More RRIF and RRSP questions answered

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Last week's column on registered retirement income fund (RRIF) withdrawals prompted several questions from readers. Because nothing beats learning about RRIFs on a summer day, today I'll answer some of them.

In a recent article about mandatory RRIF withdrawals you mentioned the option of transferring shares "in kind" from a RRIF to a non-registered account. Does that option exist for transferring shares from a registered retirement savings plan (RRSP) to a non-registered account?

Yes, in-kind withdrawals are permitted for RRSPs. However, withholding tax will be assessed on the full amount of the RRSP withdrawal, whereas with RRIFs only the amount over and above the minimum mandatory annual withdrawal will be subject to withholding tax.

Withholding tax rates are 10 per cent for amounts up to $5,000, 20 per cent for withdrawals from $5,000 to $15,000, and 30 per cent for withdrawal amounts of more than $15,000. (Withholding tax rates are higher in Quebec.)

You will need to have sufficient cash in your portfolio to cover the withholding tax that applies to your in-kind RRSP withdrawal. Keep in mind that the amount of withholding tax is based on the gross amount of the withdrawal, not the net amount.

For example, say you decide to withdraw 100 shares of XYZ Corp. from your RRSP, and the shares are trading at $30 each. The net value of your withdrawal would be $3,000.

However, the gross value of your withdrawal would be $3,333, which, after deducting withholding tax of 10 per cent (or about $333) would leave you with the net withdrawal of $3,000. In this case, you would need to have at least $333 in cash in your RRSP to cover the withholding tax.

Two other important things to keep in mind: First, the gross value of your in-kind RRSP withdrawal will be added to your taxable income; second, when you make an RRSP withdrawal, you lose the contribution room. So think carefully before you withdraw securities or cash from your RRSP.

Regarding your article on RRIF withdrawals, do the same rules apply on in-kind transfers from my RRSP to my tax-free savings account (TFSA)?

When you transfer securities from your RRSP (or RRIF) to a TFSA, the transactions are considered to be a separate disposition and acquisition at fair market value. "It's effectively a two-step process," says John Waters, head of tax and estate planning at BMO Nesbitt Burns.

Step one is that the securities are withdrawn from the RRSP at their fair market value, and the gross amount is added to your taxable income and subject to withholding tax. Step two is that the securities are transferred to your TFSA. Even though the shares end up in your TFSA, there is no getting around the tax consequences of the RRSP withdrawal. "In addition to being mindful of your available TFSA contribution room, be aware that if the subsequent transfer to your TFSA is not immediate there may be additional tax consequences," Mr. Waters says.

"In particular, after receiving the securities from your RRSP/RRIF, you will then be considered to have disposed of the securities at fair market value at the time of the TFSA contribution. If there is a delay in the transfer to your TFSA such that the fair market value at the time of the 'in-kind' TFSA contribution exceeds your tax cost of the securities (which will be the value of the securities at the time of the withdrawal from the RRSP/RRIF), you will have to report a capital gain in your income tax return. However, if your tax cost exceeds the fair market value, the resulting capital loss cannot be claimed."

With in-kind RRIF withdrawals, is it possible to split the RRIF income with a spouse to lower the tax?

"Whether you make a RRIF withdrawal in-kind or in cash, if you are 65 or over the pension income-splitting rules will allow you to split the amount with your spouse regardless of the spouse's age," Mr. Waters says. Both spouses must be Canadian residents for tax purposes.

What's more, if you are 65 or over, up to $2,000 of the RRIF withdrawal would be eligible for the pension income tax credit. "If you're both over 65 you could double up on that pension credit," Mr. Waters says.

For more on income splitting, see my previous column at tgam.ca/EAjh.