Q&A: Tax bite hurts

Question: I am 58 years of age and in October 2006 was ‘restructured’
out of my job. I was given a severance package (approximately $25,000) which
I put into an RRSP and then a RRIF pursuant to my financial planner’s suggestions
so that I can withdraw a monthly amount to live on until I obtain further employment
(no plans for retiring).

I determined that I would need $1,700 cash monthly to live on and was told
that there would be a monthly withholding tax of 10 per cent at the time I set
up my RRIF. No problem. All of a sudden in January, I received only $1,300 and
was told by the bank that Revenue Canada had changed the rules and that the
withholding tax was increased to 30 per cent PER MONTH. I think this is totally
outrageous. At this rate, my severance is not going to last as long and frankly
I resent paying some $350 monthly extra in taxes when I’m unemployed. Is there
any way around this? Will I also have to declare this money as income on my
income tax? Thank you. – E.W.

Gordon Pape’s answer: The mistake was to set up a RRIF in
the first place. There was absolutely no need to do that and it cost you flexibility,
plus creating a tax problem. You could have left the money in the RRSP and made
withdrawals as needed. The withholding tax would have been much less (10 per
cent) if the amounts had been under $5,000.

There are ways to unwind the RRIF and convert back to an RRSP however they
are a bit complex. Perhaps your planner is familiar with them; if so he should
do the work at no charge since he was the one who made the recommendation to
begin with.

In most cases, my advice is not to convert from an RRSP to a RRIF until you
absolutely have to at age 69.

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