How the transition to new RRIF rules may work in your benefit
A Registered Retirement Income Fund is one of two vehicles you can select for your RRSP at age 71 (the other being a registered annuity). The RRIF, as you know, allows you to enjoy continued tax deferral on the funds therein. The minimum you are required to withdraw annually is based on a percentage factor (known as the "RRIF factor") multiplied by the fair market value of the RRIF assets on Jan. 1 each year.
This year's budget announced new, lower RRIF minimum withdrawal factors for ages 71 to 94 inclusive "to better reflect more recent long-term historical real rates of return and expected inflation." It was a welcome change, but the transition rules released as part of Bill C-59, introduced in Parliament last week, stated that the "unreduced minimum amount for 2015 ... continues to apply" in three situations. In other words, the older, higher RRIF factors are still relevant for 2015 and may, in fact, provide some additional benefits - at least for this year.
One) Withholding tax: The general rule is that when you receive a payment from a RRIF in excess of the minimum amount, the RRIF carrier must withhold 10 per cent for excess payments up to $5,000; 20 per cent if the payment is between $5,000 and $15,000; and 30 per cent for payments above $15,000. (Higher withholding rates apply in Quebec.) For 2015, the old, higher minimum amounts will be used to calculate the withholding tax, resulting in effectively less withholding tax than if the new, lower minimums were used.
Two) Non-residents' withholding tax: RRIF withdrawals are subject to a non-resident withholding tax at various rates, as adjusted by any tax treaty Canada has with the foreign country. For example, under the Canada-U.S. Tax Treaty, non-resident tax is withheld when the RRIF withdrawal exceeds the greater of twice the minimum amount for the year and 10 per cent of the fair market value of the RRIF at the beginning of the year. In these treaty cases, for 2015, the old, higher minimum amounts will be used, possibly resulting in less withholding tax for 2015.
Three) Attribution rules: A spousal RRIF is the continuation of a spousal RRSP in which your spouse or partner makes contributions to your RRSP, and withdrawals are generally taxed in your hands. It is a common way to accomplish income splitting when one spouse is expected to be in a significantly higher tax bracket than the other in retirement.
To prevent short-term income splitting, however, there is a special attribution rule which states that if you withdraw funds from a spousal RRSP or RRIF - and contributions have been made by your spouse to a spousal RRSP in the same calendar year or any time in the previous two calendar years - the withdrawal may be attributed to the contributor spouse who will be forced to pay tax. There is an exception, however, for the minimum amount, which may be withdrawn from a RRIF before any possible attribution of income occurs.
For 2015, the old, higher minimum amount is to be used, reducing the potential impact of these attribution rules.