Federal budget modifies RRIF minimum withdrawals and TFSA maximum contributions

On April 21, 2015, the Federal Government released its 2015 Economic Action Plan (the “Budget”). The Budget includes a number of announcements relating to retirement and benefit plans.

Registered retirement income fund (RRIF) minimum withdrawals

The minimum withdrawal from a RRIF has been reduced for ages 71 to 94. An individual is required to make RRIF withdrawals commencing in the year following the year in which the RRIF was established. Individuals are generally required to transfer Registered Retirement Savings Plan (RRSP) funds into an RRIF by the end of the year in which they turn age 71.

An individual’s minimum withdrawal from an RRIF is calculated by multiplying the market value of the RRIF holdings at the beginning of the year by a “prescribed factor”. This prescribed factor will be updated commencing in 2015.

The existing RRIF factors were determined on the basis of providing a regular stream of payments from age 71 to 100 assuming a seven per cent nominal rate of return on RRIF assets and indexing at one per cent annually. Budget 2015 proposes to adjust the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94, on the basis of a five per cent nominal rate of return and two per cent indexing. These assumptions are more consistent with long-term historical real rates of return on a portfolio of investments and expected inflation.

The new RRIF factors will range from 5.28 per cent at age 71 to 18.79 per cent at age 94. The percentage that seniors will be required to withdraw from their RRIF will remain capped at 20 per cent at age 95 and above.

These updated minimum withdrawals would also affect life income funds (LIFs) established using funds transferred from registered pension plans and locked-in retirement accounts. The maximum withdrawals for such products are set out in pension legislation and are una.ected by the change. Similar rules will apply to those receiving annual payments from a variable payment account in a defined contribution RPP or a PRPP.

The new RRIF factors will apply for the 2015 and subsequent taxation years. To provide flexibility, RRIF holders who at any time in 2015 withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess (up to the amount of the reduction in the minimum withdrawal amount provided by this measure) to their RRIFs. Re-contributions will be permitted until February 29, 2016 and will be deductible for the 2015 taxation year.

Comparison of RRIF Factors

Comparison of RRIF Factors

Tax free savings account (TFSA) maximum contributions

TFSA maximum contributions will be increased from $5,500 to $10,000 per calendar year commencing with the 2015 calendar year. In connection with this change, the annual TFSA contribution limit will no longer be indexed to inflation.

Permitting charities to invest in limited partnerships

The Budget proposes to permit charities to invest in limited partnerships on a passive basis. This would allow charities to diversify their investment portfolios to better support their charitable purposes. In addition, since limited partnerships are also used to structure some social impact investments, allowing investments in limited partnerships would give charities the flexibility to use more innovative approaches to address pressing social and economic needs in Canada. This proposal will also apply to registered Canadian amateur athletic associations.

To ensure that a registered charity’s investment in a limited partnership remains a passive investment, the measure will apply only if:

  • the charity – together with all non-arm’s length entities – holds 20 per cent or less of the interests in the limited partnership; and
  • the charity deals at arm’s length with each general partner of the limited partnership.

These rules would not apply where a charitable organization or public foundation carries on a related business through a limited partnership.

Compassionate care benefits under EI

The Government proposes to extend the duration of compassionate care benefits from the current six weeks to six months, as of January 2016. compassionate care benefits provide financial assistance to people who have to be away from work temporarily to care for a family member who is gravely ill with a significant risk of death.

Employment insurance premium reductions reaffirmed

The Government reaffirmed its intentions to reduce employment insurance (EI) contributions. In 2017, the Government will implement the seven-year break-even EI premium rate-setting mechanism, which will ensure that EI premiums are no higher than needed to pay for the EI program over time. Any cumulative surplus recorded in the EI operating account will be returned to employers and employees through lower EI premium rates once the new mechanism takes effect.

This is expected to result in a substantial reduction in the EI premium rate, from $1.88 in 2016 to an estimated $1.49 in 2017, a reduction of 21 per cent.

Consultation regarding infrastructure investments in Canada

In order to facilitate investment in infrastructure in Canada, the Government will undertake a public consultation on the usefulness of the rule that restricts pension funds from holding more than 30 per cent of the voting shares of a company.

Target benefit plans

The Government also continues to assess a voluntary target benefit plan option for Crown corporations and federally regulated private sector pension plans. The Government understands the importance of ensuring that any changes to the federal pension regime protect benefits that have already been earned by requiring that plan members and retirees consent to the treatment of accrued benefits at the time of plan conversion. In addition, given that a number of provinces are moving ahead with the development and implementation of target benefit plan frameworks for their jurisdictions, the Government will consider modifications to the income tax rules to appropriately accommodate target benefit plans within the system of rules and limits for registered pension plans.