A Triple Win for Seniors - Gifts from RRSP/RRIFs

Ian Wood, CFP, RWM, MFA-P, FDFS

RRSP and RRIF are retirement savings plans where investments grow on a tax-deferred basis.  When proceeds are taken from these accounts, the full amount withdrawn is reported on the RRSP/RRIF holder’s tax return as income. Can charitable giving reduce the tax sting?  Is that a smart strategy given the detailed tax rules that can leave a tax gap? Can planning now help keep assets invested as markets show signs of recovery?  Yes, but you need to do a little extra tax legwork.

While there is no forced withdrawal from RRSPs, RRIFs have a minimum amount required to be withdrawn every year.   If the RRIF holder wants to withdrawal more than the minimum amount, say to make a donation, the institution holding the RRIF is required to withhold 10- 30% to pay CRA, leaving the RRIF holder with a less than the amount originally withdrawn, and less funds available for the gift.    If the intent is to donate the “gap’ created by the withholding tax it can be problematic as the donor will need to find other property to donate the full amount intended and wait for their tax refund to be made whole.

There is a way to avoid withholding taxation.  DeWayne Osborn, head of Philanthropic Services with Cardinal Capital Management, explains, “The T1213 Request to Reduce Deductions at Source permits the RRSP/RRIF holder to pull out an amount to donate that is not subject to withholding taxation.  In other words, the full amount can be donated.”

Given that 100% of the amount withdrawn from the RRSP/RRIF is taxable, for people in the highest tax brackets, the result from a tax perspective is a “wash”.   A “wash” means that the donation tax credit eliminates all, or almost all, of the tax in the income from the RRSP/RRIF withdrawal.  

Osborn further explains, “In jurisdictions where the donation tax credit is less than the highest marginal tax rate (e.g. Ontario), the tax savings on the donation will not completely offset the taxation from the withdrawal.   Alternatively, in Alberta, the donation tax credit is higher than the highest marginal tax rate for individuals.  Therefore, there will be excess credit to apply to other income.”

Evelyn Jacks, DMA™, RWM™, MFA-P™, FDFS™ and President of Knowledge Bureau, adds another factor to consider.  “Starting in 2024, high earners will need to consider the effect of the Alternative Minimum Tax on their charitable giving.  This will occur in general when taxable income exceeds $173,205 in 2024.  Therefore, during tax season, it’s important to calculate some “what if” scenarios to educate clients about their strategic philanthropy early and in advance of their March 15 quarterly instalment payments.  It’s an important way to stay invested as markets continue their recovery.”

How to Make A Difference.  These are all good reasons to start planning early in 2024 with retirement and strategic philanthropy discussions, in particular with clients who are drawing income from RRIFs.  It’s a triple win:  for seniors, their advisors and for the community as well.

For more information and tools on how to calculate the tax specifics, there are three important resources, from Knowledge Bureau:

• The MFA-P™ Designation Program
• The Introductory Personal Tax Course in the DMA™ Tax Services Specialist Program
• The TaxTip Tookit™ which includes a donations tax software calculator and income tax estimator.