You’ve spent years planning and saving for your retirement and now you’re ready to convert those investments into income to support your golden years. Learn how to navigate this process and the additional considerations that come with holding Exempt Market Securities (EMS) in your account.
The Canada Revenue Agency (CRA) mandates that you must convert your Registered Plan (RRSP, RRSP Spousal, LIRA) to an Income Fund account (RRIF, RRIF Spousal, LIF, LRIF) by the end of the calendar year that you turn 71. The investment(s) within the account remain the same, it is just the account type that changes. A minimum amount must be paid to you annually following the year your RRIF was established.
How Much Will I Get?
The minimum amount disbursed is based upon your age and the Market Value of the Income Fund account on December 31 of the previous year. The idea is that the account will provide income in your retirement years for the remainder of your lifetime.
For example, the minimum payment for a RRIF for 2023 is calculated using a percentage determined by CRA based on your age multiplied by the market value of the account on December 31, 2022. CRA publishes the percentages on their website, which they refer to as prescribed factors or rates (see here).
When you are converting your RRSP to a RRIF, and before you have received any payments, you can select either your own age, or your spouse, or common-law partner’s age as the basis for the calculation. This does not apply to the conversion of the RRSP to a RRIF (you cannot delay the conversion if your spouse is younger). In the case where you do not require much income and would like the lowest payment possible, you would opt to use the age of the younger of you or your spouse or common-law partner to calculate the payment.
What About Taxes?
No income tax is deducted from minimum RRIF payments; however, if you are withdrawing more than the minimum payment amount, your financial institution must deduct tax and forward it to CRA. This is referred to as withholding tax. You will receive a T4RIF for all RRIF payments you receive, and you need to include these in your income tax return for the year.
Considerations When Holding Exempt Market Securities in your RRIF
1. Can I receive my payment in cash?
As there is no market for selling EMS investments (they are private investments), this can make RRIF payments tricky unless you also have cash in your RRIF account for the payment.
Some issuers of EMS investments may provide redemption options, so it is best to contact them to determine if this is an option for you. If the security can be redeemed, you will need to give instructions to the issuer to redeem the required amount to ensure there is enough cash in the account for the RRIF payment.
If you hold multiple RRIFs, another option is to transfer cash from one RRIF account to your RRIF account that holds the EMS investment(s). Contributions cannot be made to a RRIF, so this is a way to get cash into the account. Keep in mind that both accounts must be in your name and the account types must be the same to do the transfer (ie. A RRIF Spousal to a RRIF Spousal). Once this partial account transfer of cash is completed, this cash can be used to make your RRIF payment. Keep in mind that you will still need to take your annual minimum payment from each RRIF you hold.
If a redemption or a RRIF transfer, as discussed above, are not possible then your payment can also be made “in-kind”. This means that a security in your RRIF will be withdrawn in the amount of the required payment.
For example, you hold 55,000 private shares in Company ABC in your RRIF account and the price is $1.00 per share. If the minimum RRIF payment due was $1,200, 1,200 shares would be withdrawn (as the value is equal to the payment amount of $1,200). You would receive a certificate registered in your own name for 1,200 shares of Company ABC that you now hold personally. A T4RIF would be issued in the amount of $1,200 for the tax year that the payment was received. The RRIF now holds 53,800 shares, and you hold 1,200 personally (not in the RRIF account anymore). Any future distributions or redemptions on the 1,200 shares would now be sent to you directly.
3. What if I have more than one EMS in my RRIF?
If you hold multiple EMS investments in your RRIF, you will have to pick the security you would like to receive for the in-kind payment. One thing to consider is the cost of registering the securities in your own name as the amount can vary depending on the issuer. Another consideration would be the tax consequences of holding an investment personally versus in a registered account.
If you have a RRIF, reach out to your financial institution and your advisor to ensure you are aware of your minimum payment amount and your options each year, especially if you hold EMS investments.
*Olympia Trust Company does not provide any accounting, tax or investment advice. Please direct any inquiries to your own financial, tax, or investment advisor.