A recent Canada Revenue Agency (CRA) regulation interpretation has had an effect on Registered Retirement Income Funds (RRIF’s).
In many cases this will mean a lower monthly payment as a result of increased tax withholding. In the case of RRIF payments, considered to be a series of scheduled withdrawals, the tax withholding rate is now to be based on the total of annual payments in excess of the RRIF minimum. This minimum is determined by a formula provided in the Income Tax Act and is determined at January 1 of each year and changes as you get older.
CRA requires payment from a RRIF in excess of the “minimum amount” is subject to tax deductions at source using the withholding rates noted as:
|RSP Withdrawal or Annual RRIF Excess Amount||Rate|
|Payments made up to $5,000||10%|
|Payments over $5,001 but no more than $15,000||20%|
|Payments in excess of $15,000||30%|
For example, Shirley from Qualicum Beach has made a request to have monthly payments of $1,000 per month totaling $12,000 from her RRIF plan.
|Annual Amounts||Monthly Amounts|
|$12,000 scheduled annual payment||$1,000 monthly payment|
|$4,800 annual RRIF minimum||$400 monthly minimum|
|$7,200 annual excess amount||$600 monthly minimum|
Prior to this change, the rates were based on the monthly amounts once the minimum was met. For example, last year $60 dollars of withholding was required. $600 monthly excess at 10%, resulting in a net monthly payment of $940.
Based on CRA’s change this year, the tax withholding rate now considers the sum of all annual payments in excess of the RRIF minimum. This translates to $120 dollars of withholding, $600 at 20%, resulting in a net monthly payment of $880. Another $60 of monthly income is now paid to CRA lowering Shirley’s monthly income by the $60. However if Shirley had the funds in two different financial institutions the withholding tax increase may not apply since each institution withholds a lower amount, say 10% instead of 20%.
It will still also depend on her total annual taxable income but proper planning may help Shirley preserve her same monthly income and pay less tax on a monthly basis.