- What are Registered Retirement Savings and Registered Retirement Income Plans?
- RRSP and RRIF Charitable Giving
- Benefits of a RRSP and RRIF Donations
An essential part of financial planning in Canada includes preparation and planning for retirement. Registered Retirement Savings and Registered Retirement Income Plans are an important part of this planning.
Registered Retirement Savings Plan (RRSP)
An RRSP is a government registered savings plan that an individual establishes and contributes into up to the age of 65.
Contributions to the RRSP can be made by the account owner or their spouse or common-law partner. Eligible deductible RRSP contributions can be used to reduce income taxes.
Any income which is earned in the RRSP is usually exempt from tax as long as the funds are not withdrawn from the plan. In general terms tax is only due when funds are withdrawn from the RRSP.
Registered Retirement Income Fund (RRIF)
An RRIF is an arrangement between an individual and a carrier (an insurance company, a trust company or a bank) that is registered with the Canadian Government. In principle it is similar to a Guaranteed Investment Certificate (GIC). One are where it differs is in the funding. GIC’s are funded with after-tax dollars, whereas RRIF’s are funding with pre-tax dollars.
To establish an RRIF property is transferred to the RRIF carrier from an RRSP, a Pooled Registered Pension Plan (PRPP), a Registered Pension Plan (RPP), an Simplified Pension Plan (SPP), from another RRIF, or from an First Home Savings Account (FHSA) and the carrier makes payments to the individual who established the plan.
The minimum amount must be paid to you in the year following the year the RRIF is entered into. Earnings in a RRIF are tax-free and amounts paid out of a RRIF are taxable on receipt.
Many Canadians strategize in regards to saving for retirement, but it is just as important to make plans for how the remainder of your RRSP’s and RRIF’s will be dispersed upon your passing.
During your lifetime qualifying contributions to RRSPs can be used to reduce taxes owing on income. When the time comes to retire and you begin to withdraw funds from these accounts it is typically at a time when your income is lower and therefore the withdrawals from the funds are taxed at a reduced rate.
The funds that remain in the RRSP and RRIF are taxable upon withdrawal.
Upon death RRSPs are most often transferred to the named beneficiary, typically a spouse, without a tax liability to the spouse or estate. In the case of RRIFs the balance can be transferred to a qualified beneficiary (spouse, common-law partner, dependent child or dependent grandchild). Taxes are not immediately incurred as the transfer is not considered a withdrawal.
However, in the case where there is no beneficiary or qualified beneficiary these accounts are deemed to be disposed of at the time of your death and the full value of the accounts are added to the taxable income of your estate. It is possible that this can cause the income for the year to move into the highest marginal tax rate which may result in a very large tax bill.
In Canada it is possible to receive tax credits for charitable gifts to the value of 100% of your income in the year of your passing (and retroactive one year). The tax savings for the estate can be substantial, depending on the value of the registered retirement saving and income plans.
Naming a Charity as Beneficiary
In situations where there is no qualified beneficiary for your RRSP’s or RRIF’s the tax implications can be significant. The value of the RRSP’s and the RRIF is considered income upon withdrawal or disposal and depending on the value in these account the marginal tax rate can be pushed in to a higher tax bracket.
There is a way to reduce the taxable income to the estate by naming a charity as beneficiary. The amount of the taxable income on the estate can be reduced by the total value of the charitable donation. This means that naming a charity, such as Global Aid Network, will reduce tax implications to the estate.