Should your client reduce their RRIF withdrawal in 2020?

Tax tips tailored to the pandemic were on tap at the Institute of Advanced Financial Planners’ virtual symposium. Peter Bowen, vice-president of tax and retirement research with Fidelity Investments Canada ULC, gave his annual tax and retirement update on Thursday.

One topic covered was reduced RRIF withdrawals. The federal government lowered the annual minimum withdrawal amount for RRIFs by 25% for 2020 in March, as retirees saw their portfolios dip in value amid pandemic-induced market volatility.

If your retired client hasn’t made their full RRIF withdrawal yet this year, could they benefit from the measure?

Bowen said that, for most clients, “it’s not necessarily advisable.”

Still, the decision depends on a client’s personal circumstances. Specifically, “We don’t want to defer taxes from a low-tax year to a high-tax year,” he said.

Thus, a client whose income fell this year due to Covid-19 likely shouldn’t reduce their withdrawal.

“They’re probably at a lower tax rate than they would be in normal years,” Bowen said.

The client whose income remains at the usual level should consider their potential tax rates for the next few years as well as estate planning, he said.

For example, when a RRIF annuitant dies and has no surviving spouse, their RRIF would be included in income on their final tax return, he noted. A high RRIF balance would mean a higher terminal tax bill, reducing the size of the annuitant’s estate.

Another factor is ensuring net income stays below $79,054 (2020) to avoid any clawback of old age security (OAS).

Bowen said clients already subject to OAS clawback may ask about a reduced RRIF withdrawal.

He also noted that automatic withdrawals are calculated based on the usual rules, not the 25% reduction. So, if a client’s withdrawal is automatic and the client would benefit from a reduction, “you need to take positive action to reduce the amount that comes out of the RRIF,” he said.

Another topic Bowen covered was the potential for tax changes as the government’s deficit balloons.

In the recent throne speech, the government stated it will identify additional ways to “tax extreme wealth inequality,” carrying on with its work to limit the stock option deduction for wealthy people at large corporations.

Speculation has also focused on the potential for the government to increase the capital gains inclusion rate or make changes to the principal residence exemption.

Bowen said tax changes are often but not necessarily associated with a budget. For example, if the next budget included an increase to the capital gains inclusion rate, the increase could be effective as of the budget date.

As a result, a client planning on realizing a capital gain within the next couple of years may want to trigger that gain before the next budget (which could be this fall but is so far unknown).

“Maybe you end up paying taxes earlier than you otherwise would have,” Bowen said.

Editor’s note: Advisor’s Edge and sister publication Investment Executive were media sponsors of the symposium. This story was written independently of the sponsorship.