In mid-March, the federal government announced a major economic plan aimed at easing the economic downturn already being felt by many Canadians. One measure in that plan, however, seems to have gone largely unnoticed by our clients and the very people the measure is intended to help.
The government announced, pending final legislation, a temporary 25% reduction in the minimum annual RRIF withdrawals required to be taken by any holders of a RRIF, who are generally over the age of 71. For example, the typical withdrawal requirement for a RRIF holder at age 78 is 6.36%, or $63,600 on a RRIF valued at $1,000,000. Under the new relief plan, the percentage would be only 4.77%, or $47,700 on a RRIF of $1,000,000. As usual, RRIF holders with a younger spouse or common-law partner can continue to use their partner’s age for determining the withdrawal requirement, this lower requirement would still be reduced by the 25% under the relief measure.
The benefit of this relief is twofold. First, investors who do not need as much income from their RRIFs as they’re required to withdraw (or any at all) save a significant amount of tax in the short-term. Since every dollar drawn from a RRIF is taxed as income, this is material and could have a meaningful impact on the total taxes the investor must pay for the year.
Second, this additionally gives investors the chance to “lock in” smaller losses on investments which must be sold to free up cash for the withdrawal. Stock markets have experienced a significant correction over the last five weeks, with both TSX and S&P 500 down 23% year to date as of time of writing. While we expect markets to recover eventually, it is impossible to tell how long that will take. By allowing investors to keep more of their money deployed through smaller withdrawal requirements, that can allow their portfolios to experience a more robust recovery as it occurs.
Here are a few scenarios showing how much tax would be saved as a result of this initiative.
This is a valuable relief program which has the ability to reduce taxes significantly for many clients. As indicated above, we are awaiting final legislation from CRA before we can make any changes and will advise you when this available.
If you are interested in reducing your RRIF withdrawals, or discussing its appropriateness for your portfolio, please reach out. We are happy to help.