COLUMN: Ask the Money Lady – Learn about taxation on your RRIF

Dear Money Lady, – I am turning 71 at the end of this year and I want to know if there is any way I can reduce the taxation on my RRIF? Thanks, Kim H.

Hello Kim – this is a great question, and something that I have talked about quite often recently, if you were at any of my presentations last month. There are only two ways to reduce the taxation on your RRIF (registered retirement income fund) and that is to start a home-based business and write off the expenses or to do an in-kind transfer when stock prices fall.

RRSPs and RRIFs are like a double-edged sword. The government knew exactly what they were doing when they first came out in 1957, since Canadian taxation is progressive. Originally, they were designed for the top-tier income earners in Canada. However, now they make up a major part of our financial landscape and have worked their way into Canadian culture with everyone being encouraged to use them as a savings tool for their future. Your financial advisor will want you to only take the minimum withdrawals from your RRIF once you hit the age of 71 to ensure that they keep the bulk of your investment on their books – but this is not a wise idea for the average Canadian. You see, if you die with a balance in your RRIF, regardless of you having named a beneficiary, the balance in your RRIF at the time of your death must be declared on your last tax return and taxed as income upon your estate. Of course, there is an automatic spousal rollover if your spouse dies before you to avoid the taxation; but what if you are the surviving spouse or a single when you die? In Ontario, the highest marginal tax rate is 53.5 percent, a far cry from what it was when RRSPs came out in the 50’s at 11.4 percent. Let’s look at an example together to get a better understanding as to why you need to drain your RRIF before you die. We will use a scenario of you dying with a balance of $200,000 in your RRIF, (while I am sure there are many Canadians with much higher balance). Your executor will need to file your last tax return and by doing so, will tally up all your income during your last year. So, that would be OAS, CPP, GIS, perhaps a RRIF withdrawal already, pension income, widower pensions, etc. Then, they will add the balance of your RRIF at the time of your death (the $200K balance). You can now see, it would not be hard for the average retiree to be pushing into the highest marginal tax rate with this inevitable calculation, paying out a hefty chunk of their RRIF balance to the CRA to cover the tax bill. This is why you must withdraw your RRIF before you die to avoid giving half of it to the government.

I know this sounds harsh—but it’s the reality many Canadians don’t see coming. And that’s exactly why I’ve been talking about these issues so much lately during my Vibrant Living Series presentations. In fact, if you’re someone who likes real-life examples and wants to understand the why behind the rules your advisor never quite explains, you’ll love the presentations I’m giving this fall. If you’re nearby, come out and join us for a free session. Check out my website to learn more at askthemoneylady.ca.

Now let’s talk about how to reduce the taxation. While it’s unlikely that most retirees want to start a business in retirement just to lower their taxation, some may want to consider an “in-kind-transfer.” This would work great in our current rollercoaster stock market if your RRIF is currently invested in securities. What you will want to do is to wait until the stock market falls (perhaps when Trump says something ridiculous) and then transfer your stock “in-kind” to your TFSA (tax free savings account) if you have the room in your TFSA, or you could choose to transfer to a non-registered account too. You do not want to cash out the stock at this low market value but instead move it out of your RRIF into another registered account to avoid any further taxation. Of course, you will need to pay the taxation on the balance that you transfer at that time, however when the stock rebounds in the future and goes up again, you will now have these securities in your TFSA with no taxation or in a non-registered account with a much lower tax rate. Funds transferred to a non-registered account will only have the growth subject to capital gains tax, which will be much less than RRIF income tax. If you plan to use this strategy, make sure your advisor calculates all commissions and fees when working out your ACB (adjusted cost base) on the actual portfolio amount you plan to transfer.

Christine Ibbotson is a Canadian finance writer, radio host & YouTuber. For more advice check out her YouTube channel: ASK THE MONEY LADY – Your Canadian Finance Coach.