While the proposed legislation states that the ALDA will be deemed to have come into effect on January 1, 2020, some industry professionals suspect that it will not come into force until next year. We will update this article once such legislation is enacted.
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contributed are tax-deferred until the funds are withdrawn out from the plan.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 is currently designed to have come into effect on January 1,
2020.* It will be available for purchase 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.
Non-Compliance
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.
Conclusion
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.
I understand the ALDA issue remains unresolved with no final definitions/regulations. In reviewing the few details available, the participant will forfeit all access to their ALDA contribution, regardless of need until the age 85 gate opens. From the date of contribution, the annuitant will forfeit all investment income until an unknown future date, when the original contribution plus investment income is less than all benefits paid. From this date, the annuitant is ahead of the game. Prior to this, the annuitant's estate is privy to the original contribution less any benefits paid.
ReplyDeleteWhy is it necessary for anyone to pay for this tax exposure deferral relative to those unaffected by RRSP age limitations? Please note the loss of human rights protection provisions applicable to age discrimination and elder abuse contained in the UN Universal Declaration of Human Rights, Canadian Bill of Rights, Canadian Human Rights Act, Taxpayer Bill of Rights, Canadian Charter of Rights and Freedoms and Constitution Act s. 24, 52 and 91.
I have been seeking evidence of this age discrimination and elder abuse qualifying as "demonstrably justifiable" (Charter s.1) and "good Government" (Constitution s. 91) from our PM and appropriate Ministers for some time. As of this date, they still don't know how elder abuse is defined, despite being defined by the WHO and numerous other authorities. The PM directed all Cabinet Ministers defend the Charter in his Mandate letters of November, 2015. I am unware of any relief from this directive in the case of age discrimination being provided by the PM.
Last year, I was deprived of deferring any income in an RRSP because of age resulting in higher tax obligations than the younger crowd and I was exposed to new taxable RRIF income. Does this not qualify as unlawful confiscation/expropriation/seizure/theft of property benefit ownership rights?
My budget has never balanced itself and I don't trust government with hard earned resources.
I am proud of my country. I am ashamed of my governments.
Good luck with it.
Ken McLennan