Budget 2019 proposed a new type of annuity, the advanced life deferred annuity (ALDA), to provide greater flexibility to Canadians managing their retirement savings.
When individuals contribute to registered plans, such as a registered retirement savings plan (RRSP), the amounts contributed are tax-deferred until the funds are withdrawn out from the plan. Generally, these are considered “retirement savings” because it is expected that you do not withdraw them until after you have retired. The benefit of waiting is that people are usually in a lower tax bracket after retirement. However, not everyone wants to start withdrawing funds (and being taxed on such funds) immediately after retirement.
The most common example is an RRSP. An RRSP “expires” in the year that the owner turns 71. The owner’s options are to:
· withdraw all the funds from the RRSP;
· convert it to a registered retirement income fund (RRIF); or
· use the funds to buy some other annuity.
A full withdrawal means all the funds are included in the owner’s taxable income. Alternatively, at the moment, an RRIF and most other annuities purchased using registered funds will generally require minimum annual withdrawals (taxable) by you by the end of the year you turn 71. The proposed ALDA (a new annuity) will instead allow you to defer the start of withdrawals until the end of the year you turn 85.
This change can mean a valuable tax deferral for individuals who do not need or want to draw down their registered funds between the ages of 71 and 85. Those individuals can continue to hold some of these funds tax free for an additional 14 years.
The ALDA is also a great tool for longevity planning. By purchasing an ALDA, you ensure that there are funds available to support you in your (much) later years.
Things to Know
The ALDA came into effect on January 1, 2020.* It can now be purchased under an RRSP, RRIF, deferred profit sharing plan, pooled registered pension plan (PRPP), or a defined contribution registered pension plan (RPP). An ALDA will also be a “qualified investment” for a trust governed by an RRSP or RRIF.
There are, however, a couple limits on the amount of an ALDA that an individual can purchase. There is a lifetime dollar limit of $150,000 (indexed to inflation) and a lifetime limit of 25% of any particular qualifying plan.
These limits apply at the time of purchase meaning that any subsequent devaluation of assets held by a plan and corresponding reduction in the lifetime ALDA limit will not lead to a surrender of the excess amount. That means it is best to purchase an ALDA when the assets in your qualifying plan are at their peak value to ensure maximum contribution to the ALDA and therefore maximum tax deferral.
The value of the ALDA will be excluded in calculating the minimum amount that must be withdrawn in a year from a RRIF, PRPP or defined contribution RPP.
The tax benefits are two-fold. First, you may defer the taxes of up to 25% or $150,000 of your funds held in a registered plan until you are 85. Second, by excluding the value of the ALDA from the RRIF, PRPP, or defined contribution RPP minimum calculation, the regular payments out of these funds/plans will therefore be lower meaning even more tax savings between the ages of 71 and 85.
Any purchases of ALDA contracts beyond an individual’s limit will attract a tax of 1% per month on the excess amount. However, all or a portion of this penalty may be waived if the purchaser establishes that the overcontribution was a reasonable error and the excess amount is repaid to the registered fund it was taken from by the end of the following year.
A non-compliant ALDA contract will be considered a non-qualifying annuity purchase or a non-qualified investment for tax purposes. This may mean an immediate tax liability.
It is very important that you receive advice and purchase an ALDA through an appropriate institution.
The ALDA is a great new tool for tax deferral and longevity planning. If done right, it can mean substantial tax reduction between your 71st and 85th years. But, if done wrong, it may lead to immediate negative tax consequences.
Our Wills & Estates team would be happy to help you incorporate the use of an ALDA into your succession plan and estate plan. Please contact our office.
*The legislation implementing the ALDA has not yet been enacted. As drafted, the changes will be deemed to have come into force on January 1, 2020.