The Sources of Retirement Income

Clients want to know: “Where Will the Money Come From?”

After reading this, you should understand:  The sources of retirement income

There are four broad sources of retirement income: 1. Personal, non-registered savings; 2. Registered savings plans; 3. Registered pension plans; Registered Pension Plans 4. Government retirement pensions. (RPPs) A registered pension plan is a Personal, Non-registered Savings plan set up by an employer to As you will see in this section, contributions to registered savings plans, private provide a retirement pension plans, and government retirement pensions are all limited. The personal income for its savings plan will be the form in which people save funds in excess of these plans employees. since there is no limit to the amount that can be saved and invested. + FILE See File 50 Guaranteed Investment Certificates (GICs) are a popular savings vehicle for for an illustration of retirement and during retirement, due to their low risk. a GIC in practice.

Life insurance with cash value, segregated funds, and annuities are investments to which funds can be directed that provide for the tax-deferred growth and can supplement retirement income.

Life Insurance Policy Cash Surrender Values as a Source of Income + FILE It is not improbable to find a person with a life policy struggling to find ways to See File 51 for an supplement retirement income. illustration of life policies used for A policy with a cash value — that is, whole life or universal life — can help to retirement provide the policy owner or his or her spouse with an income during retirement. purposes.

LLQP

Options include: On the death of the life insured, using the face amount of the policy to buy a life annuity for the survivor. A life annuity will provide an income, until death. The cash surrender value (CSV) could be taken, and the proceeds used to buy a life annuity. A policy loan for 90% of the CSV could be taken and, although the death benefit would be reduced by the amount of the loan, a beneficiary would receive some funds at settlement, perhaps to assist with last expenses. If a universal life policy is in place, a cash withdrawal could be made, which, while reducing the amount of death benefit, does not require the policy to be sacrificed.

While each option has benefits and drawbacks, they are useful to bear in mind + FILE See File 52 for on should the need for retirement income take precedence over estate-planning uses use of life insurance for final expenses. (such as the payment of capital-gains tax).

Personal savings can also include the equity that has been built in a home via mortgage payments. Such equity can be accessed by a reverse mortgage: an option that is beyond the scope of the LLQP course.

Which of the following statements is correct?

A Policy CSVs can create an income stream via the purchase of an annuity. B A variable annuity will create a stable income. C Insurance policy loans exceed 90% of CSVs when they are used to purchase an annuity. D There are no drawbacks to utilizing accumulated cash surrender value as retirement income.

Tax-Free Savings Accounts (TFSA) Earlier in this book we referred to the new savings plan, the Tax-Free Savings Account, and its use to fund the costs of higher education. The TFSA will also be very useful in the context of planning for retirement income.

Like RRSPs, the TFSA has a limit to the amount that can be contributed; in 2010 and 2011 the amount will be $5,000. That figure will be indexed for future years at the inflation rate, in $500 increments. Unused contribution room can be carried forward, as with an RRSP. The investments in the TFSA can be held in the same investments as an RRSP. On the death of the plan owner, plan assets can be transferred to the TFSA of the owner’s spouse or common-law partner.

Unlike RRSPs, the TFSA contribution is not tax-deductible, and withdrawals are not taxed.

The TSFA provides a valuable opportunity for tax-free investment growth, while providing retirees with a source of income that will not affect their OAS benefit (because withdrawals are not taxable income). Withdrawals from the TFSA are unlimited.

Comparison of RRSPs/RRIFs and TFSAs

RRSPs/RRIFs TFSAs Contribution limit $22,450 $5,000 (2011) Tax deductibility of yes no contributions Tax on withdrawals yes no Tax on investment no no growth while in the account

Registered Savings Plans A registered savings plan is initiated by the client. There is no requirement to have such a plan. It is simply an excellent idea to have one to take advantage of the tax savings that such a plan provides.

Registered Retirement Savings Plans A Registered Retirement Savings Plan (RRSP), as provided for by the Income Tax Act, is a plan designed to help people save for their retirement. The plan permits individuals to receive a tax deduction for their contributions to the RRSP, and then defers tax on growth within the plan until withdrawals are made. A RRSP can help an individual attain a higher standard of living during retirement by supplementing their government or private pension with additional funds.

An RRSP is available as a managed or self-directed plan. In both types of plans, the plan holder chooses from a variety of investments, though the self- directed plan holder has options not available to the managed plan holder.

A managed plan is one in which the plan holder’s contribution is invested in products held in trust under the plan. Managed plans offer a wide range of investment options, including Guaranteed Investment Certificates (GICs), index- linked GICs, retirement savings deposits, mutual funds, and segregated funds.

In a self-directed plan, also called a self-administered RRSP, the plan holder’s contributions are administered by a bank, trust company, or investment dealer. All investment decisions are made by the plan holder. Investment options, such as some stocks, are available to the self-directed plan holder that are not available to the managed plan holder.

Qualified investments for self-directed RRSPs include: Money on deposit in banks or similar institutions;

Bonds, debentures, and similar obligations guaranteed by the government of Canada, a province, municipality, or crown corporation (including Canada Savings Bond issues);

Shares and debt obligations of Canadian public companies;

Shares of foreign public corporations listed on a stock exchange outside Canada;

GICs issued by a Canadian trust company;

Certain annuities issued by Canadian companies;

Shares of a utility company can be purchased within a self-directed RRSP. In a managed plan, such shares would be acquired through the holdings of a mutual fund.

Units of a mutual-trust or an insurance-company pooled fund;

Rights or warrants related to securities that qualify for a RRSP;

The purchase of call options on Canadian equities or Canadian debt instruments on a recognized Canadian exchange and the writing of covered calls on Canadian equities on a recognized Canadian exchange;

A mortgage, or interest in a mortgage, or a pool of mortgages secured by real property located in Canada. Interest in Mortgage-Backed Securities (MBS) (i.e., pools of first mortgages on Canadian residential properties guaranteed by Canada Mortgage and Housing Corporation) and shares in most Canadian mortgage investment companies;

Shares, bonds, debentures, or similar obligations issued by certain cooperatives or credit unions, and shares of certain investment corporations;

Certain life insurance policies;

Bankers’ acceptances;

Limited partnership units listed on a Canadian stock exchange;

Capital stock of a small business corporation (SBC), qualified venture capital corporation, or specified cooperative corporation;

Gold and silver bullion of acceptable purity.

Investments that do not qualify for self-directed RRSPs include: Precious metal bars and coins with fair market value above their stated value as legal tender; Shares and debt obligations of private corporations subject to some conditions being met; Commodity futures contracts; Works of art, jewellery, or antiques.

Which of the following do not qualify as investments for self-administered RRSPs?

A Gold, and silver bullion B Diamonds, emeralds, and rubies C Certain life insurance policies D Mortgage-backed securities

Making Contributions to a Registered Plan All individuals who have eligible earned income (including non-residents with Canadian earned income) may contribute to an RRSP up to December 31 of the year in which they reach age 71. Although individuals may own as many RRSPs as desired, they may retain ownership of their plans only up to the end of the calendar year in which they turn 71. At that point, the plan is said to have ―matured,‖ and it must be cashed out (and tax paid accordingly), or converted to a Registered Retirement Income Fund (RRIF) or annuity.

Each year, the Canada Revenue Agency mails taxpayers a statement that confirms their maximum RRSP contribution limit for that year. Contributions to an RRSP for a calendar year may be made during that specific calendar year or up to 60 days after the end of the calendar year, unless the contributor has turned 71 that year. In that case, the contributor must contribute by year-end.

The issuers of RRSPs are required to provide plan owners with official tax receipts for their contributions by March 31 of the following year. These are attached to his or her income-tax return.

Retirement funds are locked-in to provide the employee with a future retirement income.

Contributing to an RRSP There are six factors that determine how much can be contributed to a RRSP:

1. The Annual Contribution Limits There is a maximum amount that can be contributed annually to an RRSP. It is the lesser of two amounts: the dollar amount limit for the year, as specified by the Canada Revenue Agency ($22,450 in 2011) or 18% of the previous year’s earned income.

The dollar amount limit of contribution increases annually.

Determining earned income correctly is essential to an accurate computation of a person’s contribution limit. Earned income for RRSP contributions is different from earned income for tax purposes. The fundamental difference is that earned income for tax purposes includes investment income (interest, dividends, and capital gains), whereas earned income for RRSP purposes does not include investment income.

Which of the following are not considered “earned income” for RRSP calculation purposes?

A Payments from a DPSP B Stock dividends C Deferred annuity income D All of the above

Determining Earned Income

Earned income includes: Deductions from earned Not included in earned income: income for RRSPs: Gross salary (before deductions Alimony paid and any taxable Investment income for CPP, EI, etc.) support payments Commissions Deductible employment-related Pension benefits expenses, such as union dues, professional association charges Net business income Rental losses Retiring allowances Net research grants Pension adjustment Severance pay Royalties Past service pension adjustment Death benefits Alimony received and any Payments from a RRSP, RRIF, taxable support payments or deferred profit-sharing plan Net rental income Disability income from CPP

2. The Annual Contribution Limit, Reduced by Contributions to Other Pension Plans The amount that can be contributed to an RRSP is reduced by contributions made to a Registered Pension Plan (RPP) or a Deferred Profit-Sharing Plan (DPSP). These are the types of pensions provided by employers.

The contribution to these plans is called a pension adjustment (PA). It is the amount contributed to the RPP or DPSP for the previous year. So, the amount that can be contributed to your RRSP for 2011 is reduced by your pension adjustment for 2010.

Sometimes an employee may be eligible to make optional additional contribution to his pension plan for years that he worked earlier. This kind of contribution is possible only in defined benefit plans and usually comes about under the following circumstances: a) The employer starts a new pension plan. To benefit old employees the plan may permit voluntary contributions for past years of service in the company. b) If the plan benefit is increased from, say, 1.5% to 2%, the plan may allow for voluntary contributions to reflect the benefit retroactively. Such voluntary contribution to a defined benefit plan when permissible is called a past service pension adjustment (PSPA), and it also reduces the amount of RRSP contribution.

A pension adjustment is . . . ?

A A clawback tax B A reduction in CPP benefits C The accrued benefits in CPP D The amount deducted when calculating allowable RRSP contribution room for the subsequent tax year.

3. The Annual Contribution Limit Increased by a Catch-up Contribution The amount of contribution room will be increased if the plan holder has failed to make the maximum RRSP contribution in any year. This amount, called the unused contribution room, is made known to the plan holder by a notification from the Canada Revenue Agency annually and can be carried forward indefinitely. This is called the RRSP carry-forward feature.

The phrase “carry forward” means?

A Part of the multiplication process B The balance of a taxpayer’s Alternative Minimum Tax credit C A brutal “piggyback” exercise commonly practiced in karate class D The act of allocating unused RRSP contribution to a future tax year

4. Overcontribution to RRSP The Income Tax Act allows RRSP plan owners a cumulative overcontribution amount of $2,000. The $2,000 overcontribution can be made at any time;

A penalty tax of 1% per month is assessed on the cumulative excess amount (CEA) in the Registered Retirement Savings Plans (RRSPs) plan until the excess is withdrawn.

The CEA is calculated as follows:

Total undeducted RRSP contributions after 1990, less individual’s unused RRSP contribution room + $2,000 (lifetime overcontribution limit)

If the overcontribution exceeds $2,000, a penalty of 1% per month is charged on the excess amount. The excess above $2,000 may be withdrawn without being taxed if it is done in the year in which the client receives a Notice of Assessment for the year the excess contribution was made or in the following year.

5. The Annual Contribution Limit Reduced by a Contribution to a Spousal RRSP + FILE See file 53 A legally married or common-law spouse may contribute to an RRSP registered for an illustration of in the name of his or her spouse. This is called a spousal RRSP. The maximum a spousal contribution to a spousal RRSP is equal to the contributor’s RRSP contribution RRSP. limit, minus any contribution that was made to his or her own RRSP. So, if the contribution limit of one spouse is $20,000, and he contributes $5,000 to the spousal RRSP, he has $15,000 left in contribution room for himself.

If withdrawals are made from the spousal plan in the year of the contribution or the two full years following, the withdrawal is taxable to the contributor.

Until several years ago, the reason to maximize contributions — and hopefully growth — in a spousal plan was to benefit from the lower tax bracket of that spouse when funds were withdrawn. However, since pension-splitting of RRSPs, RRIFs, and RPPs came into effect, the need to use spousal RRSP contributions for income-splitting has been diminished. A spousal plan can be used to split income more than 50% if the couple desires, by contributions to a spousal RRSP. A spousal plan is still useful if one spouse is older than 71 and the other younger, because contributions can be continued to be paid into the younger spouse’s plan until the plan matures.

A spousal RRSP uses contribution room of the contributing spouse. However, withdrawals may be taxed at a much lower rate if the spouse receiving the contribution has no other sources of retirement income.

Which of the following reasons illustrate why a spousal RRSP is a great retirement- planning concept?

A It allows the contributor spouse to reduce tax and access his cash immediately. B Spousal RRSPs are used in divorce settlements, often to the advantage of the contributor spouse. C The lower-income spouse can cash in the contributed amount, but must pay tax on the redemption proceeds. D The lower-income spouse will pay less tax on withdrawals than the contributing higher-income spouse.

6. The Annual Contribution Limit Increased by Retiring Allowances Retiring allowances include severance pay, sick-leave credits, and court awards for wrongful dismissal (except for damages for mental anguish, humiliation, etc.) earned for each year of employment prior to 1996. Although they are included in earned income, part or all of them may be transferred tax-free to a RRSP without using up annual RRSP contribution limits.

The amount that may be transferred is $2,000 for each calendar year (or part year) of service before 1996, plus $1,500 for each year of employment before 1989, for which employer contributions to his or her pension plan have not vested. There is no consideration for employment post-1995.

Summary of Contributions to an RRSP

Decreased by Annual Contribution Limit Increased by $22,450* or 18% of earned income Contributions to other Catch-up contribution pension plans Contributions to a One-time spousal plan overcontribution Contribution of retiring allowance

* For 2011

Calculate Your RRSP Contribution Limit

Practice this calculation using your own earned income for the last taxation year. To complete the calculation, even though the Pension Adjustment and Past Service Pension Adjustment may not be applicable to you, or you may not have unused contribution room, put $1,000 in each space.

1. Taxation year ______RRSP $ Limit: $______

2. Calculate earned income for the PREVIOUS year: $______x .18 = $______

3. Lesser of 1 or 2: $______

4. Minus the Pension Adjustment (PA) for the PREVIOUS year: $______

5. Minus the Past Service Pension Adjustment (PSPA) for the CURRENT year: $______

6. Equals current year’s RRSP contribution limit: $______

7. Plus any unused RRSP contribution room from all previous years: $______

8. Total RRSP contribution limit: $______

9. Plus $2,000 allowable overcontribution for those 19 years and older (if not already claimed) $______

Withdrawals from an RRSP There are three ways in which funds may be removed from a RRSP: As cash On maturity, when they are: - Transferred to an annuity; - Transferred to a Registered Retirement Income Fund (RRIF); - Transferred to another RRSP, as long as this is done prior to December 31 of the year in which the plan holder turns 71 years of age. At age 71, the RRSP must be converted to one of the above options; - On death.

Cash Withdrawal Funds may be withdrawn from an RRSP at any time. When funds are withdrawn, the financial institution is required to deduct a withholding tax on the amount withdrawn.

The gross amount withdrawn (including the amount of the withholding tax) is added to the plan holder’s taxable income for that tax year and is taxed at the individual’s marginal tax rate (MTR). Double taxation is avoided since the plan holder ―gets credit‖ for the tax that was withheld when the withdrawal was originally made.

The withholding tax for residents of Canada is as follows:

Withdrawals All provinces except Quebec Quebec* up to $5,000 10% 21% $5,001 to $15,000 20% 26% $15,000 + 30% 31% *includes 16% provincial tax

On Maturity All funds must be either withdrawn or transferred from the RRSP by the end of the calendar year in which the plan owner reaches the age of 71. Options for transferring the funds and continuing to defer tax include Registered Retirement Income Funds (RRIFs) and annuities.

“At the end of the year when we turn 71 we want to roll over the value of the plans into Registered Retirement Income Funds. If we don’t do that, the plans will be cashed out and we will be taxed on their value.”

On Death An RRSP holder can designate a beneficiary of the plan who can continue to enjoy the advantage of deferred tax on the funds. These beneficiaries include: - His or her spouse; - Dependent children or grandchildren.

Spouse The funds can be transferred tax-free (called a rollover) to the spouse’s own RRSP or RRIF. The spouse can also avoid paying tax on the transferred funds if they are used to acquire an annuity and pay taxes at the spouse’s marginal tax rates on withdrawals.

Dependent Children or Grandchildren If transferred to a financially dependent child or grandchild, the funds will be included in the income of the child or grandchild and taxed when received, or the amount can be transferred if they are used to buy a term annuity to age 18. The annuity must be purchased in the year the funds are received or within 60 days of year-end. Payments must begin no later than one year after the annuity has been purchased, and tax is paid on the annuity payments, when received by the child. A child or children with physical or mental infirmity can transfer the funds to the child’s RRSP or life annuity.

If any other beneficiary is named, the full value of the plan will be included in the income of the deceased, then the net funds are paid to the beneficiary.

What does the term “rollover” mean for RRSP annuitants?

A The tax-free transfer of the RRSP proceeds to a designated spouse on the death of the annuitant B A bad night’s sleep C A transfer of RRSP proceeds to a dependent child over age 18 D The conversion of an annuitant’s RRIF back to an RRSP

The Pros and Cons of RRSPs for Retirement Savings Advantages of an RRSP: Tax-deductible contributions within allowable limits. Thus, a person can reduce his or her income by making a RRSP contribution that will, in turn, reduce the amount of tax owed. When income is withdrawn from the RRSP, the plan holder is likely to be in a lower tax bracket and, so, less tax is paid.

Tax-deferred compounding of interest, dividends, and capital gains in the plan. This tax-deferred compounding allows the savings invested in the RRSP to grow much faster than they would if invested where they could not grow tax-deferred. However, the entire sum withdrawn in the year is taxed as income. There is no tax-preferential treatment for dividends and capital gains received in an RRSP account. The advantage is tax deferral.

Control over investments. RRSPs allow the plan holder to retain control over the management of his or her investments and they offer a wide range of investment options.

Pre-authorized contribution. PACs allow individuals to make monthly RRSP contributions in regular, easy-to-manage instalments throughout the year.

The carrying forward of unused contribution room. Plan holders can carry forward any unused contribution room from prior years.

The plan is unaffected by a job transfer or job loss.

It can provide money for an early retirement or a sabbatical from work.

It can provide for retirement income-splitting by a spousal contribution, thereby reducing the effective tax rate on the combined incomes.

Interest charged on a loan for an RRSP contribution is not tax-deductible, but the larger the RRSP contribution the more funds that can grow on a tax-deferred basis.

Choose the correct “investment benefit” of an RRSP from the following.

A Investment growth inside an RRSP is not taxed. B Compounded investment earnings are mixed with original capital deposits and are taxed as regular income. C Investment-growth compounds on a tax-deferred basis, as long as the earnings remain in the plan. D investment income is taxed at the annuitant’s MTR, regardless as to the type of investment earnings.

Disadvantages of Owning an RRSP When funds are withdrawn, the plan holder pays income tax on all funds as if they were interest. There is no preferential tax rate for dividends earned or capital gains or losses.

A graduated withholding tax is deducted from withdrawals.

At death, payments out of the RRSP to the plan holder’s estate are taxed as income of the deceased, unless they are directed to a spouse or a financially dependent child or grandchild of the deceased plan holder.

RRSPs are not creditor-proof, and may be seized by creditors, unless the funds are placed in an IVIC (segregated fund).

Non-retirement Uses of RRSPs + FILE In addition to their use for retirement savings, RRSPs can also be used for: See file 54 for the The Home Buyers’ Plan: details on the Home Buyers’ Plan and The Lifelong Learning Plan. Lifelong Learning Plan.

Home Buyer’s Plan (HBP) Up until 2009, the Home Buyers’ Plan allowed a RRSP plan holder to withdraw up to $20,000 from his or her RRSP to buy or build a qualifying home if neither spouse has been a homeowner in the year of such withdrawal or the previous four calendar years. In 2009, the amount of withdrawal increased to $25,000.

An RRSP owner can now withdraw up to $25,000 to buy or build a qualifying home if he or she has not been a homeowner for the preceding four years. The withdrawal must be repaid within 15 years.

Lifelong Learning Plan (LLP) If the taxpayer or his/her spouse is pursuing full-time studies in a recognized educational institution, a withdrawal of up to $20,000 may be made from an RRSP under the LLP over a period of four years ($10,000 maximum in any given year. It cannot be used to pay for a child.

A Registered Education Savings Plan (RESP) is used to save for the educational expenses for a child. The Lifelong Learning Plan gives an adult with an RRSP a way to access funds for higher education.

Are RRSP-funded HBPs and LLPs a “good thing”?

A Yes, they offer options to having to keep your money tucked away in an RRSP. B Yes, such plans help put RRSP capital to work. C Yes, HBPs and LLPs allow RRSP owners the opportunity to diversify their RRSP capital and generate higher income through further education and better job prospects. D No, because they reduce the amounts available for retirement.

The Agent and the RRSP When a client opens a registered account with an insurer, the agent has a responsibility to the client to ensure the funds are invested with the objectives of the client in mind and according to the client’s characteristics as an investor.

Based on suitability information, the agent must determine whether a managed or self-directed plan is best for the client. A client who has the interest, time, and desire to be an active investor and who will monitor investments on an ongoing basis will be a good candidate for a self-directed plan. An investor who wants to buy and sell shares must have a self-directed RRSP.

The time horizon of the investment must be carefully considered in a RRSP. The RRSP must be terminated before the end of the year in which the plan holder turns 71. For this same reason, liquidity of the investment may be an important issue: it will be essential to easily and quickly liquidate the contents of the RRSP if the investor plans to cash out the plan at its maturity date.

Finally, risk tolerance will be a very important factor in selecting appropriate investments for the RRSP. Saving for retirement is a serious savings goal that requires careful long-term thinking to assure that dreams will be met without sacrifices having to be made.

Agents have a fiduciary duty to advise clients fairly and accurately about sources of retirement income and the role life insurance can play.

What is the most important job of an insurance agent?

A To succeed to the “President’s Roundtable” for exceptional sales volumes B To find a balance between professional and personal ethics C To achieve personal financial freedom by age 55 D To insure that the financial goals and interests of his or her clients are met to the best of his or her ability.

Registered Retirement Income Funds (RRIFs) An RRSP matures on December 31 of the year in which the plan holder turns 71. The money in the RRSP must be moved out of the plan by that date. One of the options a plan holder has is to transfer RRSP funds into a Registered Retirement Income Fund (RRIF). A RRIF is an account to which RRSPs can be transferred without incurring tax at the time of transfer, and continues tax deferral on the transferred funds.

An individual may own as many RRIFs as he or she likes, and purchase them at any age, up to the end of the calendar year in which he or she turns 71. The earnings on the investments in the RRIF are tax-sheltered. Just as with RRSPs, RRIFs are available as managed and self-directed plans.

Why is “age 71” so important to Canadians?

A Death prior to age 71 is considered “premature”. B Women often live well beyond this age, and special retirement planning must be undertaken to insure these exceptional individuals can survive financially. C It is the age at which all individual registered plan owners must convert their retirement savings to retirement income. D Canadian military personnel can no longer defer a lump sum retirement benefit from the federal government.

RRIF Withdrawals A RRIF has an annual minimum withdrawal requirement. Withdrawals are reported as income annually. The minimum withdrawal is determined by the age of the plan holder or his or her spouse’s age, the date on which the RRIF was established, and other factors, such as whether the plan has been changed since it was first established. The Canada Revenue Agency (CRA) calculates minimum withdrawals as a percentage of the value of the plan.

When withdrawals are made in excess of the minimum, the same graduated withholding tax is applied as to RRSP withdrawals. The withdrawals must still be included in annual income, but an allowance is made for the amount withheld. Because amounts above the minimum can be taken, there is more flexibility in a RRIF than an annuity which provides a set benefit. (Please note that there is no maximum limit on the amount that can be withdrawn from an RRIF. The owner of the RRIF may choose to withdraw the entire balance in his/her RRIF and close the account.)

The minimum withdrawal amount is based on: ―Pre-March 1986‖: Used if the plan was established before March 1986 and has not been changed in any way since that date. In addition, there are restrictions for its use if the plan holds an annuity contract.

―Qualifying RRIFs‖: Used if the plan was established before 1986, but + FILE has subsequently been changed, or established between 1986 and before See file 55 for the details on a RRIF 1993, or established after 1993 when there has been a transfer from withdrawal. another Qualifying RRIF.

―All other RRIFs‖: Covers all other possibilities.

The CRA table applies from age 71 of the RRIF plan holder or his or her spouse onward. However, if the plan holder or spouse is 70 or younger, the minimum withdrawal is calculated as: 1 ÷ (90 minus the age of the plan holder or spouse) multiplied by the value of the RRIF. For example, if the plan holder who is 70 has a RRIF valued at $100,000, the minimum withdrawal will be:

1 ÷ (90 – 70) = 0.05 x $100,000 = $5,000.

RRIF Proceeds on Death When a RRIF plan holder dies, he or she is considered to have received immediately before death an amount equal to the fair market value (FMV) of all property held in the RRIF at the time of death. This amount will be included in the terminal tax return.

If the spouse of the plan holder is named as successor annuitant, the RRIF continues, the spouse becomes the annuitant, and income the spouse receives is taxed in the hands of the spouse.

When a spouse is named the sole beneficiary of a RRIF, the funds in the RRIF can be transferred to the spouse’s RRSP, if he or she is younger than 71, to an RRIF, or into a life annuity. Tax is not paid at the time of transfer but when payments are received.

If the spouse is named the sole beneficiary, the funds within the RRIF can be transferred to an RRSP if the spouse is younger than 71, to an RRIF, or can be used to buy an annuity. Tax will be paid when funds are received by the spouse as income.

A financially dependent child or grandchild of the annuitant who is dependent due to physical or mental infirmity is considered a qualified beneficiary and can defer paying tax on any transfer of the RRIF if it is transferred to a RRSP, RRIF,

or qualified annuity. If the child or grandchild is not physically or mentally infirm, but is dependent on the annuitant, the RRIF can be transferred to an annuity that makes payments until the child or grandchild is 18. The child will be taxed on the payments received.

+ FILE Transfer of RRIF on Death of Plan Holder (annuitant) See File 56 for transfer of a RRIF on death. RRIF can be paid to RRSP RRIF Annuity annuitant’s: Spouse or common-law partner *   Dependent child or grandchild due to    physical or mental infirmity Financially dependent child or    grandchild *Spouse or common-law partner must be less than 71 years of age.

A RRIF provides greater flexibility than an annuity. If the RRIF plan holder wants more funds in a year to take a trip, then the funds needed can be easily withdrawn. A penalty is charged when withdrawals are made from an annuity.

Do the proceeds of a RRIF have to be paid to the deceased annuitant’s estate?

A Yes, when no alternative beneficiary has been named on the plan. B No, they are always rolled over to the spouse. C Yes, if the deceased annuitant has a dependent less than age 18. D All of the above

Registered Pension Plans Private pensions are those pensions established by employers for the benefit of their employees. These pension plans are called Registered Pension Plans (RPPs). Not all employees have a pension plan from their employer.

An employer-sponsored RPP can take the form of a: - Defined plan; - Deferred profit-sharing plan (DPSP); - Group Retirement Savings Plan (GRSP).

A registered pension plan provides a pension to the plan member for the duration of his or her life.

We have suggested retirement planning begin at an age when other financial pressures have lessened, for most people in their mid to late forties. To answer the question ―How much will I have to live on from my pension?‖ you will need to turn to the pension benefit statement that registered pension plan members receive annually.

It will typically show the amount to be received on what is termed the Normal Retirement Date. However, the plan member should recognize the effect that inflation will have on the amount to be received.

About 20% of the defined benefit pension plans in Canada provide an automatic Cost of Living Adjustment (COLA) to help offset the effect of inflation. The COLA is based on the Consumer Price Index (CPI) published by Statistics Canada that measures the increase in the cost of living.

A company that sponsors a pension plan without a COLA may recognize that the pension it is providing is being diminished by inflation and will increase pensions accordingly. These increases cannot be planned for.

Defined Plans

A defined RPP plan is either a: Defined benefit plan; or a Defined contribution plan (also called a money purchase plan).

Defined Benefit Plan An employee with a defined benefit plan knows exactly how much he or she is going to pay for the pension and how much he or she will receive when retired. The employer, however, does not know precisely how much it is required to contribute since the amount of capital needed to provide the pension will be affected by interest rates during the period of accumulation.

On retirement, the funds from a defined benefit plan can be used to purchase a life annuity, or they can be transferred to a locked-in plan.

Defined benefit plan pensions are determined according to the type of plan the employer sponsors. There are four types of defined benefit plans: Career average earnings plans; Final average earnings plans; Best earnings plans; Flat benefit.

A career average earnings plan records a pension credit in every year of employment. These credits are pre-set and are expressed as a percentage of employment income for that year. Employees contribute a fixed percentage of earnings, and the employer contributes the amount needed to raise the fund to a level sufficient to provide the total pension credit for that year. Since an employee typically earns less when he or she first joins a firm than later, the amount of pension will be decreased by the lower-income years.

In a final average earnings plan, the final income-earning years (usually the highest income-earning years) are used as the basis for determining the pension income.

A best earnings plan bases pension benefits on an average of the best years of pensionable earnings, usually three or five consecutive years.

A flat benefit plan specifies the age and the number of years of service that are required before the employee is eligible for the benefit. A fixed amount will be received regardless of income.

N.B. Final average earnings and best earnings plans usually produce larger pensions.

Pension Plan Benefits: Best Bet for Highest Pension

$$$$ Highest benefit… best earnings plan $$$ next highest … final average plan $$ then… career average plan $ lowest of the four plans flat benefit plan

The ability to make retirement plans is enhanced by the defined benefit plan form of pension in which the pensioner knows exactly how much money will be received as a pension.

Defined Benefit Plan Past Service Benefits Sometimes an employee may be eligible to make optional additional contribution to his pension plan for years that he worked earlier. This kind of contribution is possible only in defined benefit plans and may come about usually under the following circumstances: a) The employer starts a new pension plan. To benefit old employees the plan may permit voluntary contributions for past years of service in the company; b) If the plan benefit is increased from, say, 1.5% to 2%, the plan may allow for voluntary contributions to reflect the benefit retroactively. Such voluntary contribution to a defined benefit plan when permissible is called a past service pension adjustment (PSPA) and it also reduces the amount of RRSP contribution that a person can make in the same year the past service contribution is made.

“Past service” means?

A Irretrievable pension credits B Special EI benefits for recently retired employees C Hours worked that are eligible for EI benefits and/or employer pension payments D Pensions for employees who worked for their employer prior to the implementation of an employer-sponsored pension plan.

Defined Benefit Plan Management Defined benefit pension plans give rise to substantial potential liabilities for employers; employers are obligated to provide adequate funding, since they must provide promised future benefits.

Many companies use the services of insurance companies to manage pension plans. The employer has the choice of three methods to fund a pension plan. All three options are designed to transfer some of the administration hassles and liabilities to the insurance company.

These plans are: Group annuity contracts; Deposit administration contracts; Segregated fund contracts.

Group annuity contracts: These limit the employer’s responsibilities to enrolling the employees, deducting their contributions from wages, and paying these and the employer’s contribution to the insurance company on a periodic basis (usually monthly).

Deposit administration contracts: Instead of making regular payments (e.g., monthly), the employer deposits enough money with the insurance company to buy the promised benefits. If contributions have been underestimated, then shortages have to be made up by extra deposits.

What is the major problem with defined benefit plans? A They are expensive to operate. B They are very complicated for plan administrators. C The employer is on the hook for any future pension funding shortfall. D All of the above

Segregated fund contracts: These contracts are similar to a deposit administration plan, except that they permit pension funds to be invested in potentially high-yield securities, such as bonds, common stock, and mortgages. Segregated-fund contracts seek to optimize the rate of return on pension funds to the employer in place of traditional performance guarantees. If the investments are successful, the final pension amounts are likely to be higher than under group annuity and deposit administration contracts, where the insurance companies invest the premiums and deposits in extremely low- or non-risk securities.

What investment vehicle(s) can help offset some of the problems faced by defined benefit plans today? A Precious metals bullion B Fixed-income securities C GICs D Segregated funds

Defined Benefit Plan Maximum Benefit The maximum yearly pension that can be provided by a defined benefit plan is the lesser of: $2,552 in 2011 multiplied by the number of years of pensionable service, or

2% per year of pensionable service multiplied by the average of best consecutive years of remuneration. Typically, three or five consecutive years is the period used.

After only two years of contributing to a pension plan, the plan member’s contributions are vested, meaning that they belong to the member irrevocably. However, the funds will be locked in until retirement.

Defined Contribution Plans A defined contribution plan, also called a money purchase plan, pools contributions of the employer and the employee to provide the pension. The employer and the employee each know the cost of such a plan, but the value of the pension itself is not known, because interest rates and investment earnings will have an impact on the total value of the pool of funds that are contributed.

N.B. An employee with a defined contribution plan does not know how much he or she will receive as a pension.

The contribution limit to a defined contribution plan (DCP) or money purchase plan (MPP) is similar to the contribution limit for a Registered Retirement Savings Plan: 18% of a year’s earned income. The key difference is that the RRSP contribution limit is based on 18% of an individual’s previous year’s salary. The contribution limit for a company’s defined contribution plan is based on 18% of the current year’s salary. Thus, the contribution limits for 2010 were $22,450 for a DCP and $22,000 for an RRSP.

In 2011, the limit for a DCP is $22,970 and for a RRSP is $22,450.

An employee with a defined contribution plan has the same options on retirement as one with a defined benefit plan: the funds can be used to purchase a life annuity, or can be transferred to a Locked-in Retirement Account (LIRA) or a Life Income Fund (LIF).

Why are employers moving away from defined benefit plans to defined contribution plans? They are:

A Cheaper to operate B Less complicated for plan administrators C Do not hold employers responsible for any pension funding shortfall D All of the above

Plan Funding The initial funding of a pension plan is based only on estimates, since future costs of the plan will change as the plan matures and employees begin to qualify for pension benefits. However, pension costs are traditionally calculated as shown in the following formula.

The Calculation of Pension Costs

benefit + administrative – interest earnings = plan cost costs costs of the plan

Regulations for Registered Pension Plans Provincial legislation ensures that pension plans are sufficiently funded, that employees receive their benefits, and that vested pension benefits are protected. The legislation covers: Pension eligibility; Vesting; Locking-in; Portability of pensions; Survivor’s benefits; Inflation indexing.

YMPE Eligibility: The federal and provincial governments have specific requirements The year’s maximum for eligibility for plan membership. Typically, all full-time employees with at pensionable earnings is the least two years of continuous service, and all part-time employees who have two amount of income above which years of continuous service and whose annual salary is 35% or more of the contributions to the year’s maximum pensionable earnings (YMPE) are eligible to join their Canada Pension Plan are not made. company’s pension plan.

Vesting: The entitlement of an employee to retain the contributions of an employer when the employee terminates is known as vesting. The minimum period in which vesting can occur is two years.

Locking-in: As we have seen, locking-in occurs when pension contributions are deposited to a Locked-in Retirement Account (LIRA), or Life Income Fund (LIF). Locking-in was created to prevent access to the funds prior to retirement.

Locked-in funds must begin to be brought into the income of a retired employee no later than the year following the calendar year in which the employee turns 71, or, if rolled into another registered plan, the plan must make minimum income payments.

Locked-in funds represent:

A Contributions made to an RPP B An RRSP that has not been transferred to a Registered Retirement Income Fund C Contributions made to a Registered Retirement Income Fund that have not yet vested D Funds in an RRSP that cannot be withdrawn until retirement

Portability of Pensions: An employee with vested contributions in a RPP who changes employment is entitled to transfer these funds to a LIRA, transfer the funds to another RPP of the new employer, transfer the funds to an insurer to purchase an annuity, or keep the funds with the existing pension plan until retirement.

Survivor’s benefits: Most plans provide members with a number of options regarding the payment of their pension after their death. They may include a specified guaranteed payment period, a joint-and-last-survivor benefit at amounts that vary from 50% to 100%, a 50% spousal benefit, or a combination of these options. Most provinces specify that the spouse must receive at least 50% of the pension upon the death of the pensioner, unless he or she specifically renounces that option in writing when choosing the pension benefit.

A key benefit of a registered pension plan is the payment to the spouse of at least 50% of the pension if the pensioner predeceases the spouse.

Inflation indexing: Defined benefit and defined contribution plans are adjusted for inflation in accordance with increases in the Consumer Price Index (CPI).

An RPP member with vested contributions can:

A Transfer his plan value to his or her new employer’s RPP. B Transfer his or her funds directly to a LIRA or to an insurance company annuity.

C Elect to keep the funds with the original employer. D All of the above

Locked-in Retirement Accounts (LIRAs) or Locked-in RRSPs An individual who is enrolled in a registered pension plan with his or her

Vesting employer has the right to keep the contributions the employer has made to the Vesting is the plan after the employee has worked for two years or more for the employer and right of an employee to keep changes jobs. This is called vesting and the funds themselves are called ―locked- an employer’s contributions to a in.‖ registered pension plan. Typically, this right exists Legislation prohibits these people from receiving their pension benefits in the after two years of employment. form of cash until retirement. Locked-in funds can remain with an employer even if the employee changes jobs, or the employee can transfer the funds as long as they remain locked-in.

Transfer options for locked-in funds are: A Locked-in RRSP, also known as a Locked-in Retirement Account (LIRA); A Life Income Fund (LIF) (in all provinces except Saskatchewan); A Locked-in Retirement Income Fund (LRIF) (in Newfoundland and Manitoba); A Prescribed RRIF (in Saskatchewan and Manitoba); A deferred life annuity (i.e., annuity payments would commence at retirement age); Another Registered Pension Plan (where the plan permits).

Locked-in RRSPs may hold the same types of investments as regular RRSPs and can be managed or self-directed.

A Locked-in Retirement Account (LIRA) is another name for a Locked-in RRSP. Pension benefits may be transferred from an employer’s plan when the employee leaves the company prior to the age of retirement to the LIRA. A LIRA generally restricts the withdrawal of funds, just as the original pension plan would do. On retirement, the funds in a LIRA continue to be locked-in and, by the end of the year in which the plan owner turns 71, the LIRA funds must be used to purchase a life annuity or transferred to a Life Income Fund, Prescribed Retirement Income Fund, or Locked-in Retirement Income Fund.

Funds in a LIRA can be unlocked on specific occasions: When there is serious financial hardship; When there is shortened life expectancy; In cases of non-residency;

When assets are below a certain level as established by the province in which the account is based.

An Alberta resident who is at least 50 years old may, with the consent of their spouse or partner, unlock up to 50% of the value of their LIRA at the time it is being transferred to a Life Income Fund or annuity.

Life Income Funds (LIFs) A Life Income Fund (LIF) is a retirement income fund into which the accumulated savings in a pension fund, a Locked-in RRSP, or a Locked-in Retirement Account (LIRA) or another LIF may be transferred and then paid out to the fund owner as retirement income. LIFS are not available in Saskatchewan.

LIFs offer a flexible retirement income option; the principal and income remain tax-sheltered until withdrawn, and there is a range of investment options to choose from, similar to those held within a RRSP or LIRA. The owner of the LIF controls the amount of income (within limits) that he or she will receive.

Income payments must begin no later than the end of the year after the LIF is opened. In Newfoundland, the funds in the LIF must be used to purchase a life annuity at age 80; a married plan owner must buy a joint-and-last-survivor annuity. In all other provinces, at age 90, all funds in the plan may be withdrawn.

The minimum age to establish a LIF is set by the pension standards legislation in the province in which the funds originated: In Alberta the minimum age is 50; In Ontario, it is within ten years of normal retirement date, typically 55; In British Columbia, it is age 55, unless the pension plan allowed for an earlier retirement date; In Manitoba, New Brunswick, and Quebec, the account can be opened at any age.

Income-stream options from a LIF are similar to those from a RRIF, in that the plan holder must withdraw a minimum amount each year. Unlike RRIFs, however, there is a maximum to annual withdrawals. The maximum is determined by a formula that applies a term-certain annuity to age 90 to the value of the fund at the beginning of each year. This limit prevents the plan holder from cashing out the plan (unlike a RRIF, which may be cashed out at any time). The maximum annual withdrawals from LIFs are set provincially, and may vary from year to year.

Withdrawals from a LIF are subject to a graduated withholding tax to amounts above the annual minimum, again just like a RRIF. The annuitant must include the total amount withdrawn in his or her income in the year in which the withdrawal is made. However, the annuitant-taxpayer is credited with the amount of withholding tax already paid.

When a LIF holder dies, the same options are available as with a RRIF plan. This includes rolling over the plan to the spouse’s LIF or LIRA or purchasing an immediate or deferred annuity tax-free. Payments received from these by the spouse will be taxable to the spouse in the year received.

Manitoba allows LIF and LRIF plan owners to transfer up to 50% of their plan to a Prescribed RRIF (PRIF).

Prescribed RRIF (PRIF) Available only in Saskatchewan and Manitoba, the PRIF provides the greatest flexibility for locked-in funds, since there is no limit to the amount of withdrawals that can be made annually. The annual minimum limit is established by the Income Tax Act. A spouse must agree to the PRIF account, since it could be depleted and thereby not be able to provide survivor benefits if the plan holder should die.

In Saskatchewan, funds can be transferred into the PRIF only when the plan holder is eligible to begin receiving a pension; a Manitoban must be at least 50 years old.

Locked-in Retirement Income Fund (LRIF) The Locked-in Retirement Income Fund (LRIF) permits the deposit of locked- in funds. The LRIF can be a fully self-directed plan. The LRIF pays out a minimum amount yearly that is equivalent to the RRIF minimum; there is also a maximum that can be withdrawn.

The maximum payout is complicated: In the first year of the plan, the maximum is limited to 0.5% of the initial value of the LRIF per month. In the second year, the maximum is limited to the greater of 6% of the January 1 value, or the total investment income earned the previous year. Thereafter, the maximum is limited to the greater of the earnings of the fund in the previous year, or the net earnings (earnings minus all payments) since the plan was established.

LRIFs are currently available only in Manitoba and Newfoundland.

Changes to LIFs and LRIFs: New Brunswick provides a one-time opportunity to unlock up to three times the maximum annual withdrawal of a LIF, but not to exceed 25% of the value of the plan. Note re: Exam The changes On January 1, 2008, a New LIF was introduced in Ontario to replace the existing described here will not be examined but LIF and LRIF. Old LIFs continue, but the New LIF has more flexible payments are important to and the opportunity to withdraw up to 25% of the money transferred into the understanding the subject. account if the withdrawal is made within 60 days of transferring funds.

The maximum amount that can be withdrawn is the greater of the amount that would have been paid by the formula (referred to above) or the amount of investment earnings in the account in the previous year. The maximum withdrawal made annually from the LIF will see the account exhausted by age 90. However, if the maximum amount has not been taken, the account will continue after age 90, and withdrawals can continue.

To acquire a New LIF, money must transferred from an Old LIF.

After December 31, 2009, anyone who acquires a New LIF will have a one-time opportunity to withdraw or transfer up to 50% of the total market value of the assets of the fund to an RRSP or RRIF. Starting January 1, 2010, these LIF owners can withdraw or transfer an additional 25% of the assets of the fund that were in the account before this date.

Between January 1, 2011, and April 30, 2012, owners of Old LIFs and LRIFs will have a one-time opportunity to withdraw or transfer to an RRSP or RRIF up to 50% of the total market value of the assets of the fund.

Deferred Profit-Sharing Plans (DPSPs) A Deferred Profit-Sharing Plan (DPSP) is a trust created for all employees of a company, or one or more classes of employee of that company (such as executives), and registered with the Canada Revenue Agency. A trust company acts as trustee.

In order to be registered, a DPSP must provide for employee vesting, which allows the employee to take control of his or her plan, not later than two years after the employee first becomes a beneficiary under the plan. A DPSP cannot be registered if any of the beneficiaries of the plan are related to a shareholder who owns more than 10% of the voting shares of the company. Copyright © 2011 Oliver Publishing Inc. All rights reserved. 353 LLQP

Only the employer makes contributions on behalf of the employees who are members of the plan. The contributions and earnings accumulate in the plan tax- deferred, and can be withdrawn upon retirement or earlier, once the contributions have vested with the employee.

The DPSP must set out the effective date and eligibility of the participants. It must clearly stipulate: Retirement age; Death and termination benefits; How payments are to be made; How the plan can be amended or terminated.

The plan must ensure contributions are allocated only for the participants, and that these contributions are defined, and vest irrevocably with the employee (that is, pass into the possession of the employee) within 24 months, once the employee becomes a beneficiary.

Identify which of the following statements is true.

A A deferred profit sharing plan is designed exclusively for executives and key employees. B Both employees and employers contribute to a DPSP. C A withdrawal cannot be made prior to retirement age. D None of the above

How DPSP Funds Are Invested Qualified Deferred Profit-sharing Plan investments are similar to RRSPs, except a DPSP is prohibited from holding employer debt. However, a DPSP is allowed to purchase Treasury shares of a qualified employer-company (that is, the company that is the employer).

Employer Contributions to a DPSP Contributions are made only by the employer; they are limited to the lesser of 18% of employee earnings for the year or $11,485 in 2011 ($11,225 in 2010).

An employer can make contributions up to 120 days after the fiscal year-end of the company.

N.B. Employees are not permitted to contribute to a DPSP.

If an employee had an income of $48,500 for 2008, what is the amount his employer contributed on the employee’s behalf to a DPSP for that year?

A $9,000 B $8,475; C $7,980 D $8,730

Benefits and Withdrawals from a DPSP The employer must pay all vested amounts to the employee (or the employee’s estate) within 90 days after death or if the employee terminates his or her employment. Partial withdrawals from vested funds are possible.

Payments, which must start within 90 days following the employee’s retirement or the employee’s 71st birthday, whichever is earlier, can be paid to the employee as: A lump sum in cash and/or stock; Periodic payments for no more than a 10-year period: A life annuity.

A DPSP can be transferred to a Registered Pension Plan (RPP), an RRSP, or another DPSP plan, as long as the ―new‖ plan has at least 10 members and has existed for one year. All other funds are taxable as income when withdrawn.

Are there any withdrawal restrictions to a DPSP and if so, what?

A No; B The employer must pay all vested amounts to the employee or to the employee’s estate within 90 days of termination of employment or the member’s death. C An employee can take the DPSP settlement in cash or company stock at any time; D It is a locked-in plan, and withdrawals are restricted to retirement.

Group Retirement Savings Plans (GRSPs) Group retirement savings plans (GRSPs) provide benefits similar to those offered by individual RRSPs, except an employer, union, or professional association administers them on a group basis. Employees or members contribute by wage deduction matched wholly or partially by the employer, union, or association. All employer contributions are deductible by the employer as salary payments and taxable to the employee as salary received.

Group RSPs are not locked-in, and can be cashed whenever the employee decides, depending on the terms of the plan.

What is the drawback to owning a GRSP?

A Employer contributions made to a GRSP on an employee’s behalf can be liquidated by the employee at any time. B There is no incentive for employees to save for their retirement. C Employees are responsible for making all the investment decisions. D All of the above

Government Retirement Pensions Canadian government retirement pensions include: Old Age Security (OAS); Guaranteed Income Supplement (GIS); The Allowance; Canada Pension Plan/Quebec Pension Plan (CPP/QPP).

Old Age Security (OAS) The Old Age Security (OAS) pension is a monthly benefit payable to all Canadians or legal residents age 65 and over who apply and meet residence requirements. Administered by Human Resources and Skills Development Canada, a department of the federal government, the OAS is funded from general tax revenues. The benefits are adjusted quarterly, and are indexed to the Consumer Price Index (CPI). Benefits received from the OAS are taxable income.

An application for OAS pension benefits can be made six months prior to eligibility, and must include proof of age, and legal residence status of the applicant. Payments begin the month after the month the applicant meets the requirements, but may be made retroactively for up to 12 months if the application is late. A person is entitled to receive payments while absent from Canada if he or she resided in Canada for a total of 20 years after age 18. Those with less than 20 years of residence can receive payments outside of Canada for a maximum of six months. However, if a pensioner returns to Canada, payments will begin again in the month of his or her return.

Summary of Registered Pension Plans

Defined benefit Defined Deferred profit- Group retirement plan contribution sharing plans savings plans plan Benefit Known by Unknown by Known by Unknown by payment employee employee employee employee Benefits for Options provided Options provided Options provided Options provided for survivors for survivor for survivor for survivor survivor Contribution Known Known Not allowed Known by employee Contribution Unknown Known The lesser of 18% Known by employer of annual employee earnings or an annual maximum Contributors Employees and Employees and Employers only Employees and employers employers employers Eligibility All full-time and All full-time and All full-time and All full-time and part-time part-time part-time part-time employees employees with at employees with at employees with at with at least 2 years least 2 years of least 2 years of least 2 years of of continuous continuous service; continuous service; continuous service; service; annual salary annual salary must annual salary must annual salary must must be 35% or more be 35% or more of be 35% or more of be 35% or more of of the year’s YMPE the year’s YMPE the year’s YMPE the year’s YMPE Inflation At the discretion of At the discretion of Not applicable Not applicable protection the employer the employer Locked-in Yes Yes Yes No Options on LIRA, LIF, or life LIRA, LIF, or life Lump-sum RRSP, RRIF, lump- retirement annuity annuity payment; stock; sum payment, periodic payments; annuity life annuity Portable Yes Yes Yes Yes Taxation of As income As income As income As income benefits Taxation of Contribution by Contribution by There is no Contribution by contributions employee is tax employee is tax employee employee is tax deductible deductible contribution, and deductible therefore no tax deduction Vested Yes Yes Yes; allows for Yes partial withdrawals

A resident is entitled to a full pension after 40 years of residence in Canada after age 18. A minimum of 10 consecutive years of residence after age 18 entitles a resident to a partial pension. This is earned at a rate of 1/40 of the maximum pension for each full year of residence in Canada (e.g., the minimum pension is 10 x 1/40 = 25% of the full pension).

For qualifying purposes, certain temporary absences from Canada for employment or studies do not interrupt the qualifying periods of residence or presence in Canada.

If a 37-year-old Canadian with 19 years residency leaves the country, can this individual receive OAS benefits? Choose the best answer.

A Yes B No C Yes, for a maximum of six months only D Yes, after a six-month waiting period

One reason to split income between spouses is that each spouse’s income is considered separately for the Old Age Security clawback. If income is transferred from the higher- income spouse to the lower- income spouse, the clawback may be reduced or even eliminated.

OAS Clawback or Repayment Those who earn high incomes — perhaps as a combination of income from private pension plans, registered plans, and investments — will have their OAS benefits taxed through a special tax that has been known as the clawback, and is now officially called the ―repayment.‖

The clawback reduces benefits for those with a net income that exceeds $67,668 (in 2011) after most deductions, including those for RRSP contributions, have been made. If net income exceeds the annual amount stipulated by the Department of Finance, the entire OAS benefit is repaid. Spouses’ incomes are not pooled in determining how much will be repaid; each person’s income is considered separately.

Note: These figures for OAS and the clawback increase annually. You are not required to know the annual dollar amounts of the clawback, but you are required to understand how retirement income can affect the clawback.

N.B. Splitting income moves income from a higher-income spouse to a lower- income spouse (i.e., husband to wife). Doing this can reduce or eliminate the clawback.

Guaranteed Income Supplement (GIS) The Guaranteed Income Supplement (GIS) is a monthly benefit paid to residents of Canada who receive the OAS and have little other income. The GIS is paid to those 65 and older who pass an annual income test.

The GIS is paid differently for single pensioners and for married pensioners. The amount a single pensioner receives is reduced by $1 for each $2 of other monthly income; the amount a married pensioner receives is reduced by $1 for each $4 of their other combined monthly income. More details on GIS rates and the Allowance is available from Human Resources and Skills Development Canada.

Recipients must re-apply annually for the GIS. Benefits are not taxed and are payable outside Canada for a maximum period of six months.

The Allowance The Allowance, formerly called the Spouse’s Allowance, is a monthly benefit paid to residents of Canada whose legal or common-law spouse receives the OAS and the GIS, and who have little other income. The applicant must be between 60 and 64 and meet residency and income-needs criteria.

Canada Pension Plan/Quebec Pension Plan (CPP/QPP) The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) have virtually the same requirements and benefits, and for this reason are frequently discussed as if one plan. The distinction is that the CPP applies to all Canadians outside the province of Quebec; the QPP is for Quebec residents only.

The CPP is available as a retirement pension, a disability pension, and survivor benefits. This section focuses on the CPP as a retirement pension.

The following concepts are fundamental to understanding the CPP retirement pension: Contributions; The year’s basic exemption (YBE); The year’s maximum pensionable earnings (YMPE); Pensionable earnings; Average monthly pensionable earnings (AMPE).

Contributions to the CPP are made by both the employee and employer, except when self-employed. Employment earnings between the Year’s Basic Exemption and the Year’s Maximum Pensionable Earnings are currently contributed at a rate of 4.95% by each of the employee and employer to a total of 9.9%. It is not possible to make additional contributions.

All working Canadians, aged 18 and older, contribute to the Canada Pension Plan. Contributions are invested by the government to ensure income will be available for retirement, disability, and survivor benefits.

If a person is self-employed, he or she is responsible for the entire contribution (9.9%). The portion of the contribution that represents the employer’s share (4.95%) can be deducted by the employer (and by the self-employed worker) and the employee’s share is allowed a federal tax credit.

CPP Contributions and Income Annual income

Year’s basic Year’s maximum exemption Pensionable earnings pensionable (YBE) earnings (YMPE)

no contribution employee and employer each contribute no contribution 4.95%; self-employed contributes 9.9%

Contributions are made by all those who work, including part-time employees, beginning at age 18. Contributions end when CPP starts (between 65 and 70), at age 70, or at death.

The year’s basic exemption (YBE) is the amount of income below which CPP contributions are not made. It is currently pegged at $3,500.

Pensionable earnings is the amount of income on which the pension contribution is based.

The year’s maximum pensionable earnings (YMPE) is the amount of income above which contributions are not made. This amount is pegged at $48,300 for 2011.

The average monthly pensionable earnings (AMPE) is used to determine the amount of the monthly retirement pension. It is determined as the total pensionable earnings, divided by the number of months that contributions were made (or 120, whichever is greater). The monthly retirement pension at age 65 is 25% of the AMPE to a maximum amount.

Determining the Amount of CPP Retirement Pension a) Determine Total Pensionable Earnings: All pensionable earnings together = total pensionable earnings

b) Determine Average Monthly Pensionable Earnings The greater of: Total Pensionable Earnings = Average Monthly No. of Months of Contributions Pensionable Earnings

or 120 months (whichever is greater)

c) Determine monthly CPP retirement pension Average Monthly Pensionable Earnings x 25% = Monthly Retirement Pension

Early or Late CPP Retirement Options A CPP recipient can elect to begin receiving his or her pension as early as age 60 if he or she has stopped working or earns less than the year’s basic exemption (YBE), and as late as age 70.

+ FILE For an early entitlement, the pension is reduced by 0.5% for each month the See File 57 for early and late CPP. recipient is younger than age 65. The recipient must prove that he or she is no longer employed or has an income lower than the amount that would be received in the CPP payment.

When the pension is delayed, it is increased by 0.5% for each month the recipient is above the age of 65. Benefits are capped at age 70, and contributions can no longer be made.

CPP Death Benefit When a CPP contributor dies, a death benefit is payable to his or her estate. The benefit is equal to the total payment that would have been received by the contributor for six months at age 65. The maximum death benefit is $2,500.

CPP Survivor’s Pension The surviving spouse or common-law partner of a CPP contributor will receive a monthly pension. The maximum amount that can be received is 60% of the contributor’s retirement benefit; the maximum is available only to survivors who are age 65 or older.

Children’s CPP Benefit When a CPP contributor dies, his or her child can receive a monthly children’s + FILE benefit. This benefit is adjusted annually; in 2011 the maximum monthly benefit See File 58 for an integration of is $218.50 a month per child. This benefit is paid to age 18; to continue to receive pension benefits. the benefit until age 25 a child must prove full-time attendance at a post- secondary institution.

If both parents were CPP contributors, and they die, their children may receive two benefits.

Summary of the CPP Retirement Pension Benefit payment Not automatic; the recipient or a person acting in the capacity of his or her power of attorney must apply. Clawback None; pension is paid without consideration for other assets and income. Contribution period Canadians aged 18 to 65, and to age 70 if the person continues to work until that age Contributions 4.95% of employment earnings contributed by both employee and employer above the Year’s Basic Exemption up to the Year’s Maximum Pensionable Earnings or a total of 9.9%; self-employed contribute full 9.9% Contributors Employees and their employers; self-employed Death benefit Yes, to a maximum $2,500 lump sum Exempted from plan Casual and migratory workers; those employed in agriculture, fishing and forestry; and those with annual income less than $250 Inflation protection Pension and benefits are linked to the Consumer Price Index and are adjusted annually. Participation Compulsory for Canadian employees, with exemptions as noted above, including those who are self-employed; program is portable and is not interrupted by changes in employment Tax Contributions are tax-deductible to the employer, and employee contributions receive a tax credit; pensions and benefits are taxable to the recipient

The government has introduced changes to CPP that take effect gradually from 2011 to 2016. The basic changes are summarized below: For late retirement after age 65 the percentage increase will go up to 0.7% per month from the current 0.5% per month, or to 8.4% per year of late retirement by 2013. For early retirement before age 65, the condition of reduced income has been removed, and a person may start receiving CPP benefits from age 60 onwards while continuing to work. The percentage decrease in CPP benefits will be increased from the current 0.5% per month to 0.6% per month or 7.2% per year of early retirement by 2016. Those working after age 60, and their employer, must continue to contribute to CPP, even when the person is receiving CPP benefits. These additional contributions will increase the CPP benefit gradually for the person by way of post-retirement benefit (PRB). A person may choose to continue to contribute to CPP (the employer also needs to continue contributions) after age 65, up to age 70. These additional contributions will increase the CPP benefits for the person gradually, by way of PRB.

Retirement Products

Type of Policy Best for people who… Segregated are concerned about claims of creditors, either in lifetime or on death. Funds have established a degree of financial security, but still wish to achieve growth in their investments. do not have the risk tolerance necessary to risk losing all the value of an investment. need an RRSP-eligible investment (they may also be held as a non-registered account). RRSP want to use the tax advantages offered by an RRSP (deductible contributions and tax-deferred growth). plan to take advantage of the wide variety of investment options available within RRSPs. enjoy the discipline forced on an investor by an RRSP, in that withdrawals from an RRSP have tax consequences. Term Certain require a regular income stream for a fixed period. Annuity may or may not be concerned about retirement. Life Annuity require a guaranteed income stream in retirement. wish to take advantage of continued tax deferral after maturing a registered plan. wish to receive retirement income that may be taxed favourably. RRIF are seeking continued tax deferral after maturing an RRSP. wish to take advantage of many of the features offered by an RRSP while in retirement. LIF need to mature a locked-in retirement account. do not wish to use a life annuity. LRIF need to mature a locked-in retirement account. do not wish to use a life annuity. only available in certain provinces.