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Annuity
A contract purchased from an insurance company to provide periodic payments (usually monthly) to a person for a specified period of time. A life annuity is payable for the lifetime of a person.
CANSIM Rate
A rate published monthly by the Bank of Canada used, amongst other things, for calculation of the annual maximum amount that can be withdrawn under a LIF.
Deferred Profit Sharing Plan (DPSP)
An employer sponsored tax sheltered arrangement whereby the employer distributes a portion of the company's pre-tax profits to each employee participating in the plan.
Financial Institution
A company dealing on financial markets which holds or invests assets on behalf of individuals and corporations.
Government Prescribed Maximum Income
In relation to a LIF, the maximum amount of income that you can receive each year as specified by provincial government rules.
The maximum annual income payment is based on your age on January 1st and is calculated as a percentage of your LIF opening balance each year. The maximum percentage is derived by calculation formulas that vary by provincial pension legislation. It is approximately equal to the amount that would deplete your LIF assets at age 90 assuming a rate of return prescribed by the government at the beginning of each year (referred to as CANSIM Rate).
Example:
- If your age on January 1st is 72, your LIF value at the beginning of the year (referred to as opening balance) is $100,000, and the maximum percentage is 12%, your gross annual maximum income payment is $12,000.
The maximum income is nil in the year the contract is purchased if all source of assets are Payout plan.
All jurisdictions, except British Columbia, Manitoba, Quebec, New Brunswick, and Nova Scotia require that the annual maximum amount be pro-rated based on the number of months the contract was in force in the year the contract was purchased.
Government Prescribed Minimum Income
In relation to LIF and RRIF, the minimum amount of income that you must receive each year as specified by federal government rules.
The minimum annual income payment is based on your age on January 1st and is calculated as a percentage of your RRIF or LIF opening balance each year. If you have a younger spouse, you can use his or her age to determine the minimum annual income payment.
The minimum income payment is nil in the year the RRIF or LIF is purchased.
The minimum percentages published by Income Tax Act of Canada are:
| Age on January 1st |
Minimum %
(only 3 decimals shown) |
|
Age on January 1st |
Minimum %
(only 3 decimals shown) |
| 71 |
7.380% |
|
83 |
9.580% |
| 72 |
7.480% |
|
84 |
9.930% |
| 73 |
7.590% |
|
85 |
10.330% |
| 74 |
7.710% |
|
86 |
10.790% |
| 75 |
7.850% |
|
87 |
11.330% |
| 76 |
7.990% |
|
88 |
11.960% |
| 77 |
8.150% |
|
89 |
12.710% |
| 78 |
8.330% |
|
90 |
13.620% |
| 79 |
8.530% |
|
91 |
14.730% |
| 80 |
8.750% |
|
92 |
16.120% |
| 81 |
8.990% |
|
93 |
17.920% |
| 82 |
9.270% |
|
94 + |
20.000% |
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For age under 71, the minimum income payment is calculated as follows:
= Opening Balance / (90 - age of owner or spouse on January 1st)
Examples:
- If your age on January 1st is 72 and your LIF opening balance is $100,000, your gross minimum annual income payment is $7,480 (i.e. $100,000 x 7.480%).
- If your age on January 1st is 60 and your LIF opening balance is $100,000, your gross minimum annual income payment is $3,333 (i.e. $100,000 / 30).
Government Withholding Tax
For Canadian Resident (i.e. Country of Taxation is Canada)
Federal
There is no federal withholding tax if the sum of all expected periodic withdrawals for the year is equal to the minimum amount; any excess will be subject to withholding tax as follows:
| If the income payment exceeds the minimum payment by: |
Withholding tax in all provinces*
except Quebec |
| Up to $5,000 |
10% |
| From $5,000 to $15,000 |
20% |
| More than $15,000 |
30% |
|
| * Based on your province of taxation i.e. the province where you file your income tax return. |
The withholding tax rate applicable to each periodic payment is based on the yearly periodic income exceeding the minimum amount, i.e. lump-sum payments are excluded from the calculation of the total yearly excess to determine the tax rate.
For lump-sum payments, the tax rate applicable to each payment is used.
Quebec
There is no provincial withholding tax if the sum of all expected periodic withdrawals for the year is equal to the minimum amount; any excess will be subject to withholding tax as follows:
| If the income payment exceeds the minimum payment by: |
Withholding tax in Quebec |
| Federal |
Provincial |
| Up to $5,000 |
5% |
16% |
| From $5,000 to $15,000 |
10% |
16% |
| More than $15,000 |
15% |
16% |
|
For lump-sum payments, the tax rate applicable to each payment is 16%.
Since the minimum amount is nil in the first year of purchase, any income payment received in this year are subject to withholding tax.
Examples:
If the gross annual income payment is $16,000, the government prescribed minimum income is $10,000 and the province of taxation is Ontario, the withholding tax amount is $1,200, i.e. ($16,000 - $10,000) x 20%.
If the gross annual income payment is $16,000, the government prescribed minimum income is $10,000 and the province of taxation is Quebec, the federal tax amount is $600, i.e. ($16,000 - $10,000) x 10%, and the provincial tax amount is $960, i.e. ($16,000 - $10,000) x 16%.
For Non-Resident (i.e. Country of Taxation different than Canada)
The withholding tax is based on the calculation of an annual "regular payment" and "excess payment".
"Regular payment" is calculated as follows:
| Owner's Age |
Regular payment |
| Less than or equal to 70 |
10% of the fund value @ Jan 1st |
| Greater than 70 |
2 times the government prescribed minimum payment |
|
"Excess payment" is equal to the income payment minus the "regular payment", if any.
There is no distinction made between a scheduled payment and a lump-up payment for the purpose of calculating withholding taxes.
The rates to apply on the minimum and the excess vary by country according to the applicable tax treaty. Here are the applicable rates for the countries of taxation available in the retirement income illustrator:
| Country of Taxation |
Withholding tax rate on the Regular payment |
Withholding tax rate on the Excess payment |
| Ireland |
0% |
15% |
| United Kingdom |
0% |
25% |
| Australia, Germany, Italy, Netherlands, Spain, Switzerland, United States of America |
15% |
25% |
| France, Other* |
25% |
25% |
|
| * The withholding rates for other countries may differ from those used in the retirement income illustrator. |
Example:
Owner's Age: 60 years old
Country of Taxation: United States of America
Gross annual income payment: $10,500
Fund Value @ Jan 1st (referred to as Opening Balance) = $100,000
Annual regular payment: $10,000 = 10% x $100,000
Annual excess payment: $500 = $10,500 - $10,000)
Tax amount: $1,625 = (15% x $10,000) + (25% x $500)
Net annual income payment: $8,875 = $10,500 - $1,625
Gross Income
In relation to a retirement payout product, the income withdrawn each year prior to any tax amount withheld at source.
Group Retirement Plan
Arrangements, which are often sponsored by an employer and allow employees to systematically save for retirement.
Inflation
A term used to describe rising prices of goods and services within an economy, usually measured as the annualized increase in the Consumer Price Index (CPI).
Investment Income
The return received from investments, including interest and realized capital gains and dividends.
Life Income Fund (LIF)
A RRIF where the funds are subject to federal pension legislation. The owner must withdraw, each year, a minimum amount up to a maximum amount prescribed by the pension legislation. Such a plan must be converted to an annuity before December 31 of the year the owner reaches 80, except in British Columbia, Manitoba, Quebec, New Brunswick and Nova Scotia. The LIF is available in all jurisdictions except Saskatchewan and PEI.
Locked-in Funds
The retirement funds that cannot be cashed out but must be used at retirement to provide a lifetime of retirement income.
Locked-in Retirement Account (LIRA)
An RRSP where the funds are subject to pension legislation. These funds must be used to purchase a life annuity or be transferred to a LIF or an LRIF by the end of the year during which the owner of the LIRA reaches age 71, at the latest. The LIRA is available in all jurisdictions, with the exception of British Columbia, Nova Scotia and under the federal PBSA.
Locked-in Retirement Income Fund (LRIF)
A RRIF under which the owner must withdraw, each year, a minimum amount up to a maximum amount prescribed by the pension legislation. As opposed to a LIF, the purchase of an annuity at age 80 is not required. The LRIF is only available in Alberta, Manitoba, Ontario and Newfoundland and Labrador.
Locked-in RRSP
An RRSP where the funds are subject to pension legislation. These funds must be used to purchase a life annuity or be transferred to a LIF by the end of the year during which the owner of the Locked-in RRSP reaches age 71, at the latest. The Locked-in RRSP is available in British Columbia, Nova Scotia and the federal PBSA.
Manitoba Simplified Pension Plan (MSMPP)
A registered pension plan whereby an employer provides retirement income to Manitoba employees. A financial institution acts as the administrator of the plan.
Net Income
The income you will receive each year once taxes have been removed i.e. gross income less any tax amount.
Owner
In relation to a retirement plan, the person who has purchased a retirement product.
Payout Plan
A retirement product that provides for regular income payments (at least annually). For registered payout products, the Canada Revenue Agency sets the minimum amount which must be deregistered each year on which income tax. Examples of Payout Plans are RRIF, Spousal RRIF, Prescribed RRIF, LIF and LRIF.
Prescribed RRIF (Saskatchewan only)
A RRIF which contains certain minimum pension legislation standards, such as, protection of spousal rights and creditor protection.
Quebec Simplified Pension Plan (QSPP)
A registered pension plan whereby Quebec employers provide retirement income to all employees. A financial institution acts as the administrator of the plan.
Registered Pension Plan (RPP)
A formal arrangement established by an employer where periodic plan members and sponsor contributions are invested towards the funding of a retirement income.
Registered Retirement Income Fund (RRIF)
A retirement payout product that accommodates assets accumulated in a RRSP and allows flexibility in the amount of money, subject to the government prescribed minimum, taken out as retirement income and the management of remaining assets.
Registered Retirement Savings Plan (RRSP)
A retirement product that allows investors to defer current income taxes while saving for retirement. Funds withdrawn (including after conversion to a retirement payout product) are subject to income tax. Such a plan must be converted to a retirement payout product before December 31 of the year the annuitant reaches age 71.
Retirement Income Illustration
A depiction of the various options available at retirement. It is used to give an individual a better understanding of what he can expect to receive at retirement and determine which option best meets his needs.
Retirement Options
The options that are available to an annuitant at retirement (e.g. Annuity, RRIF, LIF, LRIF)
RRSP Contribution Limit
This refers to the maximum amount you can deduct from contributions you made to your RRSP or to a spousal RRSP for a year. The calculation is based on your previous year earned income less any applicable pension adjustment and past service pension adjustment, plus any unused RRSP deduction room from previous years.
Spousal RRIF
A retirement payout product that accommodates assets accumulated in a Spousal RRSP and allows flexibility in the amount of money taken out, subject to government prescribed minimum, as retirement income and the management of remaining assets.
Spousal RRSP
An RRSP under which the contributor makes contributions on behalf of a spouse to provide retirement income splitting and lower combined taxes at retirement. The contributor receives the tax relief while the spouse "owns" the RRSP.
Structured Registered Retirement Savings Plan (STRP)
Provides a systematic method of allocating employer and employee contributions in separate accounts under the umbrella of a single registered retirement savings plan
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