Core Curriculum Program for CFP® and QAFP™ Certification PDF

Core Curriculum Program for CFP® and QAFP™ Certification Registered Plans REGISTERED PLANS FOUNDATION OF PENSION PLANS  FOUNDATION OF PENSION PLANS Types of Pension Plans There are two main types of pension plans in Canada: Public Pe...

Core Curriculum Program for CFP® and QAFP™ Certification Registered Plans REGISTERED PLANS FOUNDATION OF PENSION PLANS  FOUNDATION OF PENSION PLANS Types of Pension Plans There are two main types of pension plans in Canada: Public Pension Plans which are public plans and include: Canada Pension Plan (CPP) Old Age Security (OAS) Provincial and/or Territorial Pension Plans Registered Pension Plans (RPP) which are private plans and include: Defined Benefit (DB) Pension Plans Defined Contribution (DC) Pension Plans  FOUNDATION OF PENSION PLANS Parties to a Pension Plan Plan Member: Person for whom the plan is established, known as the member Plan Sponsor: Sponsor is the organization that sets up and maintains the plan In registered pension plans, this would be the employer, who sets up the plan for its employees Plan Administrator/Trustee: Responsible for administering the plan  FOUNDATION OF PENSION PLANS Regulations Registered pension plans are subject to rules under the Income Tax Act that are consistent across Canada Federal The federal government maintains jurisdiction over the federal Pension Benefits Standards Act that covers pension plans organized and administered for the benefit of persons employed in connection with certain federal works, undertakings and businesses Provincial Provincial law regulates the actual operation of the majority of pension plans across Canada and applies to any company registered to operate in its corresponding province  FOUNDATION OF PENSION PLANS Regulators Federal and provincial pension legislation is intended to protect the rights of plan members and their dependents The Canadian Association of Pension Supervisory Authorities (CAPSA) is a national interjurisdictional association of pension supervisory authorities with a mission to facilitate an efficient and effective pension regulatory system in Canada  FOUNDATION OF PENSION PLANS Pensionable Service Refers to the plan member's employment period used in determining the amount of pension retirement benefit that accrues under a defined benefit pension plan The design of the pension plan defines the formula for computing an individual's pensionable service Pension regulations establish the minimum and maximum boundaries for calculating the time periods included in the service calculation  FOUNDATION OF PENSION PLANS Eligibility Eligibility for membership in a pension plan is determined by the plan's design, although in most jurisdictions, the waiting period for participation in the pension plan cannot exceed 24 months for full-time employees Participation requirements may vary by different classes of employees, but there are restrictions that do not allow classes to be distinguished by the age or sex of the employees (ex. people employed between 2008 to 2015 or males receiving a differing pension from females) In many pension plans, participation is not an option, but rather the plan is established with mandatory participation requirements where an employee must participate  FOUNDATION OF PENSION PLANS Contributions Contributory Plan: Employee shares in the cost of providing the benefits that result from participation in the plan Non-Contributory Plan: Cost of providing the pension benefits under the plan is the sole responsibility of the employer  FOUNDATION OF PENSION PLANS Vesting Vesting refers to an employee's irrevocable entitlement to benefits from the pension plan Prior to pension reform, when an individual's employment terminated, the employee was not entitled to the contributions made to them on the employers behalf Today most jurisdictions now have a minimum vesting requirement that is usually a two-year vesting rule  FOUNDATION OF PENSION PLANS Portability Portability refers to a plan member's ability to transfer credits or benefits accrued under the registered pension plan to another registered plan Plans that are consolidated need to be from the same jurisdiction  FOUNDATION OF PENSION PLANS Normal Retirement Age Every registered pension plan specifies an age at which plan members are normally expected or entitled to retire and receive a full pension that is unreduced Drawing a pension before the normal retirement age comes with a penalty in the form of a reduction to the benefit  FOUNDATION OF PENSION PLANS Plan Amendments and Termination Amendments to a private pension plan can be made at the employer's (plan sponsor's) discretion at any time Decision to terminate a plan resides with the plan sponsor If plan is amended or terminated, these actions cannot reduce a plan member's benefits earned to date  FOUNDATION OF PENSION PLANS Locking In Provisions The term “locked-in” is a provincial or federal pension benefits legislative requirement to ensure that pension contributions or benefits cannot be withdrawn Where an active plan member terminates employment and transfers his locked-in entitlement to another plan, the locking-in provision requires that the funds be transferred to a locked-in RRSP or Locked-In Retirement Account (LIRA)  FOUNDATION OF PENSION PLANS Creditors Assets held in a pension plan are creditor proof in that they cannot be seized by a creditor of the plan member or by a creditor of the plan sponsor This of course assumes that the pension plan was established in good faith, not simply because of a looming bankruptcy  DEFINED BENEFIT PENSION PLANS Contributions Employer: The design of a defined benefit pension plan is such that there is a commitment on the part of the the employer to fund the cost of pension benefits An employer's contribution to a defined-benefit plan is not calculated as a percentage of the employee's earnings but is determined based on the results of the actuarial review  DEFINED BENEFIT PENSION PLANS Contributions Actuary: Actuaries measure and manage risk to help guide the employer in making strategic decisions regarding the pension plan There are strict guidelines enforced on the organization CRA mandates the consultation of an actuary typically every three years to make recommendations to the employer Non compliance can result in penalties and ineligibility of certain tax advantages the organization would otherwise be entitled to  DEFINED BENEFIT PENSION PLANS Contributions Investment Return: Specific assumptions are made regarding the potential investment return on the pool of assets within the pension fund With a defined-benefit plan the employer is responsible for the solvency of the plan and assumes all of its investment risk Demographics of workforce such as gender and life expectancies are factored into the actuarial valuation  DEFINED BENEFIT PENSION PLANS Contributions Past Service: Where a plan member is given the opportunity to make additional contributions that are used to purchase pension benefits applicable to past service When new pension plans are established, it is common for the plan to allow employees to purchase pension credits for periods of employment with the employer that were prior to the establishment of the pension plan Such upgrades have income tax implications and affect an individual's level of RRSP contribution room  DEFINED BENEFIT PENSION PLANS Benefits Entitlement: Benefit entitlement refers to accrued benefits that the individual has earned There are some occasions where it is necessary to calculate a member's specific entitlement under a registered pension plan: 1. on termination of employment 2. on retirement 3. at death 4. on termination of the pension plan REGISTERED PLANS DEFINED BENEFIT (DB) PENSION PLANS  DEFINED BENEFIT PENSION PLANS A defined benefit pension plan provides pension benefits based on a defined formula where the benefit is known in advance of a participant's retirement These types of plans have become far less common in the workplace today and have declined in popularity amongst employers The formula for calculating the benefit is defined within the pension plan documents and provides the plan member with a good estimation of the level of retirement income expected from the plan  DEFINED BENEFIT PENSION PLANS Types of Benefit Formulas There are three common types of formulas used in defined benefit pension plans: 1. Final Earnings or Best Average 2. Career Average 3. Flat Benefit  DEFINED BENEFIT PENSION PLANS Types of Benefit Formulas Final Earnings or Best Average Earnings With a final earnings plan, the benefit is expressed as a percentage of the member's earnings multiplied by the years of participation in the plan The formula is typically one to two per cent of the annual earnings per year of plan participation This type of formula allows an employee to begin retirement with a pension income closely aligned to their salary just prior to retirement  DEFINED BENEFIT PENSION PLANS Types of Benefit Formulas Final Earnings The earnings used in the formula are based on the member's average final earnings for a prescribed period, usually between three and five years Best Average Earnings The earnings in this case are based on the member's best earnings over a consecutive period, usually between three and five years, during the time in which the member participated in the plan  DEFINED BENEFIT PENSION PLANS Types of Benefit Formula’s The formula can be expressed as follows: Earnings x Unit Percentage x Years Where: 1. Earnings is either the final or best average in salary over the stipulated period 2. Unit Percentage is the amount used to calculate the annual amount of the pension benefit 3. Years is the amount of time the employee has been a part of the pension plan  DEFINED BENEFIT PENSION PLANS Example: Denise is planning to retire next month and has reviewed the following information to help determine what her annual pension payout amounts she will receive. Her defined benefit pension contains the following information: Type: Defined Benefit Unit Percentage: 1.5% Employment Term: 24 years 2013: $80,000 2014: $80,000 2015: $90,000 2016: $85,000 2017: $65,000  DEFINED BENEFIT PENSION PLANS If this were a final earnings plan where benefits are based on the last three years of employment, her annual benefit amount would be: Formula: Earnings x Unit Percentage x Years Earnings: (90,000 + 85,000 + 65,000) / 3 = 80,000 Unit Percentage: 1.5% Years: 24 years $80,000 x 1.5% x 24 = $28,800 Denise would have an annual pension of $28,800 under the final earnings calculation.  DEFINED BENEFIT PENSION PLANS If this were a best average plan benefits are based on the best three consecutive three years of employment, her annual benefit amount would be: Formula: Earnings x Unit Percentage x Years Earnings: (80,000 + 90,000 + 85,000) / 3 = 85,000 Unit Percentage: 1.5% Years: 24 years = $30,600 $85,000 x 1.5% x 24 = $30,600 Denise would have an annual pension of $30,600 under the final earnings calculation.  TEST YOUR UNDERSTANDING At the end of 2020, Marco retired after 22 years of participation in his employer’s registered pension plan. The plan provides a benefit based on 1.8% of his consecutive earnings over the final five years of participation. Marco received four promotions throughout his tenure and decided to reduce his hours in the final two years of employment in order to help transition into retirement. Given the following earnings history, calculate Marco’s annual pension. 2015 - $60,000 2016 - $65,000 2017 - $70,000 2018 - $75,000 2019 - $71,000 2020 - $60,000  TEST YOUR UNDERSTANDING Q U Z I At the end of 2020, Ariel retired after 15 years of participation in her employer's defined benefit pension plan. The plan provides a benefit based on 1.5% of her best earnings over three consecutive years. Her earnings over the last seven years are the highest throughout her career. Given the following earnings history, calculate Ariel’s annual pension. 2014 - $45,000 2015 - $54,000 2016 - $50,000 2017 - $51,000 2018 - $52,000 2019 - $50,000 2020 - $52,000  DEFINED BENEFIT PENSION PLANS Considerations This type of formula allows an employee to begin retirement with a pension income closely aligned to his or her salary, just prior to retirement Best average formula is even more attractive than the final average because it offers the ability to maximize the individual’s pension by including the very best income years  DEFINED BENEFIT PENSION PLANS Considerations Retirement represents a significant change in lifestyle for individuals To help ease into retirement, it can be advantageous to reduce a work schedule with a resulting adjustment to the corresponding income If an individual is relying on the final average pension formula, a downward income adjustment could have an unfavourable impact on the pension  DEFINED BENEFIT PENSION PLANS Considerations Employers who sponsor such a plan face unknown and potentially significant costs because there is no way of predicting what the employee’s final or best earnings will be many years into the future It is generally assumed that salaries will increase over time, so the plan must allow for future benefits based on future salaries, which can represent a significant liability to an employer If salaries should increase, due to inflation for example, the employer may have to come up with large sums in order to fund the pensions liabilities  DEFINED BENEFIT PENSION PLANS Types of Benefit Formula’s Career Average This formula utilizes a member's pensionable earnings for each year of participation in the plan when calculating the total retirement benefit It is easy to understand, and employers like it because the cost to provide the pension is easily determined and more predictable  DEFINED BENEFIT PENSION PLANS Types of Benefit Formula’s The formula can be expressed as follows: Total Earnings x Unit Percentage Where: 1. Total Earnings is the combined amount of income earned throughout membership 2. Unit Percentage is the amount used to calculate the annual amount of the pension  TEST YOUR UNDERSTANDING Q U Z I Miko was employed at Closets Corp for the last 8 years where she was a member of the company’s defined benefit pension plan. The plan had a benefit percentage of 2%. Last year Miko left the company to pursue other interests. Calculate the amount of her annual benefit entitlement. 2013 - $102,000 2014 - $108,000 2015 - $112,000 2016 - $120,000 2017 - $120,000 2018 - $125,000 2019 - $140,000 2020 - $150,000  TEST YOUR UNDERSTANDING Q U Z I Jeff participates in his employer's pension plan which utilizes a career average formula to derive the pension benefit. Jeff knows that the sum of his pensionable earnings is $1,025,000 and that he accrues an annual benefit of 1.85%. Jeff's annual pensionable earnings in the most recent three years are $67,000, $72,000 and $77,000. If Jeff has 28 years of service, what is his accrued annual pension benefit?  DEFINED BENEFIT PENSION PLANS Considerations Employers like this method because the cost to provide the pension is easily determined and more predictable From an employee perspective, the pension may be much lower in comparison to a final/best earnings While not always the case, earnings in the later years of employment tend to be higher than earnings from prior years and this is not taken into account in the career average plan If an employee’s earnings follow the traditional growth patterns over time, the career earnings will result in a lower final pension benefit than under the final/best earnings options  DEFINED BENEFIT PENSION PLANS Types of Benefit Formula’s Flat Benefit This type of plan uses a fixed amount in the pension benefit formula: a fixed dollar amount for each year of pensionable service Often plans are non contributory The formula is unrelated to the individual’s income and instead uses a pre-determined fixed amount for each plan member  DEFINED BENEFIT PENSION PLANS Types of Benefit Formula’s The formula can be expressed as follows: Benefit Amount x Years Where: 1. Benefit amount is the stipulated sum based on each year of annual accruement 2. Years is the amount of time the employee has been a part of the pension plan  DEFINED BENEFIT PENSION PLANS Example: Luci belongs to a defined benefit pension plan in which she accrues a $725 flat benefit for each year of service. If Luci has 37 years of service, her annual pension entitlement will be $26,825 ($725 x 37 years).  TEST YOUR UNDERSTANDING Q U Z I Sonya belongs to a defined benefit pension plan in which she accrues a $325 flat benefit for each year of service. Her annual earnings for each of the past five years are $47,000, $48,000 and $49,000, $52,000 and $53,000. If Sonya has 17 years of service, calculate her annual pension benefit accrued to date?  DEFINED BENEFIT PENSION PLANS Considerations Trade unions commonly negotiate flat-benefit pension plans where the benefit amount is unrelated to an employee’s salary history. Administration of these types of plans is very simple with both the employer and employee easily understanding the amount of pension benefit that accrues through the employee’s career Pension benefit tends to be quite low in comparison to other methods. REGISTERED PLANS DEFINED CONTRIBUTION (DC) PLANS  DEFINED CONTRIBUTION PLANS Introduction Contributions into the defined contribution plan are based on a specific formula and the sum of those accumulated contributions and earnings are used to purchase a pension at retirement Contributions into the plan can be contributory or non contributory Contributions are allocated specifically to each plan member where the member's funds are held and earn an investment return Defined contribution plans are cost effective for the employer and easier to administer – no actuarial valuations required  DEFINED CONTRIBUTION PLANS Plan Fit Contributions into the plan are a known quantity but the resulting benefits from the plan are dependent upon the total contributions and investment performance of the plan's assets An inherent characteristic of a defined contribution plan lies in the fact that the plan member assumes all responsibility for the investment risk Contributions may be based on a fixed percentage of pensionable earnings, a regular fixed dollar amount or a specified amount based on years of service or hours worked There are no past service credits that can be purchased with this type of pension plan  DEFINED CONTRIBUTION PLANS Contributions Example: Susan is a full-time at Aqua Corp which has a defined contribution pension plan. Based on her pensionable earnings, the contribution schedule requires annual contributions of 4% for employees and 6% for the employer. Susan had total earnings of $81,000 and pensionable earnings of $76,800. Contributions into Aqua Corp’s pension plan on Susan’s behalf are: Aqua Corp: $4,608 Susan: $3,072 Total: $7,680  TEST YOUR UNDERSTANDING Q U Z I Jerome participates in his employer's defined contribution pension plan that requires the employer and employee to each make contributions of 5%, up to the maximum dollar amount permitted. If Jerome’s pensionable earnings were $45,250 for 2020, calculate the total pension contributions.  DEFINED CONTRIBUTION PLANS Contributions Investment Selection: Contributions are invested and it is the sum of the contributions + investment earnings that will later be used to purchase a retirement income The plan member has a selection of different investment options they can have their contributions directed to including mutual funds, GIC’s and cash accounts  DEFINED CONTRIBUTION PLANS Contributions Maximum Contributions: The Act requires a minimum annual contributions of at least one percent made by the employer The limit for 2020 is the lesser of: 18% of earnings; and $27,230 (The maximum RSP limit)  DEFINED CONTRIBUTION PLANS Contributions Entitlement: Benefit entitlement refers to accrued benefits that the individual has earned There are a number of occasions when it is necessary to communicate a member's benefit entitlement under a registered pension plan: 1. On termination of employment; 2. On retirement; 3. At death; and 4. On termination of the pension plan  DEFINED CONTRIBUTION PLANS Contributions Benefit Calculation There is no restriction on the maximum pension that may arise under a defined contribution pension plan REGISTERED PLANS OPTIONS AT RETIREMENT  OPTIONS AT RETIREMENT Retirement Normal Retirement: Majority of pension plans provide for a normal retirement date that ties to the date that the plan member reaches 65 Upon reaching normal retirement age, a plan member is generally offered a number of options relative to the benefit entitlement Spouses can opt out of the annuitants pension but must provide written consent  OPTIONS AT RETIREMENT Normal Retirement The normal form of pension is an annuity type of payment and may include: 1) Life Income Pension 2) Life Income with a Guarantee Period 3) Joint and Survivor 4) Joint and Survivor Option with a Guarantee Period  OPTIONS AT RETIREMENT Life Income Pension This option provides a retirement income to the retiree for his or her lifetime, ceasing upon his or her death.  OPTIONS AT RETIREMENT Example: Darren retired from Tech Corp. recently after 35 years of service. He is single with no children and decided to opt for a life income pension that pays him $3,500 each month for the rest of his life. He receives the highest benefit possible as there are no guarantee periods attached to the annuity. Three months later, Darren was in a tragic car accident that claimed his life. The pension payments would cease the following month after death and the employer would be absolved of any further liability. The fact that Darren was far from drawing the full value of his pension has no relevance under this option.  OPTIONS AT RETIREMENT Life Income with a Guarantee Period: A pension is paid during the lifetime of the retiree combined with a minimum guarantee period. If the plan member should die prior to the end of the selected guarantee period, the pension payments continue to a beneficiary for the balance of the guarantee period (or a commuted value is paid to the beneficiary).  OPTIONS AT RETIREMENT Example: Darren retired from Tech Corp. recently after 35 years of service. He is single with no children and decided to opt for a life income pension with a five year guarantee period naming his niece as the beneficiary. The pension pays him $3,200 each month for the rest of his life. Three months later, Darren was in a tragic car accident that claimed his life. The pension payments would continue to be paid to his niece for the remainder of the guarantee period at which point the they would cease absolving Tech Corp of any further liability.  OPTIONS AT RETIREMENT Joint and Survivor: This option presents the annuitant a pension that will continue for the rest of their lives and provide the surviving spouse a life time amount in the event the initial annuitant predeceases them. The selection of the 100% option means the full pension amount continues to the spouse for their lifetime. Similarly, selection of the 60% option results in only 60% of the original pension amount continuing to the surviving spouse.  OPTIONS AT RETIREMENT Retirement Options Survivorship Option Guarantee Period None 5 years 10 years 15 years 100% $450.65 $438.20 $422.98 $415.25 75% $475.90 $463.75 $459.12 $450.00 60% $508.30 $500.41 $489.55 $477.10  OPTIONS AT RETIREMENT Example: Joseph draws a pension of exactly $1,000 on the first of each month. He opted for the 60% joint and survivorship option with no guarantee period. In the event that Joseph’s predeceases his spouse, a payment of $600 will continue to be paid for the remainder of her life. Upon the surviving spouses death, the payments will cease and the employer will be absolved of any further liability.  OPTIONS AT RETIREMENT Joint and Survivor Option with a Guarantee Period: The joint and survivor feature is combined with a minimum guarantee period. If a minimum guarantee period is selected and both spouses die prior to the end of the guarantee period, the remaining pension payments are commuted and paid to the beneficiary.  OPTIONS AT RETIREMENT Example: Claudia and Jake have been married since 1985. Four years ago Claudia began drawing a her pension from her former employer that paid her $2,500 each month. She opted for a 75% joint and survivor pension with a 15 year guarantee period. If Claudia and Jake were to both die today, $2,500 would continue to be paid to any named beneficiaries for 11 more years. Subsequently, the beneficiaries could take a lump sum value (commuted value) at which point the employer would be absolved of any further liability.  OPTIONS AT RETIREMENT Retirement Early Retirement: In most jurisdictions registered pension plans provide the option for a plan member to retire with a life pension at any time within 10 years of normal retirement age An actuarial reduction refers to providing an early retirement benefit where a decrease to the payout is calculated based on a set of circumstances  OPTIONS AT RETIREMENT Retirement Early Retirement: 1. Plan member has made fewer contributions than if they had remained active in the plan until normal retirement age 2. Investment earnings will be less on assets associated with the plan member who leaves prior to normal retirement age 3. There is the potential for a longer payout period, given that the benefit is being taken earlier than normal retirement age  OPTIONS AT RETIREMENT Retirement Qualifying Factor: A qualifying factor is a calculation used to determine whether a pension plan member qualifies for an unreduced early pension When a plan incorporates a qualifying factor into the early retirement criteria, the formula can be expressed as follows: Earliest retirement age = (Member's age at time of joining plan + Qualifying factor) / 2  OPTIONS AT RETIREMENT Postponed Retirement: Most jurisdictions allow members of pension plans to work beyond normal retirement age and to continue to accrue additional pension credits Pension credits cannot accrue past the end of the year in which the member turns 71  OPTIONS AT RETIREMENT Income Tax Implications An employer's contributions to a registered defined benefit pension plan are: a tax deductible business expense for the employer provided that the contributions are based on the recommendations within the pension plan valuation report; and Not considered a taxable benefit to the employee so therefore are not included in an employee's taxable income  OPTIONS AT RETIREMENT Income Tax Implications Benefit Payout Amounts paid into a registered pension plan have not yet been taxed As such, amounts paid out to employees on a periodic basis are generally taxable to the recipient Certain tax credits are available for the pensioner to help reduce the tax liability REGISTERED PLANS REGISTERED RETIREMENT SAVING PLANS  REGISTERED RETIREMENT SAVING PLANS Introduction RRSPs were introduced in 1957 to encourage Canadians to extend their savings by specifically setting funds aside to provide income during their retirement years The term “registered” refers to the fact that the plan is registered with the CRA as a tax-sheltered vehicle and, as such, must adhere to specific attributes RRSPs have special tax advantages that allow for the deferral of income tax, which has the potential to greatly accelerate the accumulation of savings  REGISTERED RETIREMENT SAVING PLANS Wealth accumulation is the period during which an individual acquires assets in anticipation of providing a retirement income at a future point in time  REGISTERED RETIREMENT SAVING PLANS Types of RRSP’s Individual RRSP: An individual RRSP is a personal savings plan established by way of a contract between the annuitant and the financial institution Individual RRSP’s provide fewer investment choices for the holder Self-Directed Individual RRSP: A self-directed RRSP allows a wider choice of investment options rather than one single investment type  REGISTERED RETIREMENT SAVING PLANS Types of RRSP’s Spousal RSP: A taxpayer may make eligible contributions (contributing spouse) on behalf of their spouse or common law partner (holder of the plan) Spousal RSP’s provide an opportunity to shift tax liabilities in retirement between the spouses Group RRSP A GRRSP is a series of individual RRSP accounts where contributions are made through payroll deductions on a pre tax basis and not subject to pension standards legislation Administering is much easier and cost effective for employers  Qualified Investments: Qualified Investments cont.: cash deposits and GICs with Canadian units in mutual fund trusts banks, trust companies and credit foreign stock exchange index trusts unions annuities, if purchased from a licensed shares of a corporation listed on a annuities provider prescribed stock exchange in Canada warrants, rights or options that, if shares of corporations listed on a exercised, will result in the acquisition prescribed foreign stock exchange of a qualified investment shares or debt of a Canadian public royalty units listed on a Canadian stock corporation (other than a mortgage exchange and whose value is derived investment corporation) from Canadian resource properties shares of a small business corporation limited partnership units listed on a or venture capital corporation prescribed stock exchange in Canada bonds, debentures, notes, mortgages or similar debt obligations guaranteed by the Government of Canada (i.e., Canada Savings Bonds)  Qualified Investments cont.: Non-Qualified Investments: a mortgage on Canadian property real estate ((1) if the mortgage is for personal shares of private corporations, use by the annuitant, the mortgage where the RRSP annuitant and his must be administered by an or her immediate family hold more approved lender and be insured by than 10 per cent of any class of an approved insurer, under the shares National Housing Act; and (2) the commodity futures terms of the mortgage must reflect listed personal property, such as normal business practice) works of art and antiques investment-grade gold and silver gems, other precious stones, and bullion, coins, bars, and metals certificates, effective for investments made on or after February 23, 2005  REGISTERED RETIREMENT SAVING PLANS Contribution Limits A single limit on the total annual deductible contributions that can be made to all forms of tax-assisted retirement savings plans on behalf of an individual taxpayer is permitted The prescribed formula is based on 18 per cent of the taxpayer's earned income from the previous year up to the maximum dollar limit ($27,300 for 2020)  REGISTERED RETIREMENT SAVING PLANS Contribution Limits Example: Rachel has an earned income of $50,000 in 2020. The CRA’s contribution limit maximum for the year is $27,300. She is trying to determine what her eligible RRSP contribution will be for 2021. She has no carryforward from prior years. Rachel’s RRSP contribution room will equal $9,000. The lower of: 50,000 x 18% = $9,000 OR $27,300  REGISTERED RETIREMENT SAVING PLANS Earned Income Includes: Earned Income Does Not Include: Income from office or employment Investment income (i.e., dividend Royalties in respect of a work or income or interest income) invention Net rental income from real property Taxable capital gains Income from carrying on business Scholarships or bursaries received as a proprietor or active partner by the taxpayer Receipt of taxable child and spousal Business income earned as a support payments Amounts received under a limited partner supplementary unemployment Employment Insurance benefits benefit plan (not including benefits Workers' Compensation benefits received from the federal Employment Insurance program) Canada/Quebec Pension Plan Net research grants retirement benefits CPP/QPP disability pensions Old Age Security retirement received in the year benefits Retiring Allowances  REGISTERED RETIREMENT SAVING PLANS New Contribution Room A taxpayer’s annual contribution limit is determined by three factors: 1. earned income from the previous year 2. the maximum dollar limit established by the CRA 3. Whether or not one was a member of a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) in the previous year  REGISTERED RETIREMENT SAVING PLANS Pension Adjustment (PA) A pension adjustment reflects the integration that occurs between contributions made to RPP’s and RRSP’s A taxpayer's pension adjustment is the value of the benefits earned or accrued to a taxpayer because of her participation in an RPP or DPSP A pension adjustment decreases the individuals RRSP contribution room  REGISTERED RETIREMENT SAVING PLANS Pension Adjustment (PA) Defined Contribution Plan A taxpayer’s PA from participation in a money purchase pension plan is equal to the sum of the employee and employer contributions to the plan for a given year: PA = (Employer + Employee contributions) x Pensionable Earnings Example: Gina has a money purchase plan where both employer and employee each contribute 6%. Her pensionable earnings for the year were $77,000. Gina will need to report a PA of $9,240 for he tax year. PA = (6% employee + 6% employer) x $77,000 PA= $9,240  REGISTERED RETIREMENT SAVING PLANS Pension Adjustment (PA) Defined Benefit Plan A taxpayer’s PA from participation in a defined benefit pension plan is derived through a prescribed formula: PA for defined benefit plan = (9 x benefit entitlement) – $600 Example: Joe, a member of a defined benefit pension plan, has pensionable earnings of $52,000 and earns an annual pension accrual of 1.85%. Joe’s PA for the year would be $7,824. PA = [9 x (1.85% x $52,000) ] - $600 = $7,824  REGISTERED RETIREMENT SAVING PLANS Pension Adjustment Reversal (PAR) Where a registered pension plan member does not eventually acquire a vested interest in a benefit under a pension plan A pension adjustment reversal increases the individual's RRSP contribution room  REGISTERED RETIREMENT SAVING PLANS Pension Adjustment Reversal (PAR) Example: Sean began his role on January 1st of 2018 as an account executive for a marketing firm. He immediately became a member of the company’s contributory defined benefit pension plan that had a two year vesting schedule. His PA for 2018 was $8,000. On December 1st of 2019, he had left the company. Because Sean was not yet vested, he would only be entitled to keep his contributions into the plan and not the employers portion. As a result, he would be eligible for a pension adjustment reversal of $8,000 which would restore (or increase) his RSP contribution room to make up for the reduction the PA created when he filed his income taxes for the 2018 calendar year.  REGISTERED RETIREMENT SAVING PLANS Past Service Pension Adjustment (PSPA) Where a registered pension plan member becomes entitled to a past service benefit or improvements to benefits Members of defined contribution plans are not eligible for PSPA’s A PSPA decreases an an individuals RRSP contribution room  REGISTERED RETIREMENT SAVING PLANS Past Service Pension Adjustment (PSPA) Example: Jody’s employer has offered her an opportunity to buy back pension credits for the two years she was away addressing a health issue. She agreed and provided the company with a lump sum cheque in the amount of $5,200. When calculating Jody’s RRSP contribution room for the year, a past service pension adjustment will need to be reported when she files her income taxes for the calendar year. Jody’s RRSP contribution room for this year will decrease by $5,200.  REGISTERED RETIREMENT SAVING PLANS Contributions Summary  Total Contribution Room Total RRSP contribution room for 2020 EQUALS Current contribution limit (18% of earned income for 2019 to dollar maximum $27,300) MINUS PA for 2019 PLUS PAR for 2020 MINUS PSPA FOR 2020 PLUS Carryforward of Contribution Limit REGISTERED PLANS REGISTERED RETIREMENT SAVING PLANS 1  REGISTERED RETIREMENT SAVING PLANS Timing of Contributions Contributions made to an RRSP are deductible for income tax purposes within a set of guidelines imposed by the CRA Contributions are flexible and can be timed based on the personal tax situations of the plan owner Can be carryforward and claimed in future years Generally, contributions should be claimed in higher income years  REGISTERED RETIREMENT SAVING PLANS Timing of Contributions Eligible contributions made to an RRSP during the calendar year, also referred to as the taxation year, are deductible in the taxation year  REGISTERED RETIREMENT SAVING PLANS Maximum Age Restrictions Regular: A taxpayer can make contributions into an RRSP, where they are the annuitant, up to the end of the year in which age 71 is reached Spousal: A taxpayer (the contributing spouse) may make contributions where the taxpayer's spouse is the annuitant, up to the end of the year in which the annuitant (the non-contributing spouse) reaches age 71  REGISTERED RETIREMENT SAVING PLANS Excess RRSP Contributions The CRA allows for a lifetime over-contribution limit (lifetime excess cumulative amount) that is currently $2,000 The cumulative excess is ineligible for a tax deduction The formula for the calculation can be expressed as follows: Overcontribution x 1% x months outstanding  REGISTERED RETIREMENT SAVING PLANS Excess RRSP Contributions Example: In March, Stephen made a contribution to his individual RRSP that resulted in total excess contributions of $3,000. Stephen did not realize the problem for 30 days. The penalty levied on the overcontribution will be $30. = $3,000 x 1% x 1 month = $30  REGISTERED RETIREMENT SAVING PLANS Maximum Age of Ownership An RRSP matures at the end of the calendar year in which the annuitant reaches age 71 When funds move out of an RRSP, there are three choices available to the holder: 1) Converting the RRSP to a RRIF; 2) Purchasing a registered annuity; or 3) Cashing in the RRSP The above can be chosen in conjunction with each other  REGISTERED RETIREMENT SAVING PLANS Withdrawals RRSP funds are accessible to the annuitant and may be withdrawn at anytime Any cash withdrawals are included as income for the taxpayer in the year the withdrawal is made Withholding taxes need to be factored in to the decision REGISTERED RETIREMENT SAVING PLANS Withholding Taxes (2020) Withdrawal Amount All Provinces Quebec except Quebec Up to $5,000 10% 21% $5,001 - $15,000 20% 28% Over $15,000 30% 31%  TEST YOUR UNDERSTANDING Q U Z I Franco lives in Alberta with his daughter Kaylee. Last week he had an emergency and needed to withdraw funds from his RRSP. After discussing the matter with his financial advisor, Gino, he decided that $12,000 was appropriate to address the short term liquidity need. Calculate the withholding taxes that Franco’s financial institution will remit to the CRA on his behalf: A) $1,200 B) $1,900 C) $2,400 REGISTERED PLANS HOME BUYERS PLAN (HBP)  REGISTERED RETIREMENT SAVING PLANS Home Buyers Plan The HBP is established as a program that effectively allows an individual to lend herself funds from her RRSP, free of tax, for the purpose of buying or building a qualifying home HBP funds may be withdrawn from a spousal RRSP, but not a locked-in RRSP The annuitant of an RRSP may withdraw up to a cumulative maximum of $35,000 from their RRSPs to finance the purchase of a qualified home REGISTERED RETIREMENT SAVING PLANS Eligibility  REGISTERED RETIREMENT SAVING PLANS Eligibility Example 1: Roger is a widower and wants to participate in the HBP in 2020. To be eligible as a first-time home buyer he must not have owned and occupied a principal residence home at any time during the period beginning January 1, 2016 and ending 31 days before his withdrawal in 2020.  REGISTERED RETIREMENT SAVING PLANS Eligibility Example 2: Lindsay and Russell recently married and want to buy a home using $35,000 from Lindsay’s RRSP as a down payment. Before meeting Russell, Lindsay owned and occupied a house that she sold in 2015. Russell has never owned a home. Lindsay meets the four-year criteria because if we assume 2020 is the year of withdrawal, she has not owned a home in 2019 (year one), 2018 (year two), 2017 (year three), and 2016 (year four). In addition, to qualify, Lindsay could not own and occupy a home during the period of 2020, up to 31 days before her HBP withdrawal.  REGISTERED RETIREMENT SAVING PLANS Qualifying Home The following are considered qualifying homes for HBP purposes:  single-family houses  semi-detached houses  townhouses  mobile homes  condominium units  apartments in duplexes, triplexes, fourplexes, or apartment buildings  REGISTERED RETIREMENT SAVING PLANS Withdrawals Every time a taxpayer makes an eligible withdrawal under the HBP, they must complete the Home Buyers' Plan Form The maximum amount of all withdrawals from an RRSP under the HBP is $35,000 per taxpayer Where both spouses are eligible to participate in the HBP, each spouse may withdraw up to $35,000 for a combined total of $70,000  REGISTERED RETIREMENT SAVING PLANS Repayment and Withdrawals 15-year period to repay the amount Repayment period begins the second calendar year following the year in which the taxpayer made the withdrawals To make a repayment, the taxpayer makes an RRSP contribution during the applicable repayment period and then designates the payment separately as part of their income tax return  REGISTERED RETIREMENT SAVING PLANS Repayment and Withdrawals Minimum payment must be made each year Taxpayer can accelerate repayment of the HBP but minimum payment criteria must be met Repayments can be designated in either the calendar year or the first 60 days into the following tax year If no payment is made at all, the minimum amount is included into the taxpayers income  REGISTERED RETIREMENT SAVING PLANS Repayment and Withdrawals Example: Jayleen withdrew $15,000 under the HBP on January 1st 2020. She will be required to make a $1,000 minimum repayment ($15,000 / 15 years) into the HBP no later than 60 days into the 2023 calendar year. If Jayleen does not meet the criteria for the repayment, $1,000 will be included into her income for the 2022 tax year. The amount will be classified as a payment towards the HBP whether Jayleen decides to pay it or not.  REGISTERED RETIREMENT SAVING PLANS HBP Balance When an HBP withdrawal is made from an RRSP, it creates an HBP balance. The balance at any time is: The total of all eligible HBP withdrawals made by the taxpayer minus The total of all amounts designated as an HBP repayment minus The total of all amounts included in the taxpayer's income because the required repayment was not made REGISTERED PLANS LIFELONG LEARNING PLAN (LLP)  REGISTERED RETIREMENT SAVING PLANS Life Long Learning Plans The Lifelong Learning Plan (LLP) utilizes funds from within the RRSP as a loan to finance the annuitant's or the annuitant's spouse's education Allows an individual to lend themselves funds from an RRSP, free of tax, for the purpose of financing either their own or their spouse's training or education Withdrawals from a locked-in RRSP’s are not permitted REGISTERED RETIREMENT SAVING PLANS Participation Requirements  REGISTERED RETIREMENT SAVING PLANS Eligibility Under the LLP program there are two parties: 1. LLP Participant  the individual who withdraws funds from her RRSP under the LLP 2. LLP Student  the individual whose education is being financed using the LLP An LLP student can be either the LLP participant herself or her spouse, but not the LLP participant's child  REGISTERED RETIREMENT SAVING PLANS Qualifying Educational Program The term “educational program” is used to identify a program that: 1. Lasts a minimum of three consecutive months 2. Requires student to spend at least 10 hours per week on course work in the program 3. Courses work includes lectures, practical training or laboratory work as well as research time spent on a post-graduate thesis 4. It does not include study time  REGISTERED RETIREMENT SAVING PLANS Withdrawals There are no restrictions on how the funds withdrawn under the LLP can be used The LLP participant may withdraw up to $10,000 in a single year from their RRSP Any withdrawal in a single year that exceeds the annual LLP limit will create an excess (amount withdrawn less annual LLP limit), which is treated as income to the LLP participant in the year the funds are withdrawn  REGISTERED RETIREMENT SAVING PLANS Repayment Period The LLP is considered a loan from an RRSP and a taxpayer who participates in the program has a 10-year period to repay the amount To make a repayment, the taxpayer makes an RRSP contribution during the applicable repayment period and then designates the payment separately as part of their income tax return  REGISTERED RETIREMENT SAVING PLANS Repayment Period Repayment of the LLP loan is required to begin by the earlier of: 1. The fifth year after the first LLP withdrawal; or 2. The first year after the last year in which the LLP student met the LLP qualifying conditions.  REGISTERED RETIREMENT SAVING PLANS Repayment and Withdrawals A minimum payment must be made each year to the RSP to pay back the LLP Taxpayer can accelerate repayment of the LLP but minimum payment criteria must be met Repayments can be designated in either the calendar year or the first 60 days into the following tax year If no payment is made at all, the minimum amount is included into the taxpayers income.  REGISTERED RETIREMENT SAVING PLANS Repayment Period Example: This year Leon received notification that he will be required to make minimum payments towards his LLP balance. He has a $10,000 amount outstanding. The minimum amount Leon will be required to designate back into his RRSP will total $1,000 for the year ($10,000/10 years). The repayment can also be made in the first 60 days of the following year and designated as payment for the prior year. Either way, the amount will be classified as a payment towards the HBP whether Leon decides to pay it or not.  REGISTERED RETIREMENT SAVING PLANS LLP Balance When an LLP withdrawal is made from an RRSP, it creates an LLP balance. The balance at any time is: The total of all eligible LLP withdrawals made by the taxpayer minus The total of all amounts designated as an LLP repayment minus The total of all amounts included in the taxpayers' income because the required repayment was not made  REGISTERED RETIREMENT SAVING PLANS Cancelling Participation An LLP participant can cancel her participation in the LLP if: The LLP student was not enrolled in the program when the withdrawal was made and does not subsequently enroll The LLP student leaves the program before April of the year after the withdrawal and 75 per cent or more of the student's tuition is refundable; or The LLP participant becomes non-resident after the year in which an LLP withdrawal was made REGISTERED PLANS LOCKED IN RETIREMENT PLANS (LIRA)  REGISTERED RETIREMENT SAVING PLANS LIRA’s Introduction The locked-in RRSP provides terminating employees with an option other than leaving pension funds in the pension plan upon retirement Term Locked-In Retirement Account (LIRA) was introduced as a new name for a locked-in RRSP where the objective was to make it easier for financial institutions and plan members to distinguish between a locked- in RRSP and a non-locked-in RRSP Federal government and most provinces have introduced the LIRA however, some jurisdictions still refer to it as a locked- in RSP All registered retirement plans, including locked-in plans, are registered under the Act  REGISTERED RETIREMENT SAVING PLANS Establishing LIRA Transfer options vary by jurisdiction A LIRA is one of the options to which locked-in pension funds may be transferred from a registered pension plan (RPP) LIRA’s are ineligible for Lifelong Learning Plan or Home Buyers Plan withdrawals  REGISTERED RETIREMENT SAVING PLANS Plan Maturity A locked-in RRSP/LIRA must mature by the end of the year during which the annuitant reaches age 71 The types of plans to which locked-in RRSP/LIRA may be transferred at maturity are: 1. A Life Income Fund (LIF); or 2. The purchase of a life annuity REGISTERED PLANS REGISTERED RETIREMENT INCOME FUNDS (RRIF)  REGISTERED RETIREMENT INCOME FUNDS Introduction Registered Retirement Income Funds (RRIF’s) were designed to provide an annuitant an income stream at some point in the future Income from a RRIF must be reported each year when filing a tax return RRIF’s provide a tax deferral opportunity Assets accumulate tax free in an RRSP and continue to accumulate tax free when transferred to a RRIF  REGISTERED RETIREMENT INCOME FUNDS Introduction The income payout phase is the period during which an individual begins converting the assets they have accumulated into a perpetual income stream for the annuitant or their spouse  REGISTERED RETIREMENT INCOME FUNDS Establishing RRIF’s The establishment of a RRIF begins with the transfer of funds from another registered vehicle such as: 1. An RRSP 2. Another RRIF 3. A registered pension plan Upon maturity of an RRSP, the majority of plan owners convert their savings into a RRIF to address income requirements  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation When a RRIF is first established, the annuitant has the option of electing to have the annual minimum withdrawal calculation based on either their own age or their spouses age The calculation of the minimum withdrawal for a specific year utilizes two key pieces of information: 1. Market value of assets in plan as of January 1 of that year 2. The age of the annuitant as of January 1 of that year (or the age of the annuitant's spouse or common-law partner if this election was made)  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation If the RRIF annuitant is 70 or younger as of January 1, the minimum payment calculation for that year is expressed as: Minimum payment = (Market value of plan assets on January 1) ÷ (90 – age) If the RRIF annuitant is age 71 or older as of January 1, the minimum payment calculation for that year is expressed as: Minimum payment = (Market value of plan assets on January 1) x (CRA age factor)  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation Example 1: Laura recently converted her RRSP savings into a her RIF with her local bank. She was born on February 14th,1952. On January 1, 2020, Laura’s RRIF contained assets valued at $535,000. Calculate Laura’s minimum RRIF withdrawal  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation Example 1 Continued: Laura’s minimum annual withdrawal is $23,261. This is derived as follows: Age at January 1, 2020 = 67 Minimum payment = (market value of plan assets on January 1) ÷ (90 – age) = $ 535,000 ÷ (90 – 67) = $ 535,000 ÷ 23 = $ 23,261  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation Example 2: Mervyn was 77 at the beginning of 2020 owns a RRIF that was first established in 2008. Mervyn is married to Kaitlyn, who was 74 at the beginning of 2020. When Mervyn’s RRIF was first established, he elected to use Kaitlyn’s age in the minimum payment calculation. His and her CRA age factor are 8.25% and 7.45% respectively. On January 1, 2020, the RRIF contained assets valued at $61,000.  REGISTERED RETIREMENT INCOME FUNDS Minimum Withdrawal Calculation Example 2 Continued: Mervyn’s minimum annual withdrawal is $4,545. This is derived as follows: Age at January 1, 2020 = 74 (based on Kaitlyn’s age) Minimum payment = (market value of plan assets on January 1) x (CRA age factor) = $61,000 x 7.45% = $4,545  TEST YOUR UNDERSTANDING Q U Z I Ahmed and Alicia, have been in a common-law relationship for the past five years. They plan to marry in the spring of 2020. During the fall of 2019, Ahmed converted his RRSP to a RRIF when the assets had a market value of $250,000. On January 1, 2020, the plan is expected to have a market value of $245,000. Ahmed was born in May 1947, while Alicia was born in August 1955. If Ahmed structured his RRIF to allow for the lowest possible minimum withdrawal, calculate his 2020 payment. A) $ 9,127 B) $ 9,423 C) $10,008 D) $10,432  REGISTERED RETIREMENT INCOME FUNDS Withdrawals Ongoing Withdrawal by Annuitant Minimum withdrawals must be made from a RRIF each year, and a withdrawal based on only the minimum amount is not subject to withholding tax Frequency Payments from a RRIF must be regular, and as long as the minimum income requirement is satisfied, an individual may withdraw as much as he wishes from the RRIF at any time  REGISTERED RETIREMENT INCOME FUNDS Income Tax Implications Payments to Annuitant All payments out of a regular RRIF are fully taxable as income to the RRIF recipient Minimum payments from the RRIF do not attract withholding tax REGISTERED RETIREMENT INCOME FUNDS Withholding Taxes (2020) Withdrawal Amount All Provinces Quebec except Quebec Up to $5,000 10% 21% $5,001 - $15,000 20% 28% Over $15,000 30% 31%  TEST YOUR UNDERSTANDING Q U Z I Sanjeev has a minimum RRIF withdrawal for the current year of $8,000. He has elected to withdraw $16,000 instead. What amount will he receive net of withholding taxes? A) $1,100 B) $1,600 C) $14,400 D) $14,900 REGISTERED PLANS LIFE INCOME FUNDS (LIF)  REGISTERED RETIREMENT INCOME FUNDS LIF’s Introduction Life Income Funds are retirement plans for locked-in money originating from registered pension plans Whether a registered pension plan falls under federal guidelines or provincial pension legislation depends on the province of employment  REGISTERED RETIREMENT INCOME FUNDS LIF’s Introduction Most pension assets are locked in Financial institutions must register investment products offered for LIF plans with the CRA and adhere to regulations specified in pension standards legislation  REGISTERED RETIREMENT INCOME FUNDS LIF’s There are two primary differences between LIF’s and RRIF’s: 1. LIF’s have minimum and maximum withdrawal thresholds 2. LIF’s provide spousal protection In jurisdictions where a LIF annuitant must use the balance in the LIF account to purchase a life annuity prior to the end of the year in which he reaches age 80  REGISTERED RETIREMENT INCOME FUNDS Unlocking Locked In Funds In some jurisdictions, there are special circumstances where funds can be accessed prematurely: 1. Where the annuitant is certified to have a significantly shortened life expectancy because of a medical disability 2. Where the total value of the plan assets are quite low 3. Where the annuitant is no longer a resident of Canada 4. Financial Hardship  REGISTERED RETIREMENT INCOME FUNDS Withdrawals Payments from a LIF are established within a prescribed range of a minimum and maximum amount Minimum withdrawals must be made from an LIF each year, beginning in the year following its establishment Some provinces have allowed the use of a younger spouse or common-law partner's age for calculation of minimum payments Calculating maximum payments require the actual age of the annuitant  REGISTERED RETIREMENT INCOME FUNDS Income Tax Implications Withholding tax applies on any excess LIF withdrawals Any LIF payments made throughout the year must be included as income to the annuitant Certain tax credits may be available to offset the tax liability REGISTERED PLANS ANNUITIES  ANNUITIES Introduction An annuity is the simplest retirement income option In exchange for a sum of money, a financial institution will provide a series of regular payments for a period of time The payment incorporates both an interest and principal component Annuities are suitable for those investors who want to take the unpredictability out of investing Assuris protects deposits of annuity holders should their issuer become insolvent  ANNUITIES Introduction There are two types of annuities: 1. Life Annuities - guarantee a series of payments for an individual's lifetime 2. Term Certain Annuities - guarantee a series of payments for a defined period of time  ANNUITIES Life Annuities Life annuities provide an income that cannot be outlived They are available only from life insurance companies, which are required by law to set aside reserves to guarantee the payments that have been promised Life annuities can originate from non-registered or registered assets  ANNUITIES Types of Life Annuities Single Life: Payments are guaranteed for the life of the annuitant, no matter how long he or she lives or how quickly he or she may die At the annuitant’s death, a straight annuity terminates, and the financial institution is no longer obligated to make any further payments Joint Life: Income is paid during the joint lifetime of two individuals (often spouses) and continues to the surviving individual for his or her lifetime, after the first death Upon the first death, the income payment may continue at 100% or it may continue at a reduced amount, depending upon the plan design  ANNUITIES Types of Life Annuities Single Life with Guarantee Period: The owner purchases a life annuity with the addition of a minimum guarantee period where payments continue for the life of the annuitant or for the minimum period stated in the annuity contract, whichever is longer If the annuitant dies during the guarantee period, payments continue to the beneficiary for the remainder of the guarantee period or the commuted value is payable to the beneficiary Joint Life with Guarantee Period Allows the owner to add a guaranteed term to the joint life annuity If both individuals die before the end of the guarantee period, payments continue to the beneficiary for the remainder of the guaranteed term, or the commuted value is paid to the beneficiary  ANNUITIES Temporary Annuities Life insurance companies, banks, and trust companies may all offer temporary annuities Temporary annuities may be purchased with non-registered or registered assets Can last for a certain period of time, rather than for the duration of an annuitant’s or spouse’s life  ANNUITIES Types of Temporary Annuities Term Certain: Provide a guaranteed income for a specified period of time, chosen at the time of purchase Once the last contractual payment is made, the annuity terminates If the annuitant dies before the end of the term, payments continue to the beneficiary for the remainder of the term or the commuted value is paid to the beneficiary Impaired Annuity: Designed to pay a higher income amount than a regular annuity to an annuitant who has been diagnosed with an illness or disability that may reduce life expectancy Impaired annuities are special annuities, typically offered by life insurance companies  ANNUITIES Types of Temporary Annuities Illnesses that may qualify for the evaluation of an impaired annuity, include:  Cancer  Diabetes  Stroke  Parkinson’s  Alzheimer’s  Chronic heart disease  Severe hypertension  Multiple sclerosis  Congestive cardiac failure  Renal, liver, or respiratory failure  ANNUITIES Other Annuity Features Immediate versus Deferred Annuity: Immediate annuities have payments begin any time within one year of purchase All registered annuities must be immediate annuities and must be designed to provide for a full year of payments in the year following purchase Deferred annuities have payments scheduled to begin at some date later than one year in the future  ANNUITIES Other Annuity Features Fixed versus Variable Annuity: Fixed Annuities are the most common type of annuity Provide a guaranteed payment throughout the term of the annuity Variable Annuities are relatively new and shift the investment risk from the company to the annuitant Payment is not guaranteed, but rather increases or decreases according to fluctuations based on market performance of the underlying funds chosen.  ANNUITIES Other Annuity Features Indexation: Annuities are fixed payments and vulnerable to losing purchasing power each year Indexed annuities provide for annual increase to the regular payment schedule up to a maximum percentage Addition is a costly feature because the financial institution is providing a guarantee that the annual payment amount will increase steadily over the period of the annuity contract  ANNUITIES Establishing a Registered Annuity A registered annuity is purchased with assets from a plan that contains registered money, including: RRSP LIRA or Locked-in RRSP DPSP RPP RRIF LIF With registered annuity, the plan owner and the annuitant have to be the same person  ANNUITIES Establishing Non Registered Annuities Purchased with assets that are not from a registered plan With a non-registered annuity, the plan owner and the annuitant do not have to be the same person The distinction between a registered and non-registered annuity is important because the taxation differs The funds used to purchase the non registered annuity are considered to be made with after-tax dollars which means that a portion of the payment will not be subject to income tax  ANNUITIES Income Tax Implications Registered Annuities Payments from a registered annuity are fully taxable to the recipient in the year that the payment is received Non-Registered Annuities There is no tax sheltering associated with the accumulation of the funds used to purchase the annuity Non registered annuities can fall under either non prescribed or prescribed tax treatment  ANNUITIES Income Tax Implications Non-Prescribed Taxation With a non-prescribed annuity, the interest portion of the annuity is much higher in the early years of the annuity Prescribed Taxation To address the unattractive front-end tax situation inherent with non-registered annuities, annuitants could opt to have the annuity treated as prescribed and therefore level out and defer part of the tax liability  ANNUITIES Calculating Capital and Interest Elements The following four steps will derive the taxable portion of a non registered annuity payment Step One: Capital Element Step Two: Number of Annuity Payments Step Three: Capital Proportion of Each Payment Step Four: Capital Element of Each Payment  ANNUITIES Example Kylie purchased a non-registered annuity with $ 300,000 of capital. The life annuity with no guarantee period will pay her a monthly income of $2,000, beginning one month after purchase. If Kylie has a life expectancy of 18.21 years, and she opts for prescribed tax treatment on the funds, what amount of the monthly payment is taxable? Step One: Capital Element The purchase price is $300,000, an amount equal to the premium paid for the annuity. Step Two: Number of Annuity Payments The annuity is expected to make 218.52 payments based on 18.21 years of life expectancy multiplied by 12 payments per year.  ANNUITIES Example Continued… Step Three: Capital Proportion of Each Payment The capital proportion of each payment is 69% derived as: $300,000 ÷ (218.52 x $2,000) = $300,000 ÷ $437,040 = 69.00% Step Four: Capital Element of Each Payment The capital element of each payment is $1,380, derived as: $2,000 x 69% = $1,380  ANNUITIES Example Continued… Conclusion We know that $1,380 of each annuity payment is capital; therefore, $620 ($2,000 – $1,380) of each annuity payment is interest. The annuitant will report the interest portion of the annuity payment as income.  TEST YOUR UNDERSTANDING Q U Z I Lorena purchased a non-registered annuity with $175,000 of capital. She established it as a life annuity with no guarantee period and will receive a monthly income of $1,200, beginning immediately. Lorena’s life expectancy was 22.6 years. If she opts for prescribed tax treatment on the annuity, what total amount of the monthly payment is non-taxable? A) $0 B) $477 C) $552  TEST YOUR UNDERSTANDING Q U Z I On January 1, Joanne purchased a non-registered annuity for $384,000. The life annuity has no guarantee period and will pay her an annual income of $24,250, beginning immediately. If Joanne has a life expectancy of 23.21 years, and she opts for prescribed tax treatment on the funds, what amount of the annuity payment is taxable? A) $755.93 B) $793.21 C) $888.10