Donate to Eliminate

The Registered Retirement Savings Plan (RRSP) is an important part of many Canadians’ wealth building plans. The RRSP allows for tax savings on contributions and tax-free growth inside the plan. And while many people have contribution and allocation goals; they might not have considered how and when the money will come out – i.e. their “exit strategy.”

An RRSP must be collapsed and converted into a RIF or a registered annuity by December 31st of the year in which the plan holder turns 71. If the RRSP is converted to a RIF, the fund will be subject to mandatory minimum and maximum withdrawals that increase with age. This extra income, whether desired or not, can push the plan holder into a higher tax bracket and potentially lead to a reduction in other government benefits such as the Old Age Security (OAS). A sizable RRSP or RIF at death will be treated as income on the deceased’s final tax return, which can push the plan holder into the highest tax bracket.

An RRSP/RIF exit strategy tries to avoid large withdrawals that push the plan holder into a higher tax bracket while living and avoid a large tax burden at death. Generally, a longer time period of steady withdrawals in a lower tax bracket and allocating excess funds to non-registered or TFSA accounts is more tax efficient over time.

If you have excess assets held in an RRSP/RIF, incorporating a charitable gift plan that takes into account the nuances of RRSP/RIF withdrawal rules can allow for an immediate impact and higher tax efficiencies than waiting to gift an RRSP/RIF through your estate.

Consider Gary and Jade, both retired and 65 years old. With their OAS, CPP, defined pensions and other income (excluding RRSPs) they have a combined income of $70,000/year that can be split into $35,000/year each. They have $500,000 in RRSP assets that they would like to withdraw over time so there are little to no assets left in their estate. Assuming 7% growth and 3% inflation, they can withdraw roughly $27,000/year adjusted for inflation.

Jade and Gary could adopt a donate-to-eliminate tax strategy. Their combined income generates a tax bill of $5,832. If they withdraw the full $27,000 each year from their RRSP, it would increase their tax bill to $12,156. If they then donate $14,000 of the RRSP funds withdrawn to a registered charity they will received a donation tax credit of $6,440 that can be applied to the $12,156 tax bill, resulting in taxes payable of $5,716; less than the pre-RRSP withdrawal amount. The overall outcome is a $14,000 annual gift to charity, an increase of $13,000 in expendable income and a slightly smaller tax bill.

No RRSP withdrawal RRSP withdrawal ($28,000)
Pre-tax income
(split between spouses)
A $70,000 $97,000
Gift to charity D $0 $14,000
Taxes payable (spouses combined) B $5,832 $12,156
Donation tax credit C (46%) $0 $6,440
Total taxes payable B – C $5,832 $5,716
After tax income, after donation A – D – (B-C) $64,168 $77,284

*Ontario residents

**The information and opinions contained in this article are obtained from various sources and believed to be reliable, but their accuracy cannot be guaranteed. Trinity College School and its employees and agents assume no responsibility for errors or omissions or for damages arising from the use of the published information and opinions. Readers are cautioned to consult their own professional advisors to determine the applicability of information and opinions in this newsletter in any particular circumstances.