TAXATION
Segregated Funds, like most investments, are subject to taxation. However, unlike traditional investment vehicles like GICs and Canada Savings Bonds (CSBs), which earn only interest income, segregated funds earn dividend income and capital gains or losses in addition to interest income. Dividend income and capital gains are taxed at a lower rate than interest income. This means that segregated funds have a substantial tax advantage over interest-bearing investment vehicles.
RSP TAXATION
Segregated funds registered as an RSP are not subject to tax as tile investment grows. However, when amounts are withdrawn or when an RSP is converted into an income-generating plan such as a RIF, payments is fully taxable as they are received. Financial institutions offering a RIF are required by law to withhold tax on any unscheduled withdrawal.
RIF TAXATION
Tax must be withheld from RIF's income that is in excess of the minimum amount in each calendar year. In addition, financial institutions offering a RIF are required by law to withhold tax on an)' unscheduled withdrawal.
Percentage tax withheld on cash withdrawals:
| Cash Withdrawal |
All provinces Except Quebec |
Quebec Federal |
Quebec Provincial |
| Up to $ 5,000 |
10% |
5% |
16% |
| 5,001 to 15,000 |
20% |
10% |
20% |
| 15,000 + |
30% |
15% |
20% |
For RIFs coming from a spousal RSP contribution, any income in excess of the minimum will be taxed back to the taxpayer contributor if the RSP spousal contribution was made in the current, ear or two previous years.
This is in keeping with the rules governing withdrawal of spousal contributions from RSPs. RIF scheduled payments made within the calendar year of purchase will have tax withheld on the full withdrawal amount, as there is no minimum in the year of purchase.
On the death of the RIF annuitant during the deferral period, the balance in the contract is taxable on the annuitant's final income tax return, unless the spouse is the beneficiary and elects to have the proceeds transferred directly into an allowable registered vehicle in his or her name.
