Is 25% the Final Canadian Tax on Your RRSP After You Leave? (Section 217)

"Should I just eat the 25% or file under s.217?" is the right question, and a top-voted Reddit answer recently gave a $400,000 account holder the wrong answer to it: that the flat 25% was simply final, no return needed, nothing to consider. For some people that is true. For a retiree drawing down an RRSP in low-income years, it can be wrong by five figures over a retirement. The difference is one optional election that most people have never heard of.

The default: 25% RRSP non-resident withholding, and done

Once you are a non-resident of Canada, RRSP withdrawals stop going through the normal tax-return system. Instead they fall under Part XIII of the Income Tax Act: the payer withholds a flat 25% at source and remits it to the CRA [ITA s. 212(1)(l)]. You receive the net amount plus an NR4 slip recording the gross payment and the tax withheld. There are no graduated brackets, no deductions, no basic personal amount. One rate, applied to the gross.

Treaty countries can change that rate, most famously the 15% rate many treaties give periodic pension payments. Panama is not one of them: with no Canada-Panama tax treaty, the full statutory 25% applies to every RRSP payment, lump sum or periodic (what else the missing treaty changes: internal link: Day 10).

When 25% really is final

Part XIII is designed as a final tax. If you take the withdrawal, the payer withholds correctly, and you file nothing, your Canadian obligations on that income are complete. No return is required, and for many people none is worth filing. The flat 25% is a good deal whenever your graduated-rate tax on the same income would have been higher, which is typically true for large lump sums taken while you have other significant income. In those years, "eat the 25%" is not resignation; it is the right answer. The Reddit answer was not wrong about the mechanics. It was wrong to present them as the whole story, for everyone, at every income level.

The Section 217 election: when filing gets money back

Section 217 lets a non-resident voluntarily file a Canadian return for certain kinds of Canadian income, RRSP withdrawals among them, and have that income taxed at ordinary graduated rates instead of the flat 25% [ITA s. 217; CRA guidance]. One detail matters and is easy to miss: because a non-resident pays no provincial tax, the section 217 calculation applies the federal graduated rates plus a surtax of roughly 48% of the federal tax, charged in lieu of provincial tax [ITA s. 217; surtax for non-residents]. So "graduated rates" here means federal rates grossed up by that surtax, which is the figure that actually competes with the flat 25%, and in the vast majority of cases that is how the comparison plays out. If the result is lower than what was withheld, the difference comes back as a refund. If it is higher, you simply do not elect; the election only exists to help you. The return is due by June 30 of the following year, a deadline that quietly expires for people who never knew the option existed.

Two hypothetical years show the decision. Suppose Daniel, retired in Panama, withdraws $50,000 from his RRSP in a year with no other income. Withholding takes $12,500. Under a Section 217 election, that $50,000 is taxed at graduated rates with applicable credits, producing a Canadian tax bill in the rough vicinity of $8,000-$9,000. Electing recovers roughly $3,500-$4,500. Done every year of a slow drawdown, the election is worth tens of thousands over a retirement. Now suppose instead Daniel takes a $200,000 lump sum in a year he also has substantial other income. Graduated rates on that stack would exceed 25%, so he does not elect, and the withholding stands as final. Same person, same account, opposite answers, which is why the decision is a calculation, not a rule of thumb.

Lump sum vs periodic payments

The lump-sum versus periodic distinction matters twice. In treaty countries, it often decides whether the reduced 15% treaty rate applies, since treaties typically reserve it for periodic pension payments. From Panama, with no treaty, the withholding is 25% either way, so the distinction stops mattering at the withholding stage and starts mattering at the planning stage: a multi-year periodic drawdown spreads income across years, keeps each year's graduated-rate result low, and makes the Section 217 election repeatedly valuable. A single lump sum concentrates income into one year, usually pushes the graduated result above 25%, and kills the election's value for that year. Converting the RRSP to a RRIF changes the payment pattern and has its own consequences, worth modeling rather than assuming.

The bottom line for Canadians relocating to Panama: once you stack the federal graduated rates and the roughly 48% non-resident surtax against the flat 25% on gross, the 25% withholding turns out, in most cases, to be the more advantageous outcome. Section 217 still wins in genuinely low-income years and deserves to be run every year, but for the typical Panama-bound retiree the default 25% is usually hard to beat. As always, it is a calculation on your own numbers, not a slogan.

No Canada-Panama treaty: what that changes

The missing treaty shapes this whole topic. No reduced periodic rate: 25% on everything. No treaty tie-breaker if your residency status is contested, which makes a clean, documented exit more important, not less (the departure itself has its own tax event: internal link: Day 7). And no treaty relief on other Canadian-source income either, dividends, certain interest and pensions all face their statutory withholding. None of this makes Panama a bad choice. It makes the Canadian side of the plan, the drawdown schedule, the Section 217 habit, the sequencing of accounts (what happens to the TFSA is its own story: internal link: Day 18), the part you design rather than discover. A pre-departure review models the whole drawdown before the first dollar is withheld.

FAQ

Is the 25% withholding on my RRSP final as a non-resident?

By default, yes. Part XIII withholding is a final tax if you file nothing. The Section 217 election can reduce it in low-income years, and you only use it when it helps [ITA s. 217].

What is the Section 217 election?

A voluntary Canadian return for certain Canadian income, including RRSP withdrawals, taxed at graduated rates instead of flat withholding. If that produces less tax than was withheld, the difference is refunded. The return is due June 30 of the following year.

Does the Canada-US 15% treaty rate apply from Panama?

No. Treaty rates belong to treaty residents. Canada and Panama have no tax treaty, so the statutory 25% applies to RRSP payments to Panama residents, periodic or not.

What is an NR4 slip?

The CRA information slip a Canadian payer issues to a non-resident, recording gross amounts paid and Part XIII tax withheld. It is the document you use for any Section 217 filing and for foreign tax credit claims elsewhere.

Should I withdraw my RRSP before or after leaving Canada?

It depends on your bracket each side of the move, the size of the account, and the drawdown horizon. Before departure means graduated rates as a resident; after means 25% withholding with the s. 217 option. The right answer is a calculation across both, made before you leave.

This article is general information, not tax or legal advice. Your facts decide your outcome, and that is what a review is for.