Is RRIF reform on the federal agenda?

The RRIF minimum withdrawal rate most recently was changed in 1992 – apart from a one-time reduction in 2008. The mandatory withdrawal rate calls for 7.38% of a RRIF to be withdrawn in the year the RRIF holder turns 71 years old. That rate increases to 20% by the time the RRIF-holder turns 94.

The momentum for change has been created by several developments. One such development is the release of a C.D. Howe Institute report noting that with longevity rates increasing and interest rates at historical lows, some Canadian seniors are at risk of running out of money before their death.

Ottawa has a history of listening to the Toronto-based economic policy think-tank regarding new initiatives, says Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce‘s wealth advisory services division in Toronto. Case in point: the tax-free savings account (TFSA) in 2008 was created following reports from the institute on the benefits of such a plan.

There also are political and practical reasons why Ottawa could move on RRIFs.

There has been concern that some of the proposed changes – such as allowing RRIF payments to begin later in life – might reduce tax revenue flowing into federal coffers, a big worry with government finances in the red.

However, the report suggests, although Ottawa might receive the tax revenue a little later than otherwise expected, should RRIF payments begin later, for example, there would be no real difference (on a present value basis) to the tax revenue received.

“There’s no reason to think the government would systematically lose out,” says Alexandre Laurin, associate director of research with C.D. Howe and a co-author of the report. “It’s just the timing that differs.”

As well, federal finances have improved to the point at which the next federal budget is expected to show a surplus, he adds.

Also, the Conservative government soon will be in election- campaign mode. Says Golombek: “The Conservatives are again going to run for re-election, [and the proposed RRIF rate changes] would be a very positive move.”

There also are likely to be increased calls for change to RRIFs as the growing cohort of baby boomers approaching retirement starts to take a close look at retirement planning, according to Clay Gillespie, financial advisor and managing director with Vancouver-based Rogers Group Financial Advisors Ltd.

“There are just too many [baby boomers] with too much clout,” says Gillespie, who also is chairman of the RRIF minimum policy working group of the Conference for Advanced Life Underwriting (CALU).

There are four main options on the table to reform RRIFs:

– Raise the age limit for converting an RRSP to a RRIF.

– Lower the minimum RRIF withdrawal amount.

– Create a new formula to calculate the RRIF withdrawal amount.

– Eliminate mandatory RRIF withdrawals altogether.

Laurin views the elimination of the withdrawal rate altogether as being the best option, with lowering the withdrawal amount or changing the age limit as alternatives.

Similarly, the Toronto-based Investment Industry Association of Canada (IIAC) would like to see the mandatory withdrawal rate disappear.

“Why do we want to split hairs and find arbitrary minimum withdrawals?” says Ian Russell, president and CEO of the IIAC. “Let’s do away with [them].”

However, he is not hopeful that Ottawa will make that change. Instead, Russell says, the federal government is more likely to double the limit on contributions to TFSAs, something the feds promised to do once the federal budget is balanced.

Golombek, for his part, does not see an elimination of the mandatory withdrawal rate as being likely.

“That’s just not going to happen,” he says, “because that would just be a permanent deferral of taxes for too many people.”

According to Golombek, the simplest solution is to raise the age limit at which RRSPs must be converted to RRIFs, a solution supported by IFIC.

“It’s just the right thing to do,” says De Laurentiis. “It takes into account [longevity] and, for those who would prefer to take the money out earlier, [that option is] open to them.”

CALU, on the other hand, advocates that the minimum withdrawal rate be updated to account for longevity.

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