retirement income Retirement guide A partner you can trust. For exclusive use by financial advisors SRM111A-8(11-09) PDF

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1 retirement income Retirement guide A partner you can trust. For exclusive use by financial advisors SRM111A-8(11-09) PDF

2 Table of contents 1. INTRODUCTION TO RRSPS (REGISTERED RETIREMENT SAVINGS PLANS) MAXIMUM AGE TO CONTRIBUTE TO AN RRSP EARNED INCOME MAXIMUM CONTRIBUTIONS PENSION ADJUSTMENT (PA) PENSION ADJUSTMENT REVERSAL (PAR) PAST SERVICE PENSION ADJUSTMENT (PSPA) RETIREMENT ALLOWANCE UNUSED CONTRIBUTIONS EXCESS CONTRIBUTIONS DEFERRED DEDUCTIONS SPOUSAL RRSP CONTRIBUTIONS OPTIONS AVAILABLE UPON MATURITY OF AN RRSP CONTRACT CASHING IN THE CONTRACT CONVERSION TO A RRIF PURCHASING AN ANNUITY Concept of an annuity Decision-making process to purchase an annuity Life annuities Joint life annuity Guaranteed life annuities with a minimum number of payments Life annuity with guaranteed capital recovery Life annuity with floor capital reimbursement guarantee Levelled life annuity Indexed life annuity Integrated life annuity Enhanced life annuity Mortality and life expectancy tables Annuities certain Fixed RRIF COMBINING A RRIF AND AN ANNUITY THROUGH THE LIFE INVESTMENT OPTIONS AVAILABLE UPON MATURITY OF A LOCKED-IN RRSP/LIRA CONTRACT CONVERSION TO A LOCKED-IN RRIF/LIF UNLOCKING OF FEDERALLY-REGULATED LOCKED-IN FUNDS (LOCKED-IN LIFS AND RRSPS) A. One-Time 50 Per Cent Unlocking B. Small Balance Unlocking C. Financial Hardship Unlocking PURCHASE OF AN ANNUITY FUNDS RECEIVED FROM AN RPP (REGISTERED PENSION PLAN) OR A DPSP (DEFERRED PROFIT-SHARING PLAN) RETIREMENT GUIDE JANUARY 2012

3 4. TAXATION OF ANNUITIES THE PRESCRIBED ANNUITY THE NON-PRESCRIBED ANNUITY TAXATION OF ANNUITY PAYMENTS MAXIMUM DEADLINE FOR ANNUITY PAYMENTS TO BEGIN TAXATION AT DEATH APPENDIX A.... CONDITIONS FOR WITHDRAWING LOCKED-IN FUNDS BY PROVINCE* 22 A.1 SUMMARY A.2 CONDITIONS FOR WITHDRAWING LOCKED-IN FUNDS DETAILS A.2.1 Alberta A.2.2 British Columbia A.2.3 Manitoba A.2.4 New Brunswick A.2.5 Newfoundland/Labrador A.2.6 Northwest Territories* A.2.7 Nova Scotia A.2.8 Nunavut* A.2.9 Ontario A.2.10 Prince Edward Island* A.2.11 Quebec A.2.12 Saskatchewan A.2.13 Yukon* APPENDIX B.... ELIGIBLE TYPES OF ANNUITIES ACCORDING TO THE SOURCE OF FUNDS 27 APPENDIX C.PROCEDURE AND DOCUMENTS TO BE PROVIDED TO GUARANTEE THE ANNUITY RATE APPENDIX D.... DOCUMENTS TO BE PROVIDED WHEN UNDERWRITING AN ANNUITY 29 RETIREMENT GUIDE JANUARY 2012

4 1. INTRODUCTION TO RRSPs (Registered Retirement Savings Plans) A registered retirement savings plan (RRSP) is a savings program that is overseen by the federal government. Initial RRSP contributions entitle investors to a tax deduction. Furthermore, amounts accumulated in an RRSP can continue to grow in a tax-sheltered savings vehicle and is usually used to finance one s retirement. The amount investors may contribute to their RRSP depends on how much income they earned in the previous year. Finally, taxes are payable on RRSPs during the year in which they are used. 1.1 Maximum age to contribute to an RRSP Individuals can contribute to their RRSP until December 31 of the year in which they turn 71. However, if the contributor is over 71 and declares an earned income, he may contribute to his spouse s RRSP if his spouse is 71 years of age or under. 1.2 Earned income For the purpose of calculating the allowable RRSP contribution, earned income includes: employment or business income net property rental income QPP / CPP disability pensions alimony payments received (taxable amount) employment insurance benefits research grants (net amount) but does not include: pension benefits under a public plan (QPP, CPP, OAS) retirement allowances death benefits income from an RRSP or a DPSP pension benefits under a private pension plan 3

5 1.3 Maximum contributions The annual contribution room corresponds to the lowest of the following amounts: 18% of the income earned the previous year the following ceilings RRSP CONTRIBUTION CEILING Year Maximum annual contribution 2007 $19, $20, $21, $22, $22, $22, Indexed Note that the RRSP contribution ceiling is decreased by the previous year s pension adjustment or the previous year s past service pension adjustment. In some circumstances, a pension adjustment reversal (PAR) can increase this maximum. 1.4 Pension adjustment (PA) When an individual is a member of a registered pension plan (RPP), the pension adjustment corresponds to the contributions made to the pension fund by the employee and the employer. This amount is indicated on the T4 slip. A PA exists if contributions to a registered pension plan (RPP) were made on behalf of the individual. The PA reduces the amount an individual can contribute to his RRSP. 1.5 Pension adjustment reversal (PAR) When an employee stops contributing to his pension plan and cannot recover the contributions that the employer made on his behalf, the transferable amount is often smaller than the sum of the PAs declared for the corresponding years. The PAR makes it possible to recover some of the RRSP contribution room that would have been lost due to the PA associated with the pension plan membership period. The pension adjustment reversal (PAR) makes it possible to correct this situation by recovering the unused contribution room that corresponds to the value of this penalty. The PAR increases the amount an individual can contribute to his RRSP. 4

6 1.6 Past service pension adjustment (PSPA) Like the pension adjustment (PA), the past service pension adjustment (PSPA) reduces the amount that one can contribute to their RRSP. A PSPA normally occurs when the retirement benefits under a defined benefit plan are increased retroactively. The PSPA represents supplemental pension credits that would have been included in the calculations for past service if the increase in the amount of benefits or the addition of a period of past service entitling the employee to a supplemental pension had been granted as part of the RPP during the targeted years. 1.7 Retirement allowance A retirement allowance from the employer can be transferred tax-free to an RRSP, but cannot be used as a tax deduction, according to the eligible amount. For years of service prior to 1996, the eligible amount is $2,000 for each year of service (or portion of year). However, if the individual did not have a pension fund prior to January 1, 1989, a $1,500 supplement for each year of service (or portion of year) can be added for this period. Therefore, only years of service prior to 1996 may be used to determine the eligible amount. Note that the transfer of a retirement allowance to an RRSP does not reduce the annual contribution room, and the retirement allowance cannot be transferred to the spouse s RRSP. 1.8 Unused contributions The difference between the contributions made and the maximum allowed for the year since 1991 may be deferred and used for subsequent years. The amount of unused contributions is indicated on the notice of assessment sent by the Canada Customs and Revenue Agency after income taxes are filed. 1.9 Excess contributions As of January 1, 1996, individuals can accumulate up to $2,000 over and above the maximum amount allowed in their RRSP without incurring any penalties. This excess amount does not entitle them to an immediate deduction, but can be used as a deduction in subsequent years Deferred deductions It is possible to contribute eligible amounts to an RRSP in one year and defer all or part of the deduction to a later year Spousal RRSP contributions Individuals can contribute to their spouse s RRSP and apply the tax deduction as the contributor. The total contributions made during the year (to their own RRSP and to their spouse s) must not exceed the maximum amount allowed for the contributor. If an amount is withdrawn from the spouse s RRSP since the last contribution made to one of the spouse s RRSP contracts (regardless of the institution) before three consecutive dates of December 31 have elapsed, the tax on the withdrawal is charged to the contributor (not to the spouse). 2. OPTIONS AVAILABLE UPON MATURITY OF AN RRSP CONTRACT 5

7 The RRSP 1 matures in the year in which the annuitant reaches the age of 71 years. Before the end of the calendar year in which the annuitant turns 71, the amounts held in an RRSP contract must be allocated for another purpose. At this time, the annuitant has three options: Cash in the RRSP amounts Convert the balance of the RRSP contract to a RRIF Purchase an annuity. It is also possible, and often quite useful, to combine these options. 2.1 Cashing in the contract Cashing in the amounts held in the RRSP involves a total or partial withdrawal of the investments held in the RRSP. The amounts cashed in will be added to the taxpayer s taxable income for the year in which the contract is cashed in. The primary advantage of this option is its simplicity, and the fact that the total amount after taxes is available for use at the annuitant s discretion. The primary disadvantage is that the entire withdrawal is taxable, and also that this amount will no longer be able to grow tax-free. This option is rarely the most advantageous one, and should be avoided whenever possible. 2.2 Conversion to a RRIF Like an RRSP, a RRIF (Registered Retirement Income Fund) is a registered contract in which funds can grow tax-free. No contributions can be made to a RRIF except in the case of a transfer from another RRIF contract. For each RRIF contracts, a minimum amount must be withdrawn each year in the form of retirement income, and this withdrawal is added to the taxable income for the current year. The taxpayer may receive a tax credit for the retirement income. A RRIF can be converted to an annuity at any time. RRIFs enable the annuitant to withdraw his registered funds gradually while being taxed on only the portion that is withdrawn each year. The minimum withdrawal is calculated based on a percentage of the plan value as at January 1 st of each year, and based on the annuitant s age. There is no maximum withdrawal amount. Note that the calculation can be based on the age of the younger spouse in order to minimize withdrawals. 1 When we refer to the maturity of an RRSP, we are not referring to the maturity of the investments contained in the RRSP, but the RRSP contract itself. 6

8 The following table illustrates the minimum withdrawal percentage for each year. Annuitant / Spouse Minimum Withdrawals as a % of the Assets as at January 1* Age as at RRIF RRIF January 1 Before Dec. 31, 1992 After Dec. 31, % 4.00% % 4.17% % 4.35% % 4.55% % 4.76% % 5.00% % 7.38% % 7.48% % 7.59% % 7.71% % 7.85% % 7.99% % 8.15% % 8.33% % 8.53% % 8.75% % 8.99% % 9.27% % 9.58% % 9.93% % 10.33% % 10.79% % 11.33% % 11.96% % 12.71% % 13.62% % 14.73% % 16.12% % 17.92% % 20.00% % 20.00% * The rules governing the minimum withdrawal were amended by the federal government in The primary advantages of a RRIF are its flexibility when it comes to withdrawals and the freedom it offers in terms of investment options. In fact, the owner of a RRIF is in full control of how the assets are invested, and can invest in most major asset categories (GICs, bonds, funds, stocks, etc.). However, the investments must be planned appropriately in order to ensure that enough cash is available for withdrawals to maintain a comfortable lifestyle and avoid depleting the funds prematurely. Any assets remaining upon death may be transferred to the spouse or to one or more beneficiaries. 2.3 Purchasing an annuity 7

9 An annuity is a contract stating that, in exchange for a premium payment, an individual will receive regular payments for life, or for a given period depending on the type of annuity selected. These payments may be made at virtually any frequency, but are usually made once a month. Annuities enable the annuitant to stagger the income from an RRSP and thereby minimize the tax payable each year. There are two major types of annuities: a life annuity, and an annuity certain. Each of these types is available in an immediate or deferred form. An immediate annuity is an annuity where the first payment is made within 60 days following receipt of the premium. A deferred annuity is an annuity where the payments are made more than 60 days following receipt of the premium Concept of an annuity The main advantage of an annuity is its simplicity, and the security of having a guaranteed fixed income regardless of economic conditions. Also, choosing an annuity does not require any investment decisions, and alleviates the worries that can be associated with these decisions. However, depending on the type of annuity selected, premature death or an incorrectly selected guarantee may be costly because it may leave nothing for the survivors. Purchasing an annuity is a definitive choice that cannot subsequently be changed. Contract holder Annuitant (may also be the contract holder) Payment of a single premium Fixed income (annuity) payments. Insurance company 8

10 2.3.2 Decision-making process to purchase an annuity LIFE ANNUITY ANNUITY CERTAIN FIXED RRIF LIFE INSURED GUARANTEE ANNUITY LEVEL One life Joint # of years Capital reimbursement Levelled Indexed Integrated Life annuities The life annuity provides an income for as long as the client is alive. Different options are available. First, the annuitant must decide if he wants to establish the annuity on his/her life only or a joint annuity so that the payments continue with his/her spouse in case of death Joint life annuity Life annuities can also be payable to the surviving spouse upon the death of the other spouse. This type of annuity has a mandatory minimum 5-year guarantee. For a joint and last survivor annuity with a minimum number of guaranteed payments (see ), this guarantee prevails over the joint and last survivor aspect, i.e., in case of death, the payments are maintained at their full value for the guarantee period before the annuity to the spouse is reduced. If the joint and last survivor annuity contains a capital refund guarantee (see ), the opposite applies. In case of death, the payments are reduced to the spouse and the capital refund guarantee then applies. The primary annuitant and the secondary annuitant can choose one of the following two options: First-to-die: Joint first-to-die means that the annuity is paid to the surviving spouse in the event of death of one of the spouses according to the selected percentage (100%, 60%, ), until the death of the surviving spouse. At annuitant s death: Joint at annuitant s death means that when the annuitant dies, the payments will continue to be made to the surviving spouse according to the initially determined percentage. 9

11 Guaranteed life annuities with a minimum number of payments A life annuity with a guaranteed period (minimum 5 years, other possibilities: 10 years, 15 years, 20 years, etc.) is payable for the annuitant s lifetime. If the annuitant has a spouse and dies during the guaranteed period, the annuity is paid to the surviving spouse until the end of the guaranteed period. If the annuitant does not have a surviving spouse, an amount equal to the present value of the payments remaining until the end of the guaranteed period is paid to the designated beneficiary (or beneficiaries). If the death occurs after the guaranteed period, no value is available for the spouse or another beneficiary Life annuity with guaranteed capital recovery Life annuities are also available with guaranteed capital recovery. The capital recovery guarantee insures the initial capital invested (single premium). In the event of premature death, the difference between the premium paid initially and the sum of all payments received until death are paid to the spouse or to one or more beneficiaries in a lump sum, provided this amount is less than the premium paid. For example, if a $50,000 premium was paid and the annuitant dies prematurely after receiving the total amount of $30,000 in payments, a lump sum of $20,000 will be paid to the surviving spouse or to one or more beneficiaries. $ PAYMENTS UPON DEATH Age Life annuity with floor capital reimbursement guarantee The floor capital reimbursement guarantee option works the same way as the capital reimbursement guarantee described above, except that it offers a minimum capital until age 91. Therefore, when a death occurs, the Company will stop the annuity payments and pay the beneficiaries the highest of the following options, if death occurs before the annuitant's 91st birthday: The difference between the single premium and the total payments made; The established amount of the floor capital (10% of the single premium). $ PAYMENTS UPON DEATH Floor cash refund 91 years Age The 91-year age limit does not apply for a non-prescribed, non-registered annuity and the floor capital guarantee applies until the annuitant's death Levelled life annuity 10

12 Unless otherwise indicated, annuity payments are level. This means that the amount paid is identical for the duration of the contract Indexed life annuity It is possible to select an indexed life annuity rather than the traditional level life annuity. The indexed life annuity option provides an income that increases each year according to a fixed percentage. The maximum indexation rate for funds coming from a registered plan is 4%, and no maximum is applied to non-registered funds. Unlike other types of annuities, indexed annuities provide payments that include a cost of living increase Integrated life annuity Integrated life annuities make it possible to combine a life annuity with a temporary annuity for a fixed period of time in order to compensate for insufficient income. For example, an integrated life annuity may be purchased for the time after retirement and before QPP (Quebec Pension Plan) and/or CPP (Canada Pension Plan) benefits begin. This way, the total income received by the annuitant is not altered Enhanced life annuity The enhanced life annuity, also known as the impaired life annuity, is offered to clients whose life expectancy is reduced due to their smoking status or state of health. The enhanced annuity provides higher payments than other types of annuities, to take into account reduced life expectancy. The enhanced rates are between 2% and 16%. Available at issue only The F30-196A medical questionnaire is used to pre-qualify the client. Choice of 4 types of enhanced annuity: Joint and last survivor With guaranteed period With cash refund guarantee With floor cash refund guarantee This type of annuity requires a medical certificate and is normally granted on a case by case basis according to a selection process. To obtain an enhanced annuity, you must first submit an application for a single premium annuity (F30-78A for IA or F30-78AP for IAP) accompanied by a regular annuity illustration and the medical questionnaire F30-196A for IA or F AP for IAP. Once the application has been processed, you'll receive a new illustration confirming the amount paid under the enhanced annuity. 11

13 Mortality and life expectancy tables For a life annuity, the calculation of annuity payments depends a great deal on the annuitant's age and sex. An annuitant's life expectancy is estimated using a mortality table based on these two parameters. This provides an approximation of the expected term over which the payment calculations will be made. In most cases, the annuity tables used take into account the individual's sex. However, when the funds come from a LIRA, an LIF or an RPP, the mortality table used will vary between a unisex table and one that takes the annuitant's sex into account, depending on the plan's province of jurisdiction. The following table summarizes the use of mortality tables according to the source of funds and the jurisdiction under which the plan is administered. Source of funds Jurisdictions using a unisex mortality table Jurisdictions using a mortality table based on sex Non-registered/TFSA None All provinces RRSP, RRIF None All provinces LIRA, LIF All provinces except Quebec Quebec RPP All provinces except Quebec Quebec DPSP None All provinces Annuities certain An annuity certain provides income until the end of the selected term. This period is very flexible, and can be set at the individual s convenience to cover virtually any time period (minimum 5 years). In the case of an RRSP conversion, the annuity certain must have a term that covers the annuitant to age 90. An annuity certain is the simplest option, but does not guarantee an income beyond age 90. In the event of the annuitant s death, the annuity continues to be paid to the spouse, and in the absence of a surviving spouse, an amount equal to the present value of the future payments is paid to one or more beneficiaries Fixed RRIF The fixed RRIF is much like the annuity certain. It is possible to obtain a fixed RRIF from registered funds from an RRSP or a RRIF. The fixed RRIF concept consists of levelling the annuity payments according to the balance of the contract, the rate of the fixed RRIF and the period selected to fully deplete the funds when the fixed RRIF expires. The fixed RRIF can circumvent the rules under which registered funds be used to purchase a life annuity or an annuity certain to age 90. As with the annuity, the fixed RRIF is not redeemable. The guarantee period of a fixed RRIF must be at least 5 years and may last until age 90. If death occurs before the end of the selected period, the company continues the payments to the spouse for the remaining term. If there is no spouse, the current value of the remaining payments is paid to the designated beneficiaries. 2.4 Combining a RRIF and an annuity through the life investment 12

14 Combining a guaranteed income for life and the flexibility of a RRIF can be a good and relatively simple strategy for meeting retirement needs. Like the annuity, the life investment provides a stable income, guaranteed for life, while RRIF withdrawals are more flexible and variable. By fulfilling their basic needs (food, shelter, etc.) with the life investment and their discretionary needs with the flexible portion of the RRIF or with cash, individuals can make the most of their equity. This combination of options allows people to diversify their retirement income to achieve greater stability and security, while taking advantage of the performance and flexibility of the RRIF. Financial situation Financial needs Available options Financial comfort Additional needs Essential needs Cash RRIF / investments GICs Combining these options provides a degree of diversification that makes it easier to deal with the ups and downs of the financial markets. For example, unstable financial markets or low interest rates can be offset by guaranteed fixed payments from the life investment. The opposite situation can also be advantageous. For example, if the markets are growing or if interest rates increase, the flexible portion of the RRIF contract could produce better results, which will translate into higher income in the future. By selecting a life investment within the RRIF, your client benefits from a feeling of increased security in addition to having access to investments that offer excellent potential returns, two important aspects of retirement planning. Also, including a life investment in a RRIF contract minimizes the minimum withdrawal that has to be made from the flexible portion each year. This enables the annuitant to take advantage of the potential returns of the stock market for a longer period. The amount invested in the life investment is part of the fixed income portion of the client's portfolio, as suggested in the Investor Profile. 13

15 The following table summarizes the primary advantages: RRIF (flexible portion) Flexible income Independence in investment decisions Control and flexibility when it comes to withdrawals Conversion into an annuity possible at all times Life investment Guaranteed periodic income No investment decision to be made Income independent of the financial markets No risk of depleting the capital during the annuitant's lifetime (life annuity) Peace of mind Illustration software Under the Illustration tab, the Ecoflextra and Retirement Income Illustration software contains an evaluation of financial needs questionnaire entitled Shortened Budget. Use this questionnaire to determine the amount of the payment appropriate for your client s needs, in light of their income and expenses. Product features Minimum investment amount: $25,000 Available options: Single life Enhanced N.B.: joint option not available Available guarantees: Life with cash refund Life with floor cash refund (no age limit) Types of income Minimum Indexed, maximum 8% for the entire contract Level Unlike the life annuity, the life investment is redeemable at any time, subject to surrender fees (see formula in the contract). However, the amount of the payment and the guarantee will have to be adjusted proportionally according to the amount surrendered. Moreover, since this product is redeemable, creditor protection may not apply, as is the case with segregated funds. Once selected, life investment payments can only be changed in the event of a surrender. In addition, a RRIF contract with the life investment option cannot be converted back into an RRSP contract. The first payment, with or without the flexible RRIF payment, must be made by December 31 of the year following the payment of the single premium in the life investment. 14

16 The 20% no-fee withdrawal rule does not apply to the life investment. The illustration has to be provided within 48 hours with the duly completed F12A or F12AP application for the interest rate to be guaranteed. 3. OPTIONS AVAILABLE UPON MATURITY OF A LOCKED-IN RRSP/LIRA CONTRACT Like an RRSP contract, a locked-in RRSP/LIRA is a special kind of registered retirement savings plan into which funds can be transferred from a supplemental pension plan. Funds held in this type of contract are qualified as locked-in because they must be used to provide retirement income. Since the funds originate from a pension plan, they are intended to provide an income for retirement, and may not be withdrawn sooner than provided by law. This means that, with very few exceptions (see Appendix A), it is virtually impossible to withdraw these funds. Note that when an employee terminates his employment, the employer provides the plan member with a breakdown of the options available to him with respect to his pension fund. Unlike an RRSP, only two options are available upon maturity of a locked-in RRSP/ LIRA: It can be converted to a locked-in RRIF/LIF Used to purchase a life annuity. Locked-in plans are governed by provincial legislation, and by a federal act the Pension Benefits Standards Act, 1985 and virtually all of them share the same characteristics. 3.1 Conversion to a locked-in RRIF/LIF A locked-in RRIF/LIF is to a locked-in RRSP/LIRA what a RRIF is to an RRSP. The only difference between these two types of contracts is the maximum withdrawal imposed on lockedin plans. Like the RRIF, the locked-in RRIF/LIF requires a minimum withdrawal, but also imposes a maximum withdrawal every calendar year. Certain provincial regulations require that, when the annuitant turns 80, the remaining balance be used to purchase a life annuity (see Appendix A). 15

17 3.2 Unlocking of federally-regulated locked-in funds (locked-in LIFs and RRSPs) Since May 8, 2008, the federal government has offered three options to holders of federallyregulated LIFs and RRSPs, options which allow them to unlock their funds. They are: A. One-Time 50 Per Cent Unlocking After age 55, the contractholder can ask for the transfer of funds from a Life Income Fund (LIF) to a Restricted Life Income Fund (RLIF). Sixty days after the creation of the RLIF, they can transfer up to 50% of the RLIF funds to an RRSP or a RRIF. An individual may only use this 50 percent unlocking option once. B. Small Balance Unlocking All federally-regulated LIF, RLIF and RLSP (Restricted Locked-In Savings Plan) contracts entered into after May 8, 2008, whose total holdings are less than 50% of the Yearly Maximum Pensionable Earnings (YMPE) in 2012: 50% x $50,100 = $25,050, allow the contractholder, age 55 and over a) to transfer all or a part of the funds in an RRSP or a RRIF; or b) to withdraw up to all of the funds as cash. C. Financial Hardship Unlocking All federally-regulated LIF, RLIF, locked-in RRSP or RLSP contracts entered into after May 8, 2008, allow the holder who fulfils one of the conditions described below-- regardless of their age to withdraw, within a calendar year, up to 50% of the YMPE ($25,050 in 2012) from any combination of these contracts. Condition 1 Medical or disability-related expenses The individual expects to expend more than 20% of their annual income for expenses related to their state of health. Condition 2 Low income An individual who expects to earn less than 75% of the YMPE in 2012 ($37,575) can withdraw a certain amount. This amount may be calculated using Form 1 (Attestation Regarding Withdrawal Based on Financial Hardship), available on the Office of the Superintendent of Financial Institutions Canada (OSFI) website. For more information about these changes or to obtain the necessary forms, please consult the OSFI website at the following address: 16

18 3.3 Purchase of an annuity The option to purchase an annuity is also available with locked-in funds. The annuity selected must be a life annuity and must meet certain criteria set out by each of the provinces. Generally speaking, the legislation for all of the provinces is fairly similar (see Appendix A). When an LIF/locked-in RRIF is used as the source for an annuity, it is possible to make the maximum withdrawal allowed by law for the LIF/locked-in RRIF contract and begin annuity payments that same year. 3.4 Funds received from an RPP (Registered Pension Plan) or a DPSP (Deferred Profit-Sharing Plan) Following a termination of employment, the amounts received from a RPP or a DPSP must be transferred to a LIRA (or a locked-in RRSP for a federally-chartered plan). Any non-locked-in portion can be transferred to an RRSP. Note that the transfer of an amount received from an RPP or a DPSP does not decrease the annual authorized contribution, and these funds cannot be used to contribute to the spouse s RRSP. 4. TAXATION OF ANNUITIES It is important to consider the fiscal aspect before making a selection because certain types of annuities benefit from more advantageous tax treatment. For an annuity funded through nonregistered funds, only the interest portion of the annuity payments is subject to income taxes, the remainder being the return of capital. Moreover, the income attribution rules between spouses do not apply to annuities. 4.1 The prescribed annuity The prescribed annuity is available in the form of an annuity certain or life annuity and benefits from favourable tax treatment. As with all types of annuities, the income produced is composed of two elements: the interest income and the return of capital. For the prescribed annuity, the interest income/return of capital ratio is distributed equally for the entire duration of the contract. Since a prescribed annuity is purchased with non-registered funds, only the interest income is taxable. With a prescribed annuity, the interest is taxed uniformly for the entire duration of the contract, resulting in favourable tax treatment (tax deferral). Certain conditions govern the right to purchase a prescribed annuity. Here are the main contract terms: The contractholder must be the annuitant of the contract. This means that companies cannot subscribe to a prescribed annuity. Under a prescribed annuity, the payments must be equal (cannot be indexed), payable at regular intervals and payable at least once a year. The guaranteed payment period must not exceed the 91st birthday of the annuitant or the coannuitants, whichever is younger. It also applies to life annuities with guaranteed capital recovery. 17

19 Example: Prescribed Annuity % of payment Interest income Return of capital Time 4.2 The non-prescribed annuity For this type of annuity, each payment is deemed to be made up of interest income and return of capital, whose proportions vary throughout the duration of the contract. With a non-prescribed annuity, the proportion of interest income is greater at the beginning and gradually decreases as the portion of the return of capital increases. There are no restrictions in terms of purchase rights for non-prescribed annuities. Example: Non-Prescribed Annuity % of payment Interest income Return of capital Time 18

20 4.3 Taxation of annuity payments According to the source of funds to purchase an annuity, the income tax deducted at source is different. Income tax deducted from source means the amount that the issuing company must withhold on gross annuity payments. In most cases, no income taxes are withheld and the annuitant must declare this income as taxable. The following table offers more details: Source of funds Non-registered/TFSA RRSP, RRIF Locked-in RRSP, LIRA, LIF RPP Fixed RRIF DPSP Income tax deducted at source None. None, possible on client's request. None, possible on client's request. Income tax is calculated on the amount in excess of the base provincial and federal exemption, according to the province of jurisdiction. Income tax is calculated on the amount in excess of the prescribed minimum RRIF payment. None. 4.4 Maximum deadline for annuity payments to begin When an annuity is purchased, it is important to distinguish between the annuity purchase date and the date annuity payments begin. The purchase date corresponds to the date on which the funds are received by the company and used to purchase the selected annuity. The return on the premium begins on that date. The date annuity payments begin corresponds to the date on which the first annuity payment is made. In most, cases, these two dates are different and the period that separates them is called the deferred period. Certain restrictions apply to a deferred annuity according whether the funds are registered or non-registered and according to the selected payment frequency. For non-registered funds, the maximum deferral period is 10 years. For a prescribed annuity, the annuity will be considered to be non-prescribed for the period starting from the date the annuity is purchased and the date annuity payments begin (the deferred period). After this period, the annuity will be considered to be prescribed. The rules are more strict for registered funds and vary according to the source of funds. For all fund sources other than DPSP and RPP for individuals who reach age 71 in the year in which the annuity is purchased, the maximum payments must begin at the latest in the calendar year following the date the annuity is purchased. If the funds come from a DPSP or an RPP and the individual will turn 71 during the calendar year in which the annuity is purchased, annuity payments must begin before the end of this same calendar year. The date annuity payments begin can vary according to the payment frequency chose. The following tables summarize these rules: 19

21 Source of funds: non-registered / TFSA Frequency of payments Monthly Quarterly Semi-annually Annually Maximum date to begin annuity payments January 28 of the tenth calendar year following the purchase date. March 28 of the tenth calendar year following the purchase date. June 28 of the tenth calendar year following the purchase date. December 28 of the tenth calendar year following the purchase date. Source of funds : RRSP, LIRA, RRIF, LIF Frequency of payments Monthly Quarterly Semi-annually Annually Maximum date to begin annuity payments January 28 of the calendar year following the purchase date. March 28 of the calendar year following the purchase date. June 28 of the calendar year following the purchase date. December 28 of the calendar year following the purchase date. Source of funds : DPSP, RPP Frequency of payments Monthly Quarterly Semi-annually Annually Maximum date to begin annuity payments The earliest of January 28 of the calendar year following the purchase date and December 28 of the calendar year during which the annuitant turns 71. The earliest of March 28 of the calendar year following the purchase date and December 28 of the calendar year during which the annuitant turns 71. The earliest of June 28 of the calendar year following the purchase date and December 28 of the calendar year during which the annuitant turns 71. The earliest of December 28 of the calendar year following the purchase date and December 28 of the calendar year during which the annuitant turns

22 4.5 Taxation at death REGISTERED ANNUITY CONTRACT Death of NON-REGISTERED annuitant ANNUITY CONTRACT Deferred annuity contract Death of the annuitant Annuity contract in force Spouse or dependent child A lump-sum amount is paid. The spouse or dependent child is taxed on the amounts received. A tax refund is made if the premium is rolled over into his/her RRSP and the spouse or dependent child was taxed on the amount received. The spouse or dependent child can choose to have the deceased taxed on the lump-sum amount. Spouse Other beneficiary Dependent child or other beneficiary Spouse Dependent child The payments A choice must be continue to the made whether to A lump-sum spouse. The payments receive a lump-sum A lump-sum amount is paid. continue amount to the or continue amount is paid. The spouse is taxed spouse. the payments. The deceased on the amounts is The dependent taxed on received the during the The spouse The must deceased is child is taxed on annuity year. payments declare taxed the on the annuity the amounts he/she received annuity payments received received. until his/her The deceased is received up during to his/her death. death. taxed on the annuity the year. A tax refund is payments received The dependent child made if the The beneficiary up to his/her death. The deceased or other is beneficiary premium is rolled other than the taxed on is the taxed on the over into his/her spouse or annuity amounts payments received RRSP and the dependent child is received less up the to amounts dependent child taxed on the his/her death. taxed on the was taxed on the amounts received deceased. amount received. less the amounts taxed on the The dependent deceased. child can choose to have the deceased taxed on the lump-sum amount. Other beneficiary A lump-sum amount is paid. The deceased is taxed on the annuity payments he/she received until his/her death. The beneficiary other than the spouse or dependent child is taxed on the amounts received less the amounts taxed on the deceased. 21

23 APPENDIX A. CONDITIONS FOR WITHDRAWING LOCKED-IN FUNDS BY PROVINCE* A.1 Summary Provinces Temporary Income Reduced Life Expectancy Alberta N Physical or mental incapacity (with waiver from spouse) British Columbia N Physical or mental incapacity (with waiver from spouse) Manitoba 40% of YMPE, < 65 years Physical or mental of age incapacity New Brunswick N Physical or mental incapacity Newfoundland / Labrador < 65 years of age, max temporary income = 40% YMPE total pension income Physical or mental incapacity Northwest Territories** N Physical or mental disability (case by case) Nova Scotia 40% of YMPE, < 65 years Physical or mental of age incapacity Nunavut** N Physical or mental disability (case by case) Ontario N Illness or physical incapacity, life expectancy < 2 years Prince Edward Island** N Physical or mental disability (case by case) Quebec 40% of YMPE, < 65 years Physical or mental of age disability < 71 years of age (LIRA only) Saskatchewan N Physical or mental incapacity Yukon** N Physical or mental disability (case by case) Conditions Percentage of YMPE Excess Transfer Non-Resident of Canada One-Time Withdrawal Financial Difficulties 20% of YMPE, or 40% of YMPE, > 65 years of age 40% of YMPE, > 65 years of age N N Account holder becomes non-resident Account holder becomes non-resident 40% of YMPE, > 65 years of age N N N N 40% of YMPE N Account holder owner and Max = 3 x normal N 1.06 (65 age) his or her spouse, if any, withdrawal over and cannot be Canadian above regular withdrawal, citizens, and cannot be and max. 25% of balance resident in Canada for the of funds purpose of the Income tax act 10% of YMPE or 40% of N N N N YMPE, 55 years of age or pension eligibility (first occurrence) N N N N N 40% of YMPE, > 65 years N N N N of age N N N N N 40% of YMPE, > 55 years of age Excess transfer > maximum allowed under the federal Income Tax Act N N N N N 7 eligible financial difficulties N N N N 40% of YMPE, > 65 years of age * Refer to section A.2 for details about the conditions. ** These provinces/territories use the 1985 Pension Benefits Standards Regulations (federal) in the absence of provincial legislation. N Account holder becomes non-resident (for at least 2 years) N N N N N N N N N N N N N N Marketing 22

24 A.2 Conditions for withdrawing locked-in funds Details A.2.1 Alberta Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Percentage of YMPE (Year s Maximum Pensionable Earnings): A lump sum equal to the total value of the LIRA may be paid out for 2 reasons: if the value of the contract does not exceed 20% of the YMPE for the calendar year during which the request is made, if the account holder was 65 years of age or older at the end of the preceding fiscal year and the value of all locked-in funds does not exceed 40% of the YMPE for the current year. Non-resident of Canada: A lump sum equal to the value of the LIRA may be paid out if the account holder becomes a non-resident of Canada. Conversion of locked-in funds into an annuity at age 80: Not mandatory for this province. A.2.2 British Columbia Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Percentage of YMPE (Year s Maximum Pensionable Earnings): A lump sum equal to the total value of the LIRA may be paid out for 2 reasons: if the value of the contract does not exceed 20% of the YMPE for the calendar year during which the request is made, if the account holder was 65 years of age or older at the end of the preceding fiscal year and the value of all locked-in funds does not exceed 40% of the YMPE for the current year. Non-resident of Canada: A lump sum equal to the value of the contract may be paid out if the account holder becomes a non-resident of Canada. Conversion of locked-in funds into an annuity at age 80: Not mandatory for this province. A.2.3 Manitoba Temporary income: An additional amount can be withdrawn from a LIF that offers this option for individuals between age 54 and 65. The amount may not exceed 40% of the year s maximum pensionable earnings (YMPE) for the year in which the request is made. The withdrawn amounts are taxable. Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Percentage of YMPE: Individuals aged 65 and older may withdraw the balance of their locked-in RRSP, LIRA, LIF or locked-in RRIF if the total of all amounts accumulated in these retirement savings vehicles does not exceed 40% of the YMPE for the current year. Conversion of locked-in funds into an annuity at age 80: Not mandatory for this province. Marketing 22

25 A.2.4 New Brunswick Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. One-time withdrawal: Additional funds may be withdrawn from a LIF. The maximum amount is equal to three times the maximum amount normally permitted for the year, over and above the regular withdrawal. This amount may not exceed 25% of the balance of the funds accumulated in the LIF at the beginning of the year. Only one such withdrawal may be paid out during a person s lifetime. If the amount withdrawn is less than the maximum allowed, the difference may not be withdrawn at a later date. Percentage of YMPE: Individuals are entitled to withdraw the balance of their LIRA/LIF if the total of all sums accumulated in retirement savings vehicles (LIRAs, LIFs, locked-in RRSPs, defined-contribution pension plans) does not exceed 40% of the YMPE for the current year divided by 1.06 for each year the age of the terminating or retiring member preceding age 65. Non-resident of Canada: Ability to withdraw the entire balance of the account excluding non-matured guaranteed investments when the plan member/owner and his or her spouse, if any, cannot be Canadian citizens, and cannot be resident in Canada for the purpose of the Income tax act. Conversion of locked-in funds into an annuity at age 80: Not mandatory for this province. However, the funds must be depleted before age 90. A.2.5 Newfoundland/Labrador Temporary income: An additional temporary income may be obtained from a LIF if the total pension income is less than 40% of the YMPE and the account holder is under age 65. The maximum allowable temporary income is equal to 40% of the YMPE for the current year less the total pension income from all retirement savings vehicles, with the exception of income from the Canada Pension Plan. Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Percentage of YMPE: The entire balance of the locked-in funds in a LIRA may be withdrawn if the total of all sums accumulated in retirement savings vehicles (LIRAs, LIFs, locked in RRIFs) is less than 10% of the YMPE for the current year or, for account holders who are 55 years of age or eligible to receive a pension from the plan from which the funds originate (first occurrence) if this amount does not exceed 40% of the YMPE for the current year. Conversion of locked-in funds into an annuity at age 80: Mandatory for this province. A.2.6 Northwest Territories* In reference to the Pension Benefits Standards Regulations, 1985 (federal). Reduced life expectancy: The locked-in registered retirement savings plan may provide that, if a physician certifies that the life expectancy of the account holder is likely to be considerably reduced due to a mental or physical disability, the funds may be paid in a lump sum to the account holder. The spouse s waiver of his/her entitlement to a life annuity is also required. Conversion of locked-in funds into an annuity at age 80: Mandatory for this territory. Marketing 23

26 A.2.7 Nova Scotia Temporary income: An additional amount can be withdrawn from a LIF that offers this option for individuals between age 54 and 65. The amount may not exceed 40% of the year s maximum pensionable earnings (YMPE) for the year in which the request is made. The withdrawn amounts are taxable. Reduced life expectancy: Individuals whose life expectancy is considerably reduced due to physical or mental incapacity are entitled to withdraw locked-in funds. A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Conversion of locked-in funds into an annuity at age 80: Not mandatory for this province. A.2.8 Nunavut* In reference to the Pension Benefits Standards Regulations, 1985 (federal). Reduced life expectancy: The locked-in registered retirement savings plan may provide that, if a physician certifies that the life expectancy of the account holder is likely to be considerably reduced due to a mental or physical disability, the funds may be paid in a lump sum to the account holder. The spouse s waiver of his/her entitlement to a life annuity is also required. Conversion of locked-in funds into an annuity at age 80: Mandatory for this territory. A.2.9 Ontario Reduced life expectancy: Individuals suffering from an illness or a physical incapacity that is likely to reduce their life expectancy to less than two years are entitled to make a total or partial withdrawal of the funds held in a LIRA, LIF or LRIF A medical certificate is required, as well as the spouse s waiver of his/her entitlement to a life annuity. Percentage of YMPE: Individuals aged 55 or older and for whom the total value of the assets held in all Ontario LIRAs, LIFs and LRIFs is less than 40% of the YMPE for the current year, may withdraw all of the funds held in such LIRAs, LIFs and LRIFs. Excess transfer: If the amount transferred from a former pension plan to a LIRA, LIF or LRIF exceeds the maximum provided for under the federal Income Tax Act, the excess amount may be withdrawn. Financial difficulties: Amounts can be withdrawn from a LIRA, LIF or LRIF in the event of financial difficulties. Seven types of financial difficulties are eligible: low income, debt registered against a primary residence, unpaid rent, first and last month s rent, medical expenses, renovations to a primary residence due to an illness or a physical incapacity, renovations to a primary residence of a dependent suffering from an illness or a physical incapacity. Conversion of locked-in funds into an annuity at age 80: Mandatory for this province. A.2.10 Prince Edward Island* In reference to the Pension Benefits Standards Regulations, 1985 (federal). Reduced life expectancy: The locked-in registered retirement savings plan may provide that, if a physician certifies that the life expectancy of the account holder is likely to be considerably reduced due to a mental or physical disability, the funds may be paid in a lump sum to the account holder. The spouse s waiver of his/her entitlement to a life annuity is also required. Marketing 24