RRIF  RAFT ESTATE PLANNING PERSPECTIVES

 The "RRIF Raft" - Leaves It In The Family

In the section under Cottage we talk about Capital Gains Taxes on recreational property gifted to the next generation. 

As I mused the other day about other forms of taxation, I was amazed at how many different flavors taxes come in in addition to the basic income tax. 

• Provincial Sales Tax(PST);  

• Federal Goods & Services Tax(GST); Excise Tax(ET);  

• Import Duty(ID); 

• Gasoline Tax(GT);  

• Capital Gains Tax(CGT); all else failing  

• Alternate Minimum Tax (AMT). 
   

I'm sure I have missed one or two. There are a number of tax grabs that don't have a specific name, but based on the size of the bite there surely ought to get one so we can all recognize them by name. One of these is the tax on RRSP or RRIFs, or the "RRIF Tax". When rules governing Registered Retirement Income Funds or RRIFs were relaxed in 1986 they became the overnight favorite tax shelter (over annuities) for converting RRSP savings into income. It probably became the RevCan's  favorite as well.

 Why, you might ask? 

Annuities provide guaranteed lifetime level income to the annuitant. Any unpaid capital portion of an annuity beyond the guarantee period vests in the insurance company for the benefit of other annuity holders and slips from the immediate grasp of the tax man. 

The RRIF Capital is always available and subject to full taxation and if not immediately brought into income (by taking only the allowable minimum levels) the capital grows for a considerable period of time. 

This significant exposure to tax comes as a surprise to many RRIF owners.

You may be pleasantly surprised when your $100,000 RRSP grows to be worth more than $160,000, yet you may be equally horrified to learn that $78,000  of this RRIF may be going to the tax man at your death. It's great to accumulate capital. 

Many, with alternate sources of income take the minimum RRIF payment to accumulate capital, tax  deferred for quite sometime; but have you wondered, for whom are you accumulating it. 

Under the new rules, 

The good news....

• by taking the minimum payment under a RRIF you will never outlive your RRIF capital. 

The bad news  ...

• after you (and if a spouse) both pass on, the residual amount of your RRIF is shared, not with your kids or anyone you prefer, but with  Canada Customs & Revenue Agency (CCRA), almost always equally. (CCRA = Canadians' silent partner) 
  You see, the total capital in your RRIF is considered income for the year of your death (or your spouse) and is taxed accordingly. This would almost certainly put you in the highest marginal tax bracket and expose 45% to 50% of your RRIF capital to Mr. CCRA's grasp. 

  This is particularly painful if this surplus capital was to be your legacy to the children or grandchildren. 

  This huge tax bite has led many people to seek ways of keeping more of their hard-earned capital in the family. One way to do this is a concept called the "RRIF-Raft". 
   

 Here is an example. (Assuming Min. RRIF income)

Sam and Betty Goodwill, are 65 and 64, respectively. Statistically, Betty will outlive Sam and is expected to live to age 83. At current rates, $100,000 put into a RRIF today will be worth nearly $160,000 when Betty dies. Unfortunately, after Mr. Revenue Canada's feast the estate will only be left with $82,000. Utilizing "the RRIF-Raft" concept the Goodwills can take a small part of the RRIF income and purchase life insurance  on a last-to-die basis. As a consequence, the RRIF will grow to only $141,000 at age 83; $18,000 less than before, but the after tax value to the estate is also $141,000, nearly a $60,000 improvement. 

The RRIF Raft concept helps the unused RRIF funds cross to the next generation. The Goodwills could try to save this amount on their own, outside the RRIF to provide the same benefit to the estate. 

At current rates it could take 35 years to accumulate the same amount because the investment income is taxed, while life insurance proceeds are tax-free. The RRIF-Raft concept is applicable to any RRIF even those already in place. If leaving money to the government at the expense of family or friends does not particularly appeal to you, consider establishing your very own RRIF-Raft; but age and health does have an impact on the cost so putting it off will not be to your advantage. In most instances persons unable to get insurance themselves can get joint-last-to-die RRIF-Raft coverage with their healthy spouse. 

Funding your Prepaid Capital Gains Tax Certificates for your capital gains tax exposure and funding your RRIF-Raft are both best accomplished through the purchase of life insurance. 
It's never too late to plan, but sooner is cheaper than later.