Understanding the new RRIF minimum withdrawal rules

On March 25, the Canadian federal government passed legislation, as part of its COVID-19 Economic Response Plan, that reduces the Registered Retirement Income Fund (RRIF) minimum that must be withdrawn by 25 per cent for 2020. This measure allows seniors to reduce the withdrawal of unnecessary funds from their RRIF at a time when the values of their RRIFs may have declined. Let’s investigate what this reduction in the RRIF minimum means because you may be surprised by all of the implications and planning considerations.

In simple terms, the RRIF minimum for each year is calculated by taking the fair market value (FMV) of your RRIF at the beginning of the year and multiplying it by the prescribed factor. However, note that in the year the RRIF is opened, the minimum is nil. The factor is based on your age, or the age of your spouse or common-law partner, if you make this election before receiving any payments. Each year, the factor increases until age 95, when it becomes 20 per cent.

Emily turned 71 in 2019 and converted her Registered Retirement Savings Plan (RRSP) to a RRIF before the year end. The FMV of her RRIF on January 1, 2020 was $100,000. The factor, based on Emily’s age of 71, is 5.28 per cent. So, Emily’s RRIF minimum for 2020 is $5,280.

For 2020 only, the RRIF minimum originally calculated has been reduced by 25 per cent. This leaves us with the regular RRIF minimum and reduced RRIF minimum. The table at the end of this article shows the regular and reduced factors for 2020 starting at age 71.

The 25 per cent reduction of the RRIF minimum also applies to Life Income Funds (LIFs) and other locked-in RRIFs, such as Locked-In Retirement Income Funds (LRIFs) and Restricted Life Income Funds (RLIFs).

As a result of these new rules, Emily’s RRIF minimum for 2020 is reduced from $5,280 to $3,960 (her regular RRIF minimum of $5,280 x 75 per cent).

So, what are your options? If you haven’t already withdrawn more than the reduced RRIF minimum, you can instruct your RRIF carrier to adjust your total withdrawals to the reduced minimum amount or any amount up to and including the regular minimum amount.

If you have already withdrawn more than the reduced RRIF minimum, it is not possible to recontribute the excess back to your RRIF.

Remember that, for 2020, Emily’s reduced RRIF minimum is $3,960. If she is currently withdrawing the regular minimum amount, she can elect to reduce her withdrawal to the reduced amount or anywhere in between — for example, $4,500. Emily can also choose the timing and amount of payments. If she is currently receiving monthly payments, she can choose to reduce her monthly payments, stop the monthly payments and receive one lump sum payment, or some other option provided that her total withdrawals for the year are at least equal to the reduced minimum amount of $3,960. If Emily has already received more than the reduced RRIF minimum of $3,960, she cannot recontribute the excess back to her RRIF.

Withholding tax

Withholding tax does not apply to payments of the RRIF minimum. Any payments in excess of the minimum are subject to the following withholding tax rates: 10 per cent if the excess payment is less than $5,000, 20 per cent if the excess payment is between $5,000 and $15,000, and 30 per cent if the excess payment is more than $15,000.¹ The good news is that, for 2020, the regular minimum amount will continue to be used for withholding tax purposes.

Note that, depending on your tax bracket, the tax that is withheld on your RRIF payment may not be enough to satisfy your actual tax liability. You may have to pay additional tax when you file your income tax return and should plan accordingly for this potential expense.

If you are a non-resident of Canada, your RRIF payments are subject to a withholding tax of 25% unless reduced by a tax treaty between Canada and your country of residence. For example, many countries have a tax treaty with Canada, including the U.S., that reduces the withholding tax rate to 15 per cent on the amount of the RRIF withdrawal up to the greater of twice the RRIF minimum or 10 per cent of the beginning year’s FMV. When applying this formula and calculating the withholding tax, the regular RRIF minimum will continue to be used.

Emily’s RRIF and withholding tax

If Emily is a Canadian resident and requested monthly payments of $500 from her RRIF for a total of $6,000 for the year, she would be subject to withholding tax of $72 (($6,000 - her regular minimum amount of $5,280) x 10 per cent). However, remember that Emily will have to include the full $6,000 on her tax return and, depending on her tax bracket, the resulting tax liability may be more than the $72 withheld.

If the facts are otherwise the same but Emily is a non-resident living in the U.S., then in order to calculate the withholding tax she must first determine the greater of:

• Twice the RRIF minimum: $5,280 x 2 = $10,560
• 10 per cent of the January 1 balance: $100,000 x 10 per cent = $10,000

Thus, as per the terms of the Canada-U.S. Tax Treaty, any RRIF withdrawals by Emily, up to $10,560, would be subject to 15% withholding tax with any excess subject to 25% withholding tax. As Emily is only withdrawing $6,000 from her RRIF, her payments would be subject to withholding tax of $900 ($6,000 x 15 per cent).

Spousal RRIFs and the attribution rules

If you have a spousal RRIF (e.g., a spousal RRSP that converted to a RRIF), and your spouse or common-law partner contributed to an RRSP for you in the current year or two prior calendar years (i.e., 2018, 2019, or this year, 2020), then any amount you receive from this RRIF that exceeds the minimum amount is subject to the spousal attribution rules and is to be reported for income tax purposes as income of your spouse or common-law partner and not as your income. For 2020, determining what amount, if any, is to be reported as income of your spouse or common-law partner will continue to be based on the regular minimum amount.

Emily’s spousal RRIF and the attribution rules

In 2019, Emily converted her spousal RRSP to a spousal RRIF. In 2019, her spouse contributed $10,000 to Emily’s spousal RRSP. Emily is withdrawing $6,000 from her spousal RRIF this year and her regular RRIF minimum is $5,280. Emily’s spouse will report $800 ($6,000 RRIF withdrawal - regular RRIF minimum of $5,280) on his income tax return and Emily will report the regular minimum amount of $5,280 on her tax return.²

Segregated funds offering a guaranteed income amount

Some segregated fund products offer a guaranteed income amount that allows investors to take the greater of the RRIF minimum and the guaranteed income amount without impacting the income guarantees. Whether the segregated fund carrier will continue to use the regular RRIF minimum, which is preferable, or replace it with the reduced RRIF minimum will depend on the firm and should be confirmed. Manulife will continue to use the regular RRIF minimum for these purposes and honour the associated guarantees communicated at the beginning of 2020.

Planning considerations

If you are in a position where you don’t need the regular minimum amount from your RRIF, then it’s usually advantageous to take the reduced RRIF minimum. You will reduce your taxes payable this year and the funds that remain in your RRIF will continue to grow tax-deferred until withdrawn, which will be particularly beneficial if the markets rebound. Also, by reducing your RRIF withdrawals and the income you report on your tax return, you may preserve eligibility for income-tested government benefits like Old Age Security (OAS) and the age amount tax credit.

An exception to this general rule is if you expect to be in a lower tax bracket and pay significantly less taxes this year as opposed to future years.

If, despite taking advantage of the reduced RRIF minimum, you are withdrawing funds from your RRIF that you don’t need, then either paying down debt, particularly high-interest debt like credit card balances, or contributing to your or your spouse or common-law partner’s tax-free savings account (TFSA) are sound strategies. Any investment growth within the TFSA is tax free, which is very attractive, especially if the markets rebound. TFSA withdrawals are also tax-free and completely flexible, making them a powerful retirement income-planning tool.

Another possible consolation for those 65 or older is that RRIF withdrawals qualify for the pension income credit and pension income splitting. The income tax rules allow you to allocate up to 50 per cent of eligible pension income to your spouse or common-law partner and potentially reduce your family’s overall tax bill.

Conclusion

While not nearly enough by itself, the federal government’s reduction of the RRIF minimum amount is a welcome measure. The new rules may seem straight forward, but don’t be fooled, there is a lot more than meets the eye. In these challenging times, it’s important to try and take advantage of whatever opportunities exist. Hopefully, this information will help.

These columns are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.