ALDA News:  Indexing Helps to Defer More Income

Excerpted from EverGreen Explanatory Notes

CRA has confirmed the indexing rate of 2.7% for 2025 on various income tested provisions and including personal amounts applied to reduce taxes payable.  This also applies to ALDAs, which provide a unique additional way to defer income from taxation in the case of healthy, affluent seniors.  Here’s what’s to know:

 An advanced life deferred annuity (ALDA) is an annuity that pays a pre-determined monthly income starting at age 85 and continuing until the annuitant dies.  ALDAs are permitted as a deferral vehicle under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit-sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution – also known as a money purchase - registered pension plan (RPP). 

An ALDA can be taken out at any time and is payable for life.  It can also be a joint life annuity which is payable for the life of a spouse or common-law partner after the death of the annuitant.

To qualify, the income must start no later than the end of the year in which the annuitant attains 85 years of age. No more than 25% of the taxpayer's RRSP assets may be used to invest in an ALDA.

When the program began in 2020, a lifetime limit was imposed on individual contributions to ALDAs, beginning at $150,000 in 2020.  The amounts have since been indexed as follows:

2025                             $180,000

2024                             $170,000

2022-2023                    $160,000

2020-2021                    $150,000

The Tax Advantages - Since the annuity begins at age 85, the purchasing of an ALDA defers the taxation on retirement income that would otherwise be taxed earlier.  For example, if 25% of the assets in the taxpayer's RRIF were used to purchase an ALDA, the RRIF balance would be reduced to 75% of its previous level, thereby reducing the minimum withdrawal that must begin at age 72. 

Deferring some of the taxable income could result in decreased OAS clawback as well as reducing income taxes and quarterly tax instalment remittances. Therefore, the ALDA can embellish on the time value of money compounding in tax deferred accounts for higher income earners who are otherwise caught by the OAS clawback.  These are ideal candidates for the deferral opportunities.  This can also be an excellent was to shore up estate plans. 

However, it is always important to consider income splitting opportunities with the spouse as a way to keep both parties out of the OAS clawback range which begins as follows of the years of the ALDA introduction:

OAS Clawback begins at the following individual net income levels:

2025     $93,454

2024     $90,997

2023     $86,912

2022     $81,761

2021     $79,845

2020     $79,054

The ALDA Traps.  The purchase of an ALDA will also limit the retiree's flexibility because the amount invested will not longer be available for withdrawal to meet unforeseen expenses.  Amounts received from an ALDA (starting at age 85) would be taxable in the year they are received.

The Tax Forms.  Form T2157 Direct Transfer from a Registered Plan to purchase an ALDA is used to initiate the transfer of funds from the registered account to the ALDA issuer to purchase the ALDA. 

Potential Penalties.  If an excess amount is contributed to an ALDA, form T1-OVP-ALDA must be completed by the balance due date for filing an individual income tax return (usually April 30).  The penalty for failure to remove the cumulative excess to the plan is 1% per month.  However CRA will consider waiving the penalty in two instances:

1. The taxpayer can explain by letter that an error was inadvertently made, with a reasonable explanation.
2. The taxpayer took immediate steps upon learning of the error to remove the excess amount.

This is sent to the following address with supporting documentation including ALDA account statements that indicate when the cumulative excess was withdrawn:

Canada Revenue Agency, Sudbury Tax Centre
Pension Workflow Team
Post Office Box 20000, Station A
Sudbury ON P3A 5C1

Bottom Line:   Indexing for inflation has provided a way for Canadians to stay on top of the cost of living changes, if they can afford to stay invested.  Unfortunately, the tax from registered accounts does need to be paid eventually, but sheltering along the way can help with tax erosion, especially if funds are not needed or deferrals preserve other provisions like the indexed OAS for seniors. 

Sound planning with tax and financial advisors who are Real Wealth Managers will also help.  To earn this valuable designation, check out the program guide and start your studies online immediately. Learn more.