Gifts of RRIFs in Life

I get a steady flow of inquiries about donating funds from registered retirement income funds or RRIFs. The value of RRIFs has grown through careful saving and market gains, and occasionally these funds represent surplus wealth. Some RRIF holders resent the requirement to take steadily increasing annual withdrawals from their RRIF. Add a dash of altruism and the idea of donating RRIF property arises.

There are a couple of factors to remember when considering donating RRIF assets. First, any withdrawal is taxed as income. So there is no advantage to donating appreciated public securities from within a RRIF. For tax purposes there is no capital gain and it will not be eliminated if securities are donated in kind.

Second, plan trustees are obliged to withhold 30% of any withdrawal for tax purposes. The withholding tax creates cash flow problems for the would-be donor. For example, a desire to donate $100,000 is frustrated by having only $70,000 available. There is, however, a tax liability on the full $100,000 withdrawal.

Generally it is not a good idea to make direct gifts from RRIFs during life. These gifts are tax inefficient and the withholding tax causes cash-flow issues. Still, it may make sense for a committed donor to use an offset plan to achieve similar goals. One approach is to donate appreciated publicly-list securities held outside the RRIF and withdraw an equal amount from the RRIF. The tax credit from the donation will offset the tax liability triggered by the RRIF withdrawal.

This donation is more tax effective – due to nil capital gains from a gift of public securities – and also allows the donor to reinvest funds from the RRIF in a lower tax environment that provides higher control over cash-flow. It does not eliminate the withholding tax, so it is best to make the RRIF withdrawal in December to reduce the period when the donor is out of pocket.