold stocks. Is there a way to avoid this double dipping? What if I invested the sale of the stocks in a TFSA and then withdrew the money?
Sorry to hear about your recent tax troubles. Let’s see if I can add some clarity with what you have provided.
Let’s start with your selling of stock in your registered retirement savings plan. Doing so does not in itself create a tax impact to you personally. You are able to buy and sell investments including stock within your RRSP, without any tax implications as long as the proceeds continue to be held in your RRSP account.
Investments that appreciate in value in your RRSP do not get taxed on the gain when you sell the investment, with the trade-off being that for investments that decrease in value in your RRSP, you do not get to use the loss. Again, this is with the caveat that the proceeds from selling stock are either held in cash or reinvested in your RRSP.
What does cause taxation from an RRSP is when you make a withdrawal from the account. Withdrawals from an RRSP are fully taxable as ordinary income (similar to employment income). Furthermore, tax must be withheld on these RRSP withdrawals – 10 per cent (5 per cent in Quebec) on withdrawals up to $5,000, 20 per cent (10 per cent in Quebec) on withdrawals over $5,000 up to including $15,000, 30 per cent (15 per cent in Quebec) on withdrawals over $15,000 (Quebec also has provincial tax withheld).
It sounds like this could be the first layer of tax you ran into. Did you perhaps make a withdrawal from your RRSP? If so, the withholding tax rates above would apply, depending on how much you took out. For instance, if you took out $20,000, you would only receive $14,000, as the institution you invest with is required to withhold $6,000 in taxes (30 per cent).
Now, you mention that you were also charged more in taxes when you filed your income tax return. Although this is never fun, it again is unlikely to be caused by selling the stock within your RRSP, and may not even be the direct result of your withdrawal from your RRSP.
Your taxes owing each year is based on the combination of all of your taxable sources of income (employment, Canada Pension Plan payments, rental income, investment income earned on investments held outside of the tax-sheltered accounts such as RRSPs and TFSAs, to name a few).
After factoring in any available tax deductions and credits available to you, you get your taxes owing. If your taxes owing are more than the taxes withheld on your various sources of income, you end up owing more at tax time. As mentioned above, this generally doesn’t mean you got taxed twice, it does however mean that one (or a combination) of your sources of income did not withhold enough tax to cover your taxes for the year.
The flip side of this is a tax refund – where your taxes withheld throughout the year are greater than your taxes owing at tax time. A tax refund comes with a good feeling at tax time, but in reality, you are receiving the refund because you overpaid taxes throughout the year.
Finally, to address your point of investing the proceeds in your tax-free savings account. Yes, if the withdrawal from your RRSP has taken place and taxes were paid, you can invest the after-tax proceeds into your TFSA.
TFSAs, like RRSPs allow for a variety of different types of investments to be held in the account (stocks, bonds, mutual funds and exchange-traded funds to name a few). TFSAs allow for tax-free growth of investments within the account and also tax-free withdrawals. Just be sure you have available TFSA contribution room and that after any withdrawals you remember that you do not get the withdrawn amount contribution room back until the start of the year after your withdrawal.
Zak Smith is a member of the Financial Planning Association of Canada.
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