RIF and LIF Prescribed Taxes

When setting up or modifying a RIF (Registered Income Fund) or LIF (Life Income Fund) systematic plan, it’s important to consider how taxes are applied to the withdrawals. While clients are required to withdraw a minimum annual amount from their RIF or LIF, only withdrawals above the annual minimum are subject to prescribed withholding tax (WHT).

Advisors must calculate the correct gross amount for withdrawals if a client requests a net payment (i.e., the amount they want to receive after taxes). This ensures the correct withholding tax is applied on the taxable portion, and the client receives the amount they’re expecting.

Key Considerations

• The annual minimum is tax-free.

• Withholding tax only applies to the amount above the annual minimum.

• The withholding tax rate depends on the gross or net amount being withdrawn, and whether the client is a resident or non-resident of Canada.

For residents of Canada:

• Net withdrawals up to $4,500 are taxed at 10%

• Net withdrawals between $4,500.01 and $12,000 are taxed at 20%

• Net withdrawals over $12,000 are taxed at 30%

For non-residents:

• All withdrawals are taxed at 25%

Example: The client wishes to receive a Net monthly payment of $3,200, where:

• the annual minimum on the account is $24,000

• the portion of the monthly withdrawal coming from the annual minimum is to be tax-free

• the taxable portion is to be taxed at the prescribed rate

What is the Gross monthly amount that needs to be specified on the service request form?

• Step 1. Calculate the annualized taxable portion of the desired net payments by multiplying by the frequency, then subtracting the annual minimum (which is tax-free) to determine the applicable WHT rate.

  ◦ Total Taxable Annual Amount = (Net Amount x Frequency) - Annual Min.
          = ($3,200 x 12) - $24,000
          = $14,400

  ◦ As per the table above, a net amount of $14,400 falls under the 30% WHT bracket

• Step 2. Calculate the annualized grossed-up amount of the taxable portion of the withdrawal.

  ◦ Grossed-up Taxable Portion = Taxable Amount / (1 - WHT rate)
                                                                 = $14,400 / (1 - 0.30)
                                                                  = $20,571.43

• Step 3. Add back the portion that is apart of the annual minimum to arrive at the annualized total gross amount.

  ◦ Total Gross Annual Amount = Grossed-up Taxable Portion + Annual Min.
                                                                 = $20,571.43 + $24,000
                                                                      = $44,571.43

• Step 4. Divide the total gross annual amount by the desired frequency of the systematic plan to arrive at the gross monthly systematic payment amount that needs to be specified on the request form.

  ◦ Gross Payment (Monthly) = Total Gross Annual Amount / Frequency
                                                  = $44,571.43 / 12
                                                          = $3,714.29