There was plenty of speculation after the October 2015 federal election about what changes the new Liberal government would introduce to retirement and estate planning. As of April 2016, the best-known change is a reduction in the annual TFSA contribution limit. For 2016, the limit has been reduced to $5,500 from $10,000. This measure exactly reversed what the previous government had done in 2015.

Aside from this reduction in the contribution limit, there have also been major changes to retirement and estate planning since October 2015, including those introduced in March’s federal budget.

Age-old Debate: RRSP or TFSA

Prior to the 2015 federal budget, minimum RRIF withdrawal rates were 7.38 percent at age 71, increasing gradually to 17.92 percent at age 93, and 20 percent thereafter. The new RRIF factors introduced in the 2015 budget were minimum withdrawal rates of 5.28 percent at age 71, increasing to 18.79 percent at age 94, and 20 percent thereafter. These changes will make saving through an RRSP less taxing for retirees (when compared to saving through a TFSA) and RRSP tax deductions more valuable. As a result, the RRSP/TFSA balance has shifted. Tax-free TFSA withdrawals must now compete with a more attractive RRSP package, which offers RRSP tax deductions plus lower RRIF minimum withdrawal rates.

However, the 2015 TFSA room increase allowed those taxpayers not needing to take advantage of the lower RRIF minimum withdrawal rates to simply contribute to a TFSA. With the most recent decrease in TFSA room, it’s expected that some taxpayers will be forced to use an RRSP instead of, or in addition to, a TFSA. These taxpayers cannot simply rely only on the TFSA, even if it’s more advantageous to them, because they might not have contribution room.

Retirees need to plan carefully to decide how retirement savings should be split between a TFSA and an RRSP. Withdrawals from a TFSA don’t increase the taxable income of a retiree, but, as the annual contribution limit has been reduced, there is less room for taxpayers to benefit from tax-free TFSA withdrawals. Withdrawals from RRIFs (funds transferred from an RRSP at age 71) are taxable, but minimum withdrawal rates were reduced in 2015 and have not been increased by the new government. The financial situation of each of these savings vehicles is unique; therefore, retirees should seek professional advice.

Donation Planning and Capital Gain Exemption

The 2015 federal budget proposed exempting individual and corporate donors from tax on the sale of private shares or real estate to an arm’s-length party if proceeds were donated within 30 days. If a portion of the proceeds was donated, the exemption from capital gains tax would apply to that portion. This measure was to apply to donations in respect of dispositions occurring after 2016. This was an extension of the capital gain exemption on donations of public company shares. As this exemption has quite a number of anti-avoidance rules, retirees need to pay close attention. However, the 2016 budget proposed not to implement this measure. Personally, I believe the government decided not to pursue this because of potential abuse (for example, valuation of private companies can be very difficult and subjective.)

Nonetheless, estate planning opportunities remain available with respect to donations of publicly traded shares. Capital gains as a result of donations of publicly traded companies continue to be exempt.

Donations by a GRE

Starting in 2016, testamentary trusts, except graduated rate estates (GRE)¹, are no longer taxed at the progressive tax rates that are applicable to individual taxpayers. Instead, testamentary trusts are taxed at the highest marginal rate, the same treatment as inter vivos trusts. Many estate plans that were designed to take advantage of the preferential treatment of testamentary trusts had to be restructured. However, flexibility in donation planning by testamentary trusts was introduced under Stephen Harper’s government, almost as if compensating for this major negative change to testamentary trusts.

Subject to some conditions, a testamentary trust that is a GRE can allocate donations in four different ways:

1. the estate’s taxation year in which the gift is made;
2. any of the preceding taxation years of the estate;
3. the deceased individual’s final tax return; or
4. the deceased individual’s tax return for the taxation year immediately preceding the year of death.

With this level of flexibility, there are certainly plenty of opportunities for retirees to plan donations for maximum tax efficiency.

¹ A GRE is a testamentary trust that meets all of the following conditions:

1. The estate is a testamentary trust that arose as a consequence of an individual’s death.
2. No more than 36 months have passed since the date of death.
3. The estate is designated as a GRE on the first tax return after 2015.
4. The estate is the only estate related to the deceased that is designated as a GRE.