- Let's assume an annual income of $50,000 in Ontario, making a single RRSP withdrawal of $10,000.
- The immediate withholding tax on the withdrawal could be 20% (for the portion between $5,001 and $15,000), so $2,000 is withheld.
This $10,000 is added to your annual income, making it $60,000.
- If your effective tax rate (combining federal and provincial) on that total income is, say, 30%, you'd owe $18,000 in taxes on the $60,000.
- But, you've already paid some tax through withholding on the RRSP withdrawal and through payroll deductions on your employment income.
- If the total pre-paid tax (including the $2,000 withholding) is less than $18,000, you owe the difference. If it's more, you may get a refund.