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Taxes owing vs. taxes withheld

Income Splitting

Lower minimum amounts

Pension credit

Using your RRSP overcontribution

RRIFs and estate planning

Importance of an estate plan

Successor annuitant designation

Probate Fees

Charitable giving

Life insurance

Borrowing to reduce RRIF tax

And don't forget...
The Companion Advisor: Taxes & Estates
The RRIF basics

Most individuals will convert RRSPs into either a Registered Retirement Income Fund (RRIF) or an annuity by December 31 of the year they turn 71 (revised in 2007 from aged 69 to 71 therfore, please read any notation of age 69 as age 71).

Those who choose not to convert or collapse their RRSPs before the December 31 deadline will be required to report the entire value of the RRSP as taxable income. For most, this result would be financially disastrous as much of the RRSP will be taxed at top personal rates (usually in excess of 50%).

While both the annuity and the RRIF options provide tax deferral, the most popular choice will undoubtedly be RRIFs, for many of the same reasons that people have been flocking to RRSPs for many years.

Annuities have been losing their appeal lately due to the fact that the payments over one's lifetime will be based on today's low interest rates. Annuities don't provide any flexibility or control over the investments. Also, there is a risk that, in the long run, inflation will erode the purchasing power of the annuity payments. One of the main advantages of annuities, however, is that you will never run out of capital. This is not the case with a RRIF. Your RRIF balance, however, can be protected with proper planning.

Think of your RRIF as simply an RRSP that you cannot contribute to and requires you to withdraw amounts each year. You can withdraw any amount as long as a minimum withdrawal is made annually. The withdrawals are taxed as regular income each year. A RRIF is often described as a reverse RRSP. Here are some quick facts:

  • You can exercise the same degree of control with the investments in a RRIF as with an RRSP. By using a self-directed RRIF, you can also switch between fixed income, stocks or mutual funds to adapt to changing market conditions. This gives you an edge on inflation and the best fighting chance against erosion of capital.
  • Most fund companies can convert an RRSP to a RRIF with very little administrative red tape and some no longer charge fees for the conversion of the RRIF itself.
  • You are only taxed on the RRIF income you withdraw. Amounts not withdrawn remain in the plan and are sheltered from tax.
  • The minimum annual withdrawal is based on your age until you turn 71 and on a percentage of your RRIF value after that year (see table at the end).
  • Any withdrawals above the minimum will be subject to withholding tax. You can delay the tax payable on the RRIF, therefore, by simply withdrawing the minimum amount each year and leaving the remainder to be invested.
  • As with RRSPs, 30 per cent of the RRIF can be invested in foreign property.

There are more planning opportunities available with a RRIF as it can form an integral part of your overall estate plan. (See below.)

Taxes owing vs. taxes withheld vs. tax planning

There has been a lot of press lately highlighting the fact that without proper planning, a substantial portion of your RRIF balance can be eroded by taxes. Let's review how these taxes are calculated and what they represent.

RRIF withdrawals will attract withholding tax for any amounts above the minimum annual limits. This withholding mechanism does not represent the final tax liability on the RRIF withdrawals. The ultimate tax liability depends on an individual's marginal tax rate and the tax withheld is simply a deposit used towards this final tax bill.

For example, say an individual is in the 50 per cent tax bracket and withdraws the minimum amount such that no taxes have been withheld. Many mistakenly believe that this individual will not pay any tax on the RRIF withdrawal because he/she has chosen the minimum amount. In fact, a 50 per cent tax bracket means that 50 per cent of the RRIF withdrawal will be lost to taxes when the tax return is filed.

So what can be done? Most RRIF tax plans advocate keeping the RRIF withdrawals to the lowest amount possible. This is good tax planning because it will minimize your taxable income and possibly the tax rate. For example, at the lowest levels of income, no taxes are payable because of the impact of personal tax credits. Even if there is some income, the key is to ensure the RRIF income does not elevate you into a higher tax bracket. This type of RRIF planning can be better described as "marginal tax planning".

Another way to look at RRIF tax is to think of it as a repayment of an interest free loan from Canada Customs and Revenue Agency (CCRA, formerly Revenue Canada). Basically, funds were advanced to you via a tax refund when you made an RRSP contribution and you also enjoyed the tax free growth of investments in your RRSP. The CCRA is simply requesting payment of this tax. To the extent that we can pay this tax on the RRIF withdrawals at a lower marginal tax rate when compared to the marginal tax rate that applied when we made the RRSP contribution, then we have not only technically received an interest free loan but we will also realize a tax saving.

Income splitting

One of the most popular and acceptable forms of income splitting can be accomplished through spousal RRSPs.

In a typical example, the spouse with the higher tax rate contributes to a spousal RRSP and receives a refund calculated at this higher tax rate. The lower income spouse will later roll the RRSP into a RRIF and the withdrawals will be taxed at that lower tax rate. In many provinces, the difference between the highest and lowest tax rates is approximately 25 per cent. This translates to $2,500 of tax savings for every $10,000 RRSP Contribution.

There is a further advantage to spousal RRSPs. While there are penalty provisions in the tax rules that require amounts contributed to a spousal RRSP to not be withdrawn for two years. This holding period does not apply to the minimum amount withdrawn from a RRIF.

Lower minimum amounts

One of the easiest methods of minimizing the tax rate paid on RRIF withdrawals is to reduce the minimum amount. Of course, this assumes you do not need RRIF income In excess of the minimum to maintain your standard of living.

The minimum amount is based on your age, or if you elect, your spouse's age. Therefore, you can reduce the annual minimum withdrawals by choosing the younger spouse's age. You can also reduce the minimum amount by purchasing a RRIF in any year prior to the year you turn 69. This decision, of course, should not be made in isolation and should be reviewed as part of the overall retirement plan. For example, it should be seriously considered when an individual is under the age of 69 and in a relatively low tax bracket.

Pension credit

RRIF withdrawals qualify for the $1,000 pension tax credit for those 65 years of age or older. If there are no other sources of pension income, it may be advisable to create a small RRIF and take advantage of this credit. For example, if you are 65 years old, a $20,000 RRIF would generate approximately $ 1,000 of minimum withdrawals annually. This plan works especially well if a spousal RRSP is used in cases where the spouse has not used his/her pension credit.

Using your RRSP overcontribution

There is a great opportunity for tax planning for individuals who are turning 69 and have "earned income" (generally including salaries and wages, self-employment income, and rental income). Let's review an example of how this works.

Michelle turns 69 years old in 2001, has maximized her RRSP contributions and has earned income of $75,000 this year. On January 1, 2002, Michelle will have RRSP contribution room beginning January 1, 2002 equal to $13,500 (18% of $75,000). The problem is she can't make an RRSP contribution after December 31 of this year. The "plan" would have her make a contribution in December of this year, before the RRSP is converted into a RRIF.

This results in an overcontribution and, as a result, a one per cent penalty per month will apply on the overcontribution above $2,000. In Michelle's case, an $11,500 overcontribution will result in a penalty of $115 for December.

On January 1, 2002, the overcontribution disappears since she will have $13,500 in contribution room available because of her 2001 earned income. As a result, she will no longer have to calculate a penalty. The result is that this RRSP contribution is deductible on her 2002 tax return (provided she has income to report), with a saving (assuming a 50 per cent tax rate) of $6,750. Not a bad return for a cost of $ 115!

If you expect to have earned income past age 69, you may want to consider making an even larger overcontribution before your RRSP matures as long as it is no more than 18% of your estimated earned income. You will incur more in penalties but the benefits could be substantial.

RRIFs and estate planning

One of the most significant advantages of RRIFs over annuities is the ability to use the RRIF as part of your overall estate plan. You have the complete flexibility as to which of your heirs or which organization (for example, a charity) will benefit from the value of your RRIF when you die. There is only one problem with this plan, the Canada Customs and Revenue Agency wants a piece of the action.

Unless the RRIF is passed onto a surviving spouse or a financially dependent child or grandchild, your death will result in the entire value of the RRIF being included in your final tax return. Because there are many other "income inclusions" resulting from death, many people are elevated into the highest marginal rates in this final tax return (ironically, perhaps for the first time in their lives). This means that there is a risk that half of the RRIF value will go to an unwanted beneficiary: the CCRA.

While the tax on a RRIF can never really be avoided, simple tax planning will either defer the tax for a few years or result in the application of a lower marginal tax rate.

The entire tax can be deferred if the RRIF passes to a spouse or a financially dependent child or grandchild under 18 years of age. A spouse can roll the RRIF into a RRSP or a RRIF depending on his/her age. A child must purchase an annuity that will be taxed in the child's hands as payments are received and is collapsed at age 18.

Importance of a proper estate plan

The RRIF beneficiary designation, therefore, is the single most important factor in determining how much the CCRA will collect. Because of this, it is astonishing to consider how many people make this decision without regard to the overall estate plan or simply forget to designate a beneficiary.

Let's review a simple example of the importance of having a plan. Mr. Lee, a widower, wants his two adult children to share in his $400,000 estate. He leaves $200,000 cash to his son and his $200,000 RRIF to his daughter thinking that he has been fair to both. Unfortunately, this is not the case since the RRIF will attract taxes while the cash won't. Mr. Lee would have benefited from the advice of a qualified expert and ensured his children would be treated equally on his death.

Successor annuitant designation

When naming your spouse as beneficiary, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the "successor annuitant" to the RRIF.

If a successor annuitant election is not made, the deceased's RRIF will be collapsed causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse. There may be several disadvantages to this. It may not be a good time to sell the investments in the RRIF or there may also be selling costs to consider. Also, there is the issue of preparing all of the paperwork at most likely a difficult and stressful time for the surviving spouse.

The successor annuitant designation is effortless. The spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this.

Probate fees

If a beneficiary is designated in the RRIF contract, then the RRIF value will not be included in the calculation of probate fees on death. While probate fees are not as significant as income taxes, such a simple step will ensure that there is more available for your beneficiaries.

Charitable giving

Recent changes to the charitable donation tax rules will likely result in a large windfall for charities over the next few years.

The most significant change affecting estate planning relates to the ability to receive a credit of up to 100 per cent of taxable income for donations made through a will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his/her will.

This is a great opportunity for individuals to donate money to their favorite charity that could have otherwise gone to the CCRA (in the form of taxes).

Note:CRA guidelines state "you may claim a charitable donation tax credit on the deceased persons' return for a donation of a direct distribution of proceeds to a qualified donee who is the designated beneficiary of a RRSP, including a group RRSP, a RRIF, or a life insurance policy including a group life insurance policy". Added to article June 2010.

Life Insurance

The use of insurance to pay for taxes on death is becoming increasingly popular. If structured properly, insurance can preserve the value of a RRIF for the beneficiaries. Basically, the idea is to have the insurance proceeds replace the taxes paid by the estate.

As this topic is beyond the scope of this tax tip, our best advice for anyone who wants to investigate the use of insurance is to seek out the assistance of a qualified expert.

If insurance is an option, consideration should be given to having the beneficiaries pay the premiums. They are, in effect, preserving their inheritance.

Borrowing to reduce RRIF tax

Some RRIF "experts" are promoting the use of leverage to eliminate the tax on RRIFs.

In this plan, money is borrowed and invested in mutual funds outside a RRIF. The amount of the loan is sufficient to ensure that the loan interest payments equal the withdrawals from a RRIF. This ensures you won't be taxed on the RRIF withdrawals as long as the interest expense is deductible for tax purposes.

As with most tax plans of this nature, they work like magic for some but are not appropriate for everyone. Anyone contemplating this plan should ensure that using leverage is appropriate for their level of risk tolerance and investment objectives.

And don't forget...

The RRSP contribution deadline for those turning 69 in a particular year is December 31 of that year. If contributing to a spousal plan, the deadline is December 31 of the year the spouse turns 69.

Tax installments may be required if an individual's tax liability (the difference between the taxes payable for the year and taxes withheld) exceed $2,000 in the current year or any of the two preceding years. Revenue Canada will send out notices if installments are required.

If the decision between a RRIF or an annuity is a difficult one, remember that an annuity can be purchased at any time in the future. This is useful for those who want to have the benefits of a RRIF now and convert to an annuity at a later date. Converting from an annuity to a RRIF, however, is not possible.

To calculate the minimum amount

Age at
January 1st


Age at
January 1st

65 4.00% 80 8.75%
66 4.17% 81 8.99%
67 4.35% 82 9.27%
68 4.55% 83 9.58%
69 4.76% 84 9.93%
70 5.00% 85 10.33%
71 7.38% 86 10.79%
72 7.48% 87 11.33%
73 7.59% 88 11.96%
74 7.71% 89 12.71%
75 7.85% 90 13.62%
76 7.99% 91 14.73%
77 8.15% 92 16.12%
78 8.33% 93 17.92%
79 8.53% 94+ 20.00%

Note: The first withdrawal takes place in the year following the year the plan is set up. The above percentages are based on the RRIF value on January 1 of the year the withdrawals are made.


All other
Up to $5,000 21% 10%
$5,001-$15,000 30% 20%
Over $15,000 35% 30%

Note: The withholding tax applies only on the amount of the RRIF withdrawal above the yearly minimum.

Notice: Clarington Mutual Funds and Fiscal Agents Financial Services Group are not engaged in rendering accounting, legal or other professional services or advice. The comments in this Tax Tip are not intended, nor should they be relied upon, to replace specific professional advice.

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© 1997, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.


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The Money Management Newsletter:
Taxes and Estate Planning