Locked-in plans require careful thought

Employees who retire, terminate their employment early, or find their pension plan being discontinued need to make some important decisions.  Some pension plans are being closed and employees have the “lump sum” or “annuity” option.  Other people are faced with a difficult choice, which we discussed in our last article.  Do you take a lump sum of money from the pension today, purchase an annuity, or wait to receive a monthly cheque at retirement?

The lump sum option allows the fully vested (owned) pension benefits to be transferred to a locked-in registered plan.  This article focuses on lump sum transfers to locked-in accounts.

So, what is a locked-in account?  This type of investment account is registered and is one where the plan issuer signs an agreement with your employer to “lock-in” your pension plan proceeds until retirement.  A lump sum from your pension plan is transferred into the registered locked-in investment account.  The age at which the funds may be released, and to what uses they may be put, vary with the pension legislation governing the plan.  Any amounts earned by the plan also become locked-in.

Withdrawals are generally not allowed from Locked-in Registered Savings Plans (LRSP) or Locked-In Retirement Accounts (LIRA), except in limited circumstances such as shortened life expectancy, small balance or financial hardship.  The governing legislation controls these funds, even though the employee can invest them as they wish (similar to an RRSP).  Some provinces have been changing their legislation with respect to locked-in accounts.

Governing Jurisdiction

Knowing the jurisdiction of your pension will assist your financial advisor in setting up the correct account.  In B.C., locked-in accounts are generally referred to as Locked-in Registered Savings Plans (LRSP).  In Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Ontario, Newfoundland, and Nova Scotia these accounts are referred to as Locked-In Retirement Accounts (LIRA).

Company pension plans in Canada can be established and registered under either provincial or federal legislation. The legislation governing an individual’s funds must be established upon opening the locked-in plan, as this will determine what type of plan will be opened. The pension plan administrator or the financial institution transferring the funds should provide the information necessary to correctly identify the jurisdiction governing the funds.

Provincially Regulated Pension Plans

Most pension plans are established under provincial legislation. For all provinces and territories except Quebec, the province in which the client resides on the date they terminate employment determines the governing jurisdiction, which may in fact differ from the jurisdiction in which the company is registered.

For example, a person living in Ontario the day they terminate their employment will have their funds under Ontario jurisdiction. Even if this person moves to British Columbia and transfers their pension funds, the client must open a LIRA (the name for a locked-in plan for Ontario) and not an LRSP because the funds are still under Ontario jurisdiction.

Federally Regulated Pension Plans

For federally regulated pension plans, the person’s governing jurisdiction is Canada regardless of place of residence. This applies for crown corporations or companies under federal charter.  A person living in Alberta (which offers LIRAs) who has federally regulated funds will be required to open an LRSP, since federally regulated funds require LRSPs and not LIRAs.

Maturity Options

The earliest age in which you may transfer your LRSP or LIRA into an income account (LRIF or LIF) varies by province. The governing jurisdiction also dictates the minimum age when a client can transfer their locked-in funds.  Similar to an RRSP, locked-in accounts must be converted into an “income account” or a life annuity in the year individuals turn 69.   The 2007 Federal budget proposes to extend this conversion to when the taxpayer reaches the age of 71.


The minimum and maximum withdrawal amount will fluctuate from year to year and is based on the year-end value.  The year-to-year amount will vary depending on the amount of money you withdraw, the income your plan earned and any market fluctuations that may occur.  A LRIF/LIF is similar to a RRIF in that the holder is required to receive a minimum payment out of the plan each year.  The minimum payment levels are calculated using the same method used for RRIF payments.  Additionally, these accounts are subjected to a maximum withdrawal limit. The maximum amount is established by a formula, which takes into account a discount factor and the person’s age.

In the first year an LRIF/LIF is opened, there is no minimum withdrawal required; however there is still a maximum allowable payment. This maximum is pro-rated for the number of months, including the month of transfer into the plan that is remaining in the year.

Transfer Process

Moving from a Registered Pension Plan to a locked-in plan is usually straightforward.  The first step begins with opening a self-directed locked-in registered account.  The institution name and account number will be required to complete the forms provided by your employer.  Typical forms may include a cover letter with the estimated pension value, Canada Revenue Agency forms (i.e. T2151 for direct transfer and T2037 for purchase of annuity) and a locked-in agreement.  Your investment advisor should be able to assist you with completing these forms in conjunction with setting up the appropriate account.

Cash Transfer

Lump sum pension transfers to a locked-in account generally take two to four weeks and come in as cash.  During the transfer period we recommend that individuals meet with their advisor and begin planning their investment portfolio.  For many people a lump sum transfer from their registered pension plan represents the most significant portion of their retirement savings.

Before making a final decision we recommend that you speak with your professional advisors.


Looking at retirement options

Retiring employees and those who change careers or are displaced for various reasons are often faced with some difficult decisions, because how they deal with pension plans can have consequences for their retirement

Decisions can be easier if people understand their options clearly and the resources available.  Some may not have a choice with respect to their pension.  But for others the confusion begins when you’re given various options.  Many companies offer employees a choice between taking their pension in the form of a monthly payment or a single lump sum payment.   The following summarizes the two main types of pension plans – defined contribution plan and defined benefit plan (also known as money purchase).

Defined Contribution Plan

The contributions into this type of pension plan are established by formula or contract.  Many defined contribution plans require the employer and/or employee to contribute a percentage of an employee’s salary each month into the pension fund.  The employer does not make a promise with respect to the amount of retirement benefits.  The key point to take away is that the employee bears the risk of pension fund performance in a defined contribution plan.  We encourage individuals to take advantage of any pension matching your employer may offer.  With this type of plan employees are generally given a choice amongst different types of investments (i.e. conservative, balanced, aggressive).

Defined Benefit Plan

With a defined benefit plan, the employer is committed to providing a specified retirement benefit.  The benefit is established by a formula, which normally takes into account the employee’s years of service, average salary and some percentage amount (usually between one to two per cent). The key point to take away is that the employer bears the risk of pension fund performance.  Another key point is that the employee is able to calculate their benefit with more certainty then a defined contribution plan.

Monthly amount

Those with a defined benefit plan know with more certainty what their monthly payment amount will be, providing benefits for financial planning.  The end benefit is less known for people with defined contribution plans.  A key question to ask yourself:  “Is the pension your primary asset or main source to fund retirement?”  If the answer is yes, then we would encourage most people to take the monthly pension.  If your pension is not your primarily asset or you have multiple sources of income then leaving the fund and receiving a lump-sum may make sense.

Lump Sum

Choosing this option means that the monthly pension is forfeited.  For defined benefit plans, the intent of the lump sum option is to give the employee what is known as the present value (or commuted value) of the monthly pension amounts that would otherwise be received.  The calculation, which is usually made by an actuary, makes assumptions about life expectancy and inflation and uses a discount factor to determine what the lump sum equivalent should be. The lump sum amount is meant to represent the effect of receiving a lifetime worth of pension payments (from retirement to death) all at once.  It is important to note that individuals that leave the pension and receive a lump sum, may purchase an annuity with some or all of these funds.

Helping You Decide

The following are some factors to consider when deciding whether to stay with the pension, purchase an annuity or take the lump sum.

Retirement Planning:  Determining what you would like from your retirement may assist you in making the decision.

  • Is the pension your primary asset?
  • Would you lose sleep worrying about managing a lump sum?
  • Will the fixed monthly amount cover your monthly cash flow needs?
  • Are you concerned about outliving your savings?
  • Do you like the idea of managing your finances at retirement?
  • What other sources of income do you have to fund your retirement?

Investments:  Some people may want the freedom to choose their own investments while others may choose the hands off approach.

  • How are the funds currently being managed?
  • If you chose the lump sum would you manage the funds yourself or obtain assistance from a financial advisor?
  • How much risk are you willing to take with your investments?

Pension Benefits:  Many employers provide individuals that choose to stay with the pension a few other benefits that should be factored in.

  • Do you have a defined benefit plan or a defined contribution plan?
  • How long have you been a member of the pension plan and how is the pension formula calculated?
  • Is the monthly pension indexed?
  • Does the monthly pension option provide medical, dental or life insurance coverage?

Tax Consequences:  Major decisions relating to your pension should be discussed with your accountant.

  • Are there any immediate tax consequences?
  • Are any retiring allowances transferable to your RPP or RRSP?
  • How will the choice of options affect future income taxes?
  • Is it possible to split any income? (Note:  the Federal Finance Minister’s “Tax Fairness Plan” announced on October 31, 2006 outlines what income is eligible to be split)
  • Are you single, married or living common-law?
  • Does your pension provide a benefit to your surviving spouse (if applicable)?
  • Is leaving an estate important to you?
  • How close are you to retirement?
  • Are you in good or poor health?
  • Are you likely to get full value from a monthly pension?

Estate Planning:  Individuals interested in leaving an estate may feel the lump sum offers more advantages.

Life Expectancy:  This is perhaps the most important component to the decision making process.  Most people normally begin the decision process by doing a few calculations.  With every calculation people would have to make assumptions with respect to life expectancy.  If you were to live to an old age, significant value may be obtained by leaving your funds in a defined benefit plan or by purchasing an annuity with lump sum proceeds.

Spending the time to think about the above issues will allow you to have a more productive discussion with your professional advisors prior to making any decisions.  The choice people make with respect to their pension is one of the most important financial decisions they need to make.


Borrowing tips for your RRSP

As the deadline for RRSP season approaches many investors may be asking if they should borrow to invest in their RRSP.  The answer really depends on your financial situation.  If you are contemplating borrowing to make an RRSP contribution we recommend you consider the following:

Term of the Loan

Interest rates are currently relatively low making borrowing for an RRSP fairly attractive.  Most financial institutions provide RRSP loans; however, the rates can vary considerably.  The better the terms of the loan the more attractive borrowing becomes.  Some individuals may choose to utilize their lines of credit, which may have favourable rates and the greater flexibility for repayment.  Business owners may want to utilize a RRSP loan rather than their lines of credit, which have been set up for emergencies.

Length of Loan

The general rule-of-thumb is that the quicker you pay back the RRSP loan the more advantageous it is.  Short-term loans of less than a year may have minimal interest costs and may assist those with fluctuating income.  The more difficult question is when do larger, longer-term loans make sense?  Long-term loans are often used to catch up on a significant amount of unused contribution room.  With longer-term loans it is even more important to weigh the other factors in this article.

Carry Forward Room

Prior to 1991, individuals lost their RRSP deduction room if they did not fully utilize it in a given year.  The good news is that unused RRSP contribution room may now be carried forward indefinitely and includes any unused RRSP deduction room accumulated after 1990.  The bad news is that if you wait too long then you’re missing the biggest benefit of an RRSP – the compounding growth that may occur on a tax deferred basis.  Regardless of the timing, we encourage most individuals to utilize their carry forward room prior to retirement.

Taxable Income

The greater an individual’s taxable income the more it makes senses to maximize RRSP contributions.  Reducing your tax liability is often a motivating factor for many individuals when making an RRSP contribution.  Individuals that are in the higher marginal income tax bracket should definitely speak with their professional advisor.  Even if you do not have the cash on hand to make an RRSP contribution it may make sense to borrow the funds to make a contribution before March 1.


Future Income

Individuals who are considered “employees” may receive a relatively stable monthly income that is predictable from year to year.  Business owners and entrepreneurs generally have fluctuating income resulting in a higher tax bracket one year and a lower tax bracket in another.  RRSP contributions may provide a unique way to smooth your taxable income.  Individuals may have one time spikes in income from selling a real estate investment or other type of investment that generates a significant capital gain.  Planning to utilize a portion of your RRSP contribution room to offset this future liability may make sense.

Interest Costs

Interest on a loan for your RRSP is not tax deductible. However, money borrowed to earn non-registered investment income may be deductible. This is why it may make sense to use extra cash to contribute to your RRSP and borrowed funds for non-registered investments.  If you have non-registered investments and are considering an RRSP loan you should meet with your accountant first.  There may be a way you can arrange your finances to ensure that more interest costs are deductible.

Return on Investment

This is perhaps the most difficult component for people to analyze.  If you knew with certainty the investment returns you would obtain then the decision may be easier.  Let’s step back and disregard how your investments may perform in the near term.  An RRSP is normally established with a long-term time horizon.  The focus should be on picking the highest quality investments that will prevail in the long run, regardless of market volatility.  We understand that many people scramble to make a last minute contribution to their RRSP.  This is okay provided care is taken when making the investment decision.  If the energy is focused on picking the best investments and the best advisor then an RRSP loan may make sense.

Simple Strategy

Last year we highlighted a simple strategy that investors could adopt to ease the cash flow burden of trying to come up with their RRSP contribution limit every tax season.  Let’s consider an investor with a $16,000 RRSP contribution limit for the upcoming year.  For this investor we recommend multiplying their RRSP deduction limit by 75 per cent and dividing by 12 to obtain the monthly pre-authorized contribution amount of $1,000.  In either January or February of the following year, the investor could utilize their line of credit or obtain a short term RRSP loan to contribute another $4,000 to top up to the maximum.  After filing the tax return, the combined RRSP contributions of $16,000 may provide enough of a tax refund to pay off the short-term loan or line of credit.  This of course assumes that sufficient tax was withheld on other sources of income throughout the year.

The above strategy is a combination of “automatic” savings by paying yourself monthly and a “forced” short-term loan strategy that creates the discipline to pay off the loan as soon as possible.  This combination has worked well for many successful investors.


If you were to die today

The government stands to inherit nearly half of your investments, so deferring tax liability is essential. 

Throughout our working lives we have reduced our annual tax bill by making RRSP contributions.  An important item for people to understand is the tax consequences when withdrawals are made and also the tax consequences upon death.

Withdrawals from registered accounts are generally considered taxable income in the year the payments are made.   Over time your account may have generated different types of income including dividend income, interest income and capital gains.  All of this income would have been deferred.  All withdrawals are considered ordinary income taxed at your full marginal tax rate regardless of the original type of income.

When a registered account owner dies, the total value of their registered account is included in the owner’s final tax return.  The final tax return is often referred to as a terminal tax return.  The proceeds will be taxed at the owner’s marginal tax rate.  The highest marginal tax rate (British Columbia and federal) is currently 43.7 per cent.  An individual that has a $500,000 registered account may have to pay $218,500 of that amount to Canada Revenue Agency in taxes.  These taxes must be paid out of the estate.  CRA considers you to have cashed in all of your registered accounts in the year of death.  Paying nearly 44 per cent of your retirement savings to CRA is something investors should strive to avoid.  There are a few situations where this tax liability can be deferred or possibly reduced.


Registered assets can be transferred from the deceased to their spouse or common law spouse on a tax-free rollover basis provided they are named as beneficiary.  The rollover would be transferred into the spouse’s registered account provided they have one.  If the spouse does not have a registered account they are able to establish one.  The registered assets are brought into income on the spouse’s return and offset by a tax receipt for the same amount.  This rollover allows the funds to continue growing on a tax-deferred basis.  The rollover does not affect the spouse’s RRSP contribution room.

If your spouse is specifically named the beneficiary of your RRIF account then you should designate your spouse as a “successor annuitant.”  As a successor annuitant, the surviving spouse will receive the remaining RRIF payment(s) if applicable and obtain immediate ownership of the registered account on death.  These assets will bypass the estate and reduce probate costs.  You should discuss all estate settlement issues with your legal advisors and financial institution to obtain a complete understanding.

Child or Grandchild

Registered assets may be passed onto a financially dependent child or grandchild provided you have named them the beneficiary of your registered account.  In order to be financially dependent, the child or grandchild’s income must not exceed the basic personal exemption amount.  A child that is under 18 is able to receive an income-producing annuity that pays the full amount until the child is 18.  A child of any age that is financially dependent on you is able to receive the proceeds of your registered account as a refund of premiums.  This essentially means that the tax will be paid at the child’s marginal tax rate, likely to be considerably lower than your marginal tax rate on the terminal tax return.  If the child is dependent on you by reason of physical or mental infirmity then the registered account may be rolled over tax-free into the disabled child’s own registered account.  With disabled children there are no immediate tax consequences and there is no requirement to purchase an annuity.  You may want to discuss the practical issues relating to having your registered account transferred to a disabled child.


Care should be taken when you select the beneficiary or beneficiaries of your registered accounts.  If you name a beneficiary that does not qualify for one of the preferential tax treatments listed above then it could cause some problems for the other beneficiaries of your estate.  An example may be naming your brother as the beneficiary of your RRSP and your children as beneficiaries of the balance of your estate.  In this example, the brother would receive the full RRSP assets and the tax bill would have to be paid by the estate, reducing the amount your children would receive.

Important Points

Every individual situation is different and we encourage individuals to obtain professional advice.  Below we have listed a few general ideas and techniques that you may want to consider in your attempt to reduce a large tax bill:

  • Pension Credit – you should determine if you are able to utilize the enhanced pension tax credit increased from $1,000 to $2,000 in the last federal budget.  If you are 65 or older, then certain withdrawals from registered accounts may qualify for this credit.  For couples this credit may be claimed twice – effectively allowing some couples to withdraw up to $4,000 per year from their registered accounts tax-free.
  • Single or Widowed – single and widowed individuals will incur more risk with respect to the likelihood of paying a large tax bill.   Single and widowed individuals should understand the tax consequences of them dying as no tax deferrals are available.
  • Charitable Giving – one of the most effective ways to reduce taxes in your death is through charitable giving.  Those with charitable intentions should meet with their professional advisors to assess the overall tax bill after planned charitable donations are taken into account.
  • Life Insurance – one commonly used strategy is for individuals to purchase life insurance to cover this future tax liability.  The tax liability created upon death coincides conveniently with the life insurance proceeds.  This would enable individuals to name specific beneficiaries on their registered account without the other beneficiaries of the estate having to cover the tax liability.
  • Estate as Beneficiary – if you name your estate the beneficiary of your registered account then probate fees will apply.  An up-to-date will provides guidance on the distribution of your estate.
  • Life Expectancy – Individuals who live a long healthy life will likely be able to diminish their registered accounts over time as planned.  Ensuring your lifestyle is suitable to a longer life expectancy is the easiest way to defer and minimize tax.

Individuals should ask their professional advisor to estimate the tax your estate would have to pay if you were to die today.  This will begin a conversation that may allow you to create a strategy that reduces the impact of final taxes on your estate and throughout your lifetime.


Annuities ensure you won’t outlive your savings

Investors who are turning 69 that are looking to generate retirement income have a few options with respect to their maturing Registered Retirement Savings Plan (RRSP). One is to purchase an annuity that will provide you with a steady stream of income. Individuals intrigued by this option should obtain an understanding of the features and the types of annuities available.

An annuity allows you to invest a lump sum with an insurance company in return for a predetermined income stream. Income received from an annuity purchased with registered assets is 100% taxable, as is the case with any income drawn from a registered account.


Individuals who purchase life annuities will receive an income for the remainder of their lives. This is wonderful if you live to an old age. But what happens to your investment should you die within a short period after paying this lump sum amount for a lifetime of income? To protect against such a loss, you can add a minimum guarantee to the payment period (normally 5, 10, 15, or 20 years). If you, the annuitant, dies, your spouse may elect to have the payments continued. Otherwise, a lump sum, determined by a present value calculation, would be paid. The maximum guarantee period, however, cannot extend beyond age 90. Of course there is a catch – the greater the guarantee period, the lower your payment will be.

There are three general kinds of annuities that are purchased from registered plans:

Term-Certain to Age 90

  • Payable to you or your beneficiaries, until the annuitant reaches age 90.
  • Regular payments can be monthly, quarterly, semi-annually, or annually.
  • Payment amounts are determined at the time of purchase.

Single Life Annuities

  • Provides you a guaranteed income for life regardless of the age to which you live.
  • May purchase an annuity with guarantee periods to a maximum of age 90 where the payments are guaranteed for the latter of the guaranteed period or your lifetime (if death occurs during the guaranteed period, the commuted value will be paid to the beneficiary).
  • With the exception of annuities purchased with a guaranteed period, upon death of the annuitant, payments will terminate, with zero value going to the beneficiaries.
  • Payments are generally level for the remainder of your life or can be indexed at a pre-selected rate.

Joint and Last Survivor Life Annuities

  • Payable as long as either you or your spouse is alive.
  • Provides guaranteed income for life for you and your spouse.
  • Similar to a single life, you can select a guarantee period and payments are guaranteed for the latter of the guaranteed period or life for you and your spouse.
  • If both you and your spouse die during the guaranteed period, the commuted value will be paid to your beneficiary.
  • You also have the option of continuing full payments to the surviving spouse or selecting a reduced income stream on the first death. However, this option must be selected at the time of application.

Interesting points to consider

  • It is possible to go from a RRIF to an annuity but it is not possible to go from an annuity to a RRIF (if individuals are undecided we recommend converting to a RRIF until you can make a definite decision).
  • It is possible for you to convert your RRSP to an annuity prior to age 69. An individual may want to do this to take advantage of the pension tax credit available at age 65. The good news is that the federal government increased the pension tax credit to $2,000 per year in 2006 (up from $1,000 in 2005).  This means that your taxable income may be reduced by this credit.
  • Assets in any registered retirement account, including your registered pension plan (RPP), can generally be used to purchase an annuity. Often individuals that leave a place of employment will have the option to transfer the RPP to a locked in RRSP.  In many cases purchasing an annuity with this amount may be a good option, especially if the pension tax credit can be utilized.
  • The advantage of an annuity is that payments are guaranteed. This is particularly advantageous in the case of a life annuity where the individual lives beyond the age under which RRIF funds would have been exhausted.
  • Annuities generally appeal to conservative investors who like low maintenance and guaranteed investments.
  • When purchasing an annuity investors should note that control of assets and participation in future market growth is relinquished, and that annuities are not flexible – once purchased, they generally cannot be undone.
  • Investors should assess the investments within their RRSP. Some investments are relatively illiquid or have redemption fees if sold.  In order to purchase an annuity there must be cash available in the account. It may not be prudent to liquidate a portfolio if there are significant penalties to sell any positions.

Many individuals at retirement may feel that a set monthly income to cover fixed expenses for life may form the foundation of their retirement income.  Other individuals may consider an annuity for some of the following reasons:

  • Feel that they are in good health and will live beyond average life expectancy.
  • May be concerned about outliving their savings.
  • Desire to have a fixed income guaranteed for life.
  • Not wanting to make investment decisions.
  • May be nervous about current equity markets.
  • Desire to lock in investments at current rates.
  • Not concerned about leaving an estate to their children or grandchildren.
  • Desire to solidify financial planning, as income amounts are known.

Understanding your investment objectives, estate planning goals and tax situation will help make your RRSP maturity decision easier. To help you with this decision, your financial advisor can help you prepare a cash flow analysis to determine what you think your expenses will be and what sources of income you have to meet those expenses. This would include your RRSP, as well as other investment assets and income sources and your annual cash flow needs, making sure to account for inflation and emergency situations.

All insurance products are sold through ScotiaMcLeod Financial Services* companies. ScotiaMcLeod Financial Services companies are the insurance subsidiaries of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Quebec) representing ScotiaMcLeod Financial Services. 

*ScotiaMcLeod Financial Services includes: ScotiaMcLeod Financial Services (Quebec) Inc. and ScotiaMcLeod Financial Services Inc.


Turning 69? It’s time to roll RRSP to RRIF

When investors turn 69 they must decide what they will do with their Registered Retirement Savings Plan.  One option is to roll their RRSP into a Registered Retirement Income Fund.  A RRIF is essentially a continuation of an RRSP.  The difference is that a RRIF is designed to provide a source of income during retirement.

The rollover procedures are relatively straightforward.  A transfer form that is signed by the account owner is used to move the investments from an RRSP to the new RRIF account.  This transfer may be done ‘in-kind’ so that the investments move over exactly how they were within the RRSP account.  Other options include all cash or mixture of cash and securities.  Generally, we recommend transferring all in kind.  Having the accumulated funds from your RRSP rolled over into a RRIF provides the same tax sheltering as before.

RRIFs offer some important advantages, such as the flexibility to design your own pension.  Investors may elect to have payments made from the plan on a monthly, quarterly or annual basis.  Investors may change the frequency of their payments whenever they like.  Individuals may also request a lump sum withdrawal if required.

RRIF Account

When establishing a RRIF account there are a few questions that relate to the frequency of payments, how the payments will be paid, and when they will be paid.

Frequency:  How often would you like to receive payments from the RRIF?  The options are flexible but the four most common choices are monthly, quarterly, semi-annually or annually.  If you choose monthly payments then you will need to select whether to receive the payment in the middle of the month or at the end.   Semi-annual payments are generally made in June and December.  For individuals requesting annual payments we recommend December to maximize the tax deferment.


Individuals have more flexibility today with respect to how their RRIF payments are made.  Common choices are electronic funds transfer to your bank account or a physical cheque that can be picked up or mailed.  Many individuals decide to transfer the proceeds to their cash investment account.

Beneficiary Options

Similar to an RRSP account, all RRIF accounts require you to name a beneficiary.   Single or widowed individuals may choose to name their estate the beneficiary and let your estate be distributed according to your will.  If you name specific beneficiaries outside of your estate you are able to avoid probate fees on these assets.  Individuals with a spouse are able to roll their RRIF over tax-free to their spouse’s RRIF or RRSP after death, assuming they are named beneficiary.

Younger Spouse

For investors who do not need the income and would like to maximize tax deferral they should consider electing the younger spouse’s age, if applicable.  If you elect to use the age of your younger spouse, your minimum payment will be calculated by the age formula.  This is calculated by dividing the RRIF Value at December 31 of the previous year by 90 minus the spouse’s age.  If the spouse was 65, and the value of your RRIF at December 31, 2006 was $300,000, your minimum 2007 payment would be $12,000.  This is calculated as follows:  $300,000/(90-65).  The age formula may also be used for those individuals who choose to convert their RRSP to a RRIF prior to age 69.

Minimum Withdrawals

Minimum RRIF withdrawals are based on a percentage of the year-end portfolio value.   Investors who withdraw more in the early years will receive reduced amounts in later years.  The most important factor in setting up a RRIF and deciding on the amount of withdrawal is to make choices based on your needs.  Investors not requiring income generally select the minimum withdrawal amount.  For individuals rolling their RRSP into a RRIF at age 69 there is no minimum withdrawal amount.  The following table outlines the minimum withdrawal amounts:


Under the old rules, RRIF accounts had to be closed when an individual reached the age of 90.  Amendments to the rules occurred in 1992, since that year there is no requirement that a RRIF account be closed.  After age 93, the annual withdrawal amount remains at 20 per cent of the previous December 31st value while the account owner is alive.


Take three-step inventory before RRSP planning

Should you contribute to an RRSP?  Before maneuvering money in that direction, investors should complete these key steps:

Step 1 – Review your notice of assessment from Canada Revenue Agency for the 2005 taxation year.  Within this notice you should see a table that is titled “2006 RRSP Deduction Limit Statement.”  This table provides your RRSP deduction limit for 2006 and will note the dollar amount of any unused RRSP contributions.  Some individuals may find that they have no available room and therefore are not eligible to make an RRSP contribution.   Those who have contribution room should carefully review steps 2 and 3.

Step 2 – Obtain an understanding of your income for 2006, expected income for 2007 and future years.  This may include capital gains for sales of investments and real estate other than your personal residence.  In addition you should obtain an understanding of the marginal tax bracket that you are in.  The following outlines the tax savings for an individual making a $10,000 RRSP contribution with different levels of taxable income:


No Taxable Income

For individuals with no taxable income we do not recommend contributing to an RRSP as there are no tax savings.  If a child or individual has earned income and they are under the basic exemption it may still be beneficial to file a tax return.  Filing a return will report the earned income, 18 per cent of which will be used to build up RRSP contribution room for the future.  One day when the individual has taxable income they will also have RRSP room they can take advantage of.

Lowest Marginal Rates

Individuals who are in the lower marginal tax bracket but are expecting a significant increase in salary next year may be better off delaying their RRSP contribution.  If an RRSP contribution is made then the individual may be better off not claiming the deduction and carrying forward the unused portion to the subsequent years when it is more advantageous.

Highest Marginal Rates

Those in the highest marginal tax brackets may benefit the most from RRSP contributions.  Canadian taxpayers have few ways to lower their taxable income – an RRSP contribution is one.  As illustrated above, individuals in the 43.7 per cent marginal tax bracket may reduce taxes payable (and possibly generate a tax refund) by $4,370 for a $10,000 RRSP contribution.   In addition to the tax deduction any potential growth within the RRSP compounds on a tax-deferred basis until they are taken out as a withdrawal.

For individuals in the highest marginal tax bracket it is almost always advantageous to contribute to an RRSP.  Short-term RRSP loans may make sense although the interest on the loan is not deductible.

RRSP Undeducted Contributions

A less understood fact about RRSP contributions is that you do not have to deduct them in the year they are made. RRSP undeducted contributions are contributions that you have made to your or your spouses RRSP for which you have not taken the tax deduction.

By making a contribution, you are able to take advantage of the tax deferred compounding within the RRSP. If you expect to be in a higher marginal tax rate in future years it may be beneficial to hold off on taking the tax deduction in the current year and carry forward this undeducted contribution to a future year. You will not be getting the benefit of this tax deduction until the future and therefore your current tax liability will be higher than if you took the tax deduction now.

Step 3 – Spend some time determining if the funds for the RRSP contribution will be kept within the plan until retirement.  The main questions to consider are:

  • By making an RRSP contribution will your cash flow be strained?
  • Is there significant uncertainty around current or future income?
  • Do you feel you will need to access your investments in the near future?

For all individuals, regardless of tax brackets, you need to weigh the benefits of contributing to an RRSP versus the likelihood that the contributions will not be touched until retirement.   We recommend that individuals consult with their accountant, especially if their income is fluctuating.

In-Kind Contributions

An RRSP contribution does not have to be made in cash. A contribution in-kind of securities that are already owned outside an RRSP gives the benefit of the RRSP deduction. At the same time the security continues to be owned.  Investors must, however, declare any capital gains accrued on the investment at the time of the transfer. If the investment is in a capital loss position, investors are not permitted to claim that loss unless the security is sold and then a contribution is made in cash.


The majority of people do not take full advantage of the ability to maximize their RRSP contributions.  An alarming number of Canadians have a very low income at retirement.  Many have little more than CPP and OAS to subsidize their day to day living costs.  We encourage individuals to consider their retirement years when making financial decisions.

Contribute Early

Time has an amazing way of compounding investment returns.  Investors who establish a monthly pre-authorized contribution to their RRSP are more likely to be financially prepared for their retirement years.  The sooner people begin investing, the longer the savings will be able to grow on a tax deferred basis.

Last Day

The deadline to make your 2006 RRSP contribution is March 1, 2007.  Assuming you have the deduction limit we recommend that you take a good look at your overall financial situation and review the three steps above. You and your professional advisors have just over a month to assess whether an RRSP is right for you.


Mortgages: Pay Yourself

Individuals may hold their personal mortgage as an investment within an RRSP in the same way as your RRSP can hold GICs, stocks and mutual funds.  This allows the homeowner to pay themselves interest on their mortgage.

Holding your personal mortgage within an RRSP may be one way to eliminate the frustrating conflict of making regular contributions to your RRSP while making payments on the funds you’ve borrowed to pay for your home.

First things first

Arranging your mortgage within an RRSP is not as straight forward as purchasing investments typically found in such plans.  Administrative procedures are not routine and the associated costs may lead you to meet with your accountant and financial advisor to see if the numbers make sense.

Items to Consider

  • The first step is to determine if you have sufficient assets to make the mortgage option cost-effective.  Homeowners must have a cash balance (or liquid investments) within their RRSP equal to the amount of the desired mortgage.  If fees are incurred to convert your investments into cash these should be considered and factored in.
  • Some institutions may not be able to administer this strategy. Others may have systems in place that allow them to only administer specific mortgages.
  • By following proper procedures and providing the necessary documentation there are no tax consequences involved in setting up a mortgage within your RRSP.  The proceeds from the mortgage within your RRSP can simply be used to pay off your other existing mortgage.
  • The mortgage must be based on posted or market rates and have terms and conditions that reflect normal business practices.  Unlike a normal mortgage where you try to negotiate down from posted rates, you will actually want a higher rate because you are paying yourself.
  • As interest and principal payments flow back into your plan monthly, they are able to compound more rapidly and provide frequent opportunities to reinvest in other RRSP-eligible investments.
  • The fact that you now have a mortgage in your RRSP does not affect your ability to contribute to your RRSP in any way. Your annual contributions will continue to add to the overall value of your RRSP.
  • One of the requirements of having your mortgage in your RRSP is to obtain insurance (CMHC – Canada Mortgage and Housing Corporation).  As your mortgage is secured by your own personal property it is generally considered a high quality investment.
  • There are no restrictions as to how you use the funds borrowed through your mortgage.

Initial Administrative Costs

For those financial institutions that offer this service, they may have different fee structures.  Generally, they are as follows:

  • An initial set up fee of approximately $300 may be charged
  • The mortgage trustees, likely another legal entity, may also charge a set up fee of approximately $100
  • Insurance (CMHC) application fee of $75
  • Mortgage insurance premium can range from 0.5% to 2.75% of the amount of the mortgage depending on the amount of the mortgage and its loan-to-value ratio  (Note: the premium is based on the total amount of the mortgage, regardless of the portion held within your self-directed RRSP)
  • Legal fees estimated at $400
  • Appraisal fees of $275

Monthly and Annual Maintenance Fees

  • The mortgage trustees may charge a monthly administration fee of approximately $16
  • An annual mortgage administration fee may apply of approximately $60, this is in addition to any self directed RRSP fees you may be paying (generally around $125 annually)
  • Other fees, such as transfer-in, discharge and early renewals may also apply in some situations

Two additional components that may influence your decision are current posted mortgage rates and the yields on comparable low risk investments with the same time horizon.

An individual with $80,000 could purchase a low risk investment, such as a GIC or consider the mortgage within their RRSP option.  What is the difference in the return obtained from a mortgage versus a comparable low risk investment?  If this difference exceeds the cost of the strategy then this option may be worth considering.

For mortgage balances below $80,000, individuals may find that the fees offset any benefits enjoyed from setting up the program. After considering the costs involved with this strategy it may only provide benefits for some investors.

Your investment advisor should be able to assist you with an analysis that takes into account your personal circumstances including your risk tolerance, assets within your RRSP, the length of time the program will be in place, your mortgage rate and your current return expectations. This will help determine if holding a mortgage within your RRSP is a good strategy for you.

To RRSP or Not To RRSP… you choose

It’s that time of year again when taxpayers contemplate if they will contribute to their RRSPs and, if so, how much?  RRSPs are one of the best ways to save for retirement.  Does it make sense to contribute this year?  Individuals without a corporate or government pension plan may feel more obligated to contribute to their own retirement.  Before making this year’s RRSP contribution we recommend that you take a good look at your overall financial situation.

Tax at 43.7 Per Cent

There are only a few ways in which Canadians can lower their taxable income – an RRSP contribution is one of those ways.   Individuals in the 43.7 per cent marginal tax bracket may reduce taxes payable (and possibly generate a tax refund) by $4,370 for a $10,000 RRSP contribution.   In addition to the tax deduction all of the income earned on those contributions compounds on a tax-deferred basis until they are deregistered.  For individuals in the highest marginal tax bracket it is almost always advantageous to contribute to an RRSP.  RRSP loans may even make sense even though the interest on the loan is not deductible.  Making an RRSP contribution may not make sense if cash flow is an issue, whether it is uncertainty around future income or other needs.

No Taxable Income

For individuals with no taxable income (under the basic exemption of $8,648 in 2005) we do not recommend contributing to an RRSP.  If a child or individual has earned income and they are under the basic exemption it may still be beneficial to file a tax return.  Filing a return will report the earned income, 18 per cent of which will be used to build up RRSP contribution room for the future.  One day when the individual has taxable income they will also have RRSP room.

Lowest Marginal Rates

Individuals that are in the lower marginal tax bracket but are expecting a significant increase in salary next year may be better off delaying an RRSP contribution.  If an RRSP contribution is made then the individual may be better off not claiming the deduction and carrying forward to the next year.  We recommend that individuals consult with their accountant, especially if their income is fluctuating.

For all individuals, regardless of tax brackets, you need to weigh the benefits of contributing to an RRSP versus the likelihood that the contributions will not be touched until retirement.  The two main exceptions to the rule are the Lifelong Learning and Home Buyers’ Plans.

Lifelong Learning Plan

RRSPs can help finance education costs.  Current rules allow a maximum withdrawal of up to $10,000 per year over a four-year period, as long as the total amount does not exceed $20,000.  Withdrawals must be repaid to an RRSP in equal instalments over 10 years or they will be treated as taxable income.  The first repayment is due 60 days after the fifth year following the first withdrawal.

Home Buyers’ Plan

Under the Home Buyers’ Plan you are allowed to withdraw up to $20,000 as a loan from your RRSP to buy or build a home, without counting the withdrawal as income.  You must then repay the loan, without interest, over the next 16 years.  To qualify you need to be a “first-time buyer” which is defined generally as not having owned and lived in a home as a principal residence at any time during the five calendar years up to and including the current year.

RRSP Contribution Room

RRSP contribution room is based on an individual’s prior year earned income. It is the lessor of 18 per cent of earned income or the maximum deduction limit.  Most individuals have carry-forward room from past years where they did not maximize their current year contribution.  Members of registered pension plans or deferred profit sharing plans will have their contribution room reduced by a pension adjustment.

RRSP Deduction Limits

In 2005, the maximum deduction limit was $16,500.  This limit was increased to $18,000 in 2006 and future increases will be linked to the growth in average wages.  You have until March first this year to apply contributions to the 2005 taxation year.  We encourage those investors that can contribute for the 2006 taxation year, do it now and not wait until this time next year.  Contributing early is an important element to compounding returns.

“In-Kind” Contributions

As a reminder, an RRSP contribution does not have to be made in cash. A contribution “in-kind” of securities that are already owned outside an RRSP gives the benefit of the RRSP deduction. At the same time the security continues to be owned.  Investors must, however, declare any capital gains accrued on the investment at the time of the transfer. If the investment is in a capital loss position, investors are not permitted to claim that loss unless the security is sold and then a contribution is made in cash.

No More Foreign Content Limit

The 30 per cent foreign content limit in RRSP and registered pension plans is a thing of the past. Bill C-43, which was part of the 2005 Federal Budget, finally received Royal Assent July 2005. Canadian investors now have the option to invest up to 100 per cent of their retirement plans into foreign securities without penalty. The opportunity for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians, as it provides the opportunity for greater diversity and more attractive risk-adjusted returns.

When you meet with your financial advisor ask them whether an RRSP makes sense for you.  If you have sold a property or had additional income in 2005 we recommend that you contact your accountant to assess your overall tax situation.  If this is done prior to March 1, 2006, then a contribution to your RRSP for the 2005 taxation year may still be an option.