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Canadian Tax Rules 'Put Pensioners At Risk'

by Mike Godfrey,, Washington

10 June 2014

Canada's pension rules have failed to keep pace with increased life expectancies, and force Registered Retirement Income Fund (RRIF) holders to run tax-deferred assets down rapidly, the C.D. Howe Institute has said.

A new e-brief from the Institute, Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update, warns that retirees are struggling to balance their need for current income against the risk of outliving their savings.

Federal tax rules require those with tax-deferred savings to either purchase annuities or transfer their assets into RRIFs or similar vehicles. The Income Tax Act obliges RRIF holders to withdraw minimum annual amounts on the basis of an age-related formula. The amount to be withdrawn increases each year, until it reaches 20 percent.

As the Institute explains: "By forcing the drawdown of assets that have received tax-deferred treatment, these provisions accelerate or otherwise ensure steady receipt of government tax revenue that would otherwise only occur on the death of the account holder or his/her spouse, partner or beneficiary."

The Institute says that in 1992, when the rules were introduced, "the federal government was deficit-ridden and hungry for cash. Now it is close to surplus, and the timing of receipt of those taxes matters less to the government."

RRIF holders are facing "serious erosion in the purchasing power of tax-deferred savings in their later years," it claims.

Statistics Canada puts the average life expectancy of a 71 year old man at 14.4 years and that of a 71 year old woman at 16.9 years. The Institute estimates that if a 71 year old with CAD100,000 (USD99,450) in an RRIF withdraws the minimum mandatory amounts, the real value of their tax-deferred nest egg will drop below CAD50,000 by the end of 2023, when he or she turns 80.

At the age of 87, their RRIF balance will fall below CAD25,000. If they reach 94, their balance will be less than CAD10,000, a 90 depletion of its real value, according to the Institute.

The Institute is calling on the Government to raise the ages at which minimum drawdowns must begin and to reduce the drawdown amounts.

"Governments impatient for revenue should not force these Canadians to run their tax-deferred assets down prematurely. Reforming the withdrawal rules for RRIFs and similar accounts would help retirees enjoy the post-retirement security they are striving to achieve," the report concludes.

TAGS: compliance | tax | investment | pensions | tax compliance | employees | retirement | tax planning | tax rates | Canada | tax reform

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