Government called on to change RRIF withdrawal rules

By Rosemary McCracken | December 02 2014 10:35AM

The Conference for Advanced Life Underwriting (CALU) has made two proposals to the federal government that it believes will encourage Canadians to be financially self-sufficient in their retirement years, thereby reducing their reliance on public programs and institutions.In his submission to the House of Commons Standing Committee on Finance in late October, Clay Gillespie, chairman of CALU’s RRIF Minimum Policy Working Group and managing director of Rogers Group Financial in Vancouver, noted that with longer life expectancies, the biggest concerns of aging Canadians are outliving their personal savings and receiving quality health care.


CALU has called for modification of the minimum payout formula for registered retirement income funds. The rules governing RRIFs were set out in 1992 when long-term interest rates were in the 8.5% range and Canadians’ life expectancy was about 80 years. “Today, interest rates are around 2% to 3% and life expectancy is four years longer,” Gillespie said in an interview with The Insurance and Investment Journal, “so there’s a real danger of outliving your money.”

The initial minimum RRIF withdrawal rate at age 71 is 7.38% and increases each year to a cap of 20% at age 94. “This may have worked in 1992 but, today, it forces Canadians to take too much money out of their plans in the early years, and they have to pay tax on this money,” Gillespie said.

CALU wants to see the initial minimum withdrawal rate lowered to 4.16%.

Gillespie anticipates some resistance to lowering the minimum payout because the federal government will see less tax revenue in the early withdrawal years. “But the government will get its tax money because the plans will eventually be paid out. And should a holder die with money in his RRIF, it will be taxed at the highest personal tax rate.”

By withdrawing more than they should in the early payout years, Mr. Gillespie said that RRIF holders may need to make larger-than-minimum withdrawals down the road, which could hasten the depletion of their plans. “And if the RRIF runs out,” he added, “the holder may need to tap government benefits.”

Long-term-care insurance

CALU’s second proposal called for tax incentives to purchase long-term-care insurance. In his address to the House Finance Committee, Gillespie noted that a C.D. Howe Institute report released in June estimated that the cost of long-term care will more than double to about $140 billion over the next 20 years. “This will be an additional financial burden during retirement that Canadians are not planning for,” he said.

CALU maintains that LTCI will have an increasingly important role in providing quality health care in coming years, and proposed that LTCI policies be added to the list of qualified investments for registered retirement savings plans and RRIFs under sections 146 and 146.3 of the Income Tax Act. “As a result,” the proposal stated, “contributions to or cash within an RRSP or a RRIF can be used by the RRSP or RRIF to acquire a LTCI policy without adverse tax consequences to the annuitant.”

CALU has also called for tax-deferred withdrawals from RRSPs to fund LTCI premiums. It proposed that Canadians be permitted to withdraw up to $2,000 a year to a maximum of $24,000 from their RRSPs, including spousal RRSPs, to pay premiums on qualifying LTCI policies.

“It’s in the government’s best interest to encourage Canadians to buy long-term-care insurance,” Gillespie told The Insurance and Investment Journal.

He said CALU believes there is “fertile ground” for the proposals it presented to the House Finance Committee. “There is currently a lot of discussion about pensions and seniors’ issues, including Canadians’ increased life expectancies,” he said. “Add to that the fact that a federal election will be held next October, and seniors are a group that votes.”