Jean-Claude, 68, retired, does not receive a pension fund from an employer and can only count on state pensions. Recently widowed, he is finding it increasingly difficult to meet the expenses he used to pay with his wife.
Rent, electricity, telephone, groceries, repairs to his old car… Jean-Claude “can’t handle music anymore”.
In 2021, after managing to amass $89,000 in RRSPs during his active life, he decides to withdraw some of it to pay off debts on his credit cards as well as the debts of his now-deceased spouse.
However, by paying out $50,000 from his RRSPs, of which he will only receive about $37,500 net, he will cause a financial catastrophe that will leave him in insurmountable debt.
“I never thought that this withdrawal would cause me so much trouble. I just wanted to pay off my debts and that caused me even more problems,” he laments.
chain reaction
Because by paying out his RRSPs, Jean-Claude was unaware of the impact it would have on his income and therefore his tax bill.
“By withdrawing a portion of his RRSPs, he increased his annual income, which generated more than $17,000 in taxes to be paid,” said Émilie Nadon, licensed bankruptcy practitioner and senior director of financial recovery at Raymond Chabot.
Worse, that increase in income deprived him of the guaranteed income supplement for 2022, and he even has to repay a $3,251 overpayment from GIS for 2021.
So, in total, he owes $56,700, including his credit card balance and line of credit. With only $1,649 a month in pensions and other credit, he was unable to pay his ongoing expenses, much less to pay off his debts.
Paying Out Your RRSPs: Think About It
After analyzing her file, Émilie Nadon offered her two options: bankruptcy or a consumer filing.
“He refused to go bankrupt out of pride. He also wanted to be able to repay his creditors as much as possible, even if it wasn’t everything. So he pays a certain amount for 60 months and then he is released from his tax debts, cards and line of credit,” says Émilie Nadon.
Until then, his children will help him financially because he cannot make ends meet.
She advises indebted individuals who are thinking of withdrawing their RRSPs to get out of debt to carefully consider the tax implications that withdrawal could have on their financial situation. Think about it if a hefty tax bill is generated in return.
Émilie Nadon states that when a loved one dies, it is safer to consult a notary to assess your options if the deceased was in debt. In certain situations it is undoubtedly preferable to refuse the inheritance in order not to inherit the debt at the same time.
His financial situation
Financial assets :
- MSRP (exempt): $39,000
- 1997 Hyundai Accent: No value
consumer debt:
Credit Cards: $21,450
Credit Line: $15,000
Taxes due: $17,004
Overpaid Guaranteed Income Supplement: $3,251
TOTAL DEBT: $56,705
Monthly income :
QPP: $836
Old Age Pension: $687
Solidarity Credit: $87
GST Credit: $39
TOTAL REVENUE: $1649
Monthly Expenses: $2,109 (includes rent, phone, electricity, gas, groceries, license and registration, vehicle repairs, etc.)
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