Several organizations are urging the government to raise the age of conversion from RRSP and delay the minimum withdrawal requirements as part of a federal study examining RRIF thresholds. But experts are divided on the best way forward.
The Department of Finance is conducting the review in response to a private member’s bill put forward by Liberal MP Kirsty Duncan in June, 2022, and the study will examine population aging, longevity, interest rates, and registered retirement income funds. It is expected to report its findings and recommendations to the House of Commons by June. The call for comments closes next week.
The study will contribute to a long-standing debate about RRIF conversion deadlines and mandatory withdrawal rates, now intensifying as Canada’s population ages into retirement at record rates. It coincides with other age-related financial planning debates, such as arguments to raise the tax on capital gains. Meanwhile, proposals in France to raise the retirement age from 62 to 64 have imperilled the Macron government and prompted hundreds of thousands to protest or strike.
Currently, Canadians are required to convert their Registered Retirement Savings Plans, which are used to defer taxes, into Registered Retirement Income Funds by the end of the year that they turn 71. They are then required to withdraw a certain percentage of that amount each year, which is taxed as employment income.
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In submissions to the government, several organizations have advocated for delaying the mandatory conversion age and reducing the minimum withdrawal, saying the requirements are increasing the chance of seniors outliving their funds.
“The existing rules date back to 1992 when interest rates were higher and seniors were not living as long. Today, it’s unlikely real returns on safe investments will keep pace with the withdrawals,” Laura Paglia, president of the Investment Industry Association of Canada, said in a submission.
In its submission, the Conference for Advanced Life Underwriting, representing insurance professionals, argued that mandatory withdrawals could be triggering clawbacks on programs such as Old Age Security or health care reimbursements.
CanAge Inc., a national seniors’ advocacy organization, said in its submission that delaying tax collection could benefit the government in the long run: Potential tax revenues on larger sums of unspent capital, it said, could easily exceed revenues from smaller chunks collected over a longer period of time.
However, some experts say that changes to Canada’s RRIF system could benefit wealthy Canadians by allowing them to pay less than their fair share of taxes. Frances Woolley, a professor of economics at Carleton University, said that while incremental change is necessary, she does not believe the conversion age should be raised.
“Major changes have the potential to seriously erode government revenues and its ability to pay for health care, long-term care, and education,” she said. ”We’re going to have to get taxes somewhere.”
Ms. Woolley said that offering more flexibility could allow wealthy Canadians to take advantage of income support that they don’t need, which could constitute tax avoidance. Moreover, she said, the Canadians who aren’t depending on withdrawals of their RRIFs to support their expenses are in a minority – as such, she said, the minimum withdrawal is only a problem for the wealthy.
Moshe Arye Milevsky, a York University professor of finance, said the RRIF is ”too blunt an instrument for all Canadians to have to abide by,” as it imposes an overly strict one-size-fits-all solution on a population with different needs.
Mr. Milevsky suggested an alternative: repealing the mandatory withdrawal, and instead taxing the entire holdings at a low rate – around 1 per cent – every year, following the system that Australia uses.
Editor’s note: The attribution for a submission from the Investment Industry Association of Canada has been corrected in the online version of this article.
