Free Money? Consider A RRIF before age 71 to Save Tax

Just because most people will naturally wait until the last minute to convert their RRSP account to a RRIF account (the year they turn 71), there is a good reason to consider doing it earlier – especially if you are planning any withdrawals between ages 65 and 71 (inclusive).

Money-BigStacks.jpgRecently the government announced that they had increased the pension credit from $1,000 to $2,000. This means that if you have $2,000 of pension income, you get a credit applied to your taxes. (Tax Credits are different from Tax deductions – a $2,000 tax credit will get you a savings of around $400 in tax payable depending on your province of residence.)

RRSP withdrawals do NOT qualify as pension income - but RRIF withdrawals DO QUALIFY as pension income. (Note that you must be 65 to claim the pension credit). This means that if you were withdrawing $2,000 from your RRSP from age 65 to 71, you would save an additional $2,800 (approx.) in taxes if you instead received the withdrawals in the form of RRIF income.

If you had unused RRSP contribution room – you could even offset the tax on the RRIF withdrawals by contributing them right back into an RRSP account. So in effect, you would be getting the pension credit in exchange for burning up RRSP contribution room. If you had no intention of using that RRSP contribution room otherwise, this strategy is free money.

You are able to hold a RRIF account simultaneously with an RRSP account in case you were wondering. In fact, you could even hold 100 RRIF accounts and 100 RRSP accounts at the same time if you wanted (so long as you are 71 or under)… I imagine you would feel guilty about being responsible for an entire tree’s worth of account statements every month though… 

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Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • CanadianInvestor

    Excellent post! Learned something new – had not been aware of pension income tax credit and this useful difference between RRSP and RRIF withdrawals. Happy New Year!

  • Tax Guy

    Interesting concept but I think GAAR applies. GAAR is the general anti-avoidance rule that essentially states that a transaction or series of transactions that are undertaken not for “bona fide purposes” other than to obtain a tax benefit will be denied.

    Withdrawing from a RRIF and contributing to an RRSP woudl appear to have no bona fide purpose other than to claim the pension tax credit.

    It would appear that if the CRA came across these transactions, they would be denied.

  • Preet

    @ Tax Guy – I called and asked exactly that question to a senior tax officer with CRA – they indicated it was allowed, however you are right in that GAAR could still apply nonetheless if they see fit.

  • Tax Guy

    @ Preet:

    Thanks. I admit I tend to be more conservative in my approach and more so with pensioners.