RRIF-related tax boost small

The required conversion of an RRSP into an annuity or RRIF at age 69 results in a small increase in the average income and taxes paid by Canadian seniors, according to a StatsCan report released Friday.

Using data from 2001 and 2002, the study found that the RRSP conversion boosted net income by an average of about $1,600, equivalent to 6.6% of their income in the year prior to conversion (2001).

But the taxable income for the cohort in the study only increased by $800, or 3.2%. The average tax rate edged higher, from 16.1% in the year prior to drawing down, to 16.3%.

“The boost from mandatory conversion represented only a temporary upward shift in a generally declining age-income profile for seniors,” StatsCan said in the report.

Average income tax paid increased from $4,000 in 2001, to $4,200 the following year, netting the taxman about $40 million extra from this group. It is estimated that each year Canadians contributed enough to their RRSPs to reduce tax revenues by $10 billion, thanks to their tax-deferred status.

The study also pointed out that the net increase in income appears to be rising as each successive cohort converts their RRSP into a RRIF, pointing to higher levels of savings in subsequent groups.

Perhaps not surprisingly, higher income earners were more likely to have “significant income gains” after conversion to a RRIF. The study found only a small percentage of low-income earners saw their income drop, due to GIS clawback.

Dividing the cohort into five equal populations, based on income, the study found the 3% of the lowest income group saw an increase in income of more than 5% in their seventieth year. Among the highest income earners, that number jumped to 43%.

“This suggests that much of the outflow from RRSPs will be taxed at relatively high marginal rates,” the report said.

In 2001, 32.3% of 69 year-olds derived at least three-quarters of their income from public pensions, while 20% collected a pension from their employer.

Among those who earned more than 60% of their total income from employment, the average income was $78,400 from all taxable sources in 2001. Only $2,200 of that was derived from employer-pensions. Upon the mandatory conversion of their RRSPs, these seniors saw their pension income more than quadruple to $9,600. While the amount derived from other sources dropped, their average total income still increased by $5,100, adding $1,500 to their overall tax bill.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com