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Is a Withdrawal From a Self-Directed RRSP Tax-Free?

Despite what promoters may tell you — the answer is no.

"The Income Tax Act stipulates that withdrawals of retirement funds must be included in taxpayer's income, and the amounts withdrawn are subject to withholdings of 10 to 30 per cent for income taxes," says Chartered Accountant Howard Sone, Partner, Sone & Rovet in North York.

"Be careful of promoters who advertise — 'Take advantage of your RRSP now — no tax to pay.' They will present a complicated financing scheme that involves using your self-directed RRSP funds to purchase shares of a private company. The funds used to purchase these shares are then loaned back to you at a low, or no interest rate.

However, there are no rules and regulations in the Income Tax Act that permit this or similar schemes. The amount withdrawn for such a purchase will be subject to income taxes by the taxpayer."

Canada Revenue Agency (CRA) has issued a warning that these and other types of plans will be vigorously challenged. More information on RRSP schemes such as this one and many others can be found under "Debunking Tax Myths" on the CRA website at http://www.cra-arc.gc.ca/nwsrm/myths/menu-eng.html.

Courtesy of the Institute of Chartered Accountants of Ontario.