RRIF or LRIF: What’s the difference?

David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette, scroll down to read David’s answer to the third question, about acquiring an apartment building in Florida through an LLC (limited liability company).

The Gazette
Monday, May 23, 2010

MONTREAL – The taxation of annuities and the difference between Registered Retirement Income Funds and Locked-In Retirement Income Funds were among the topics raised by readers in the latest batch of letters. Here’s what they wanted to know.

Q: “When an annuity is created from a pension fund, the payout is taxable because the pension fund was set up with pre-tax money. If one were to buy an annuity from one’s savings or lottery winnings, is the payout still subject to tax?”

A: If you use non-registered funds to buy an annuity, this is what’s known as a prescribed annuity. “They offer beneficial tax treatment since each monthly payment constitutes both income and a return of capital,” said Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management.
Under the tax rules, each monthly payment is deemed to constitute the same amount of interest and capital, which provides a significant tax deferral since the tax owing on the interest portion of the payments is spread out evenly over the term of the annuity.

Q: “What’s the difference between an RRIF (Registered Retirement Income Fund) and LRIF (Locked-In Retirement Income Fund)? Does the province where the plan is registered have a bearing on how the plan works?
I imagine that the net left in both plans would transfer to a spouse tax-free after death but I would like confirmation on that. I’d also like to understand what amounts you can withdraw from either. Is it different for a RRIF than a LRIF?”

A: Golombek explains it this way: a RRIF is an investment plan established with registered funds (usually from an RRSP), while an LRIF is pretty much the same thing but with funds that originated from a pension plan. That makes the LRIF subject to pension legislation, which includes locking-in restrictions.
Pension funds can be governed under federal or provincial legislation and though there are many similarities, each jurisdiction has its own rules. Both the RRIF and LRIF have obligatory minimum payments starting the year after the plan is established; the LRIF also has a maximum annual withdrawal. Like a RRIF, an LRIF can be transferred to a surviving spouse at death, subject to certain conditions.
“The LRIF was first introduced along with the Life Income Fund (LIF) by some pension regulators to allow more flexibility than an annuity in terms of how much income the annuitant could potentially receive in a given year,” Golombek noted. It has since been eliminated as a retirement option everywhere but in Newfoundland and Labrador, “as the advantages of an LRIF have been incorporated into the LIF.”
In addition, a few jurisdictions, such as Quebec, have an optional temporary income provision under the LIF allowing a greater-than-normal withdrawal, subject to certain conditions.

Q: “Our family and a few partners are considering purchasing an apartment building in sunny Florida. We are planning on acquiring through an LLC (limited liability company). Is this advisable?”

A: David Altro, who is both a Quebec notary and Florida attorney, doesn’t recommend that option. “For tax purposes, the IRS will consider it a flowthrough to the owner members, whereas Canada Revenue Agency will consider it a corporation and tax it as such, so foreign credits may be lost for income and capital gains tax, resulting in the dreaded double taxation.”

The Gazette invites reader questions on tax and investment matters. If you’d like your query addressed, please send it to Paul Delean, Gazette Business Reporter, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1, or by email to pdelean@montrealgazette.com
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