3/23/2021

CFP Retirement Topics

Registered plans and special retirement plans (IPP, SERP, RCA),
Income splitting, Spousal RRSPs
Trusts – special purposes

Leaving a DB Pension Plan

Three choices for what to do with your pension:
 1. Leave the pension and collect the retirement benefit later (age 65, reduced if younger)
 2. Transfer the commuted value to a LIRA type account, (or to a LIF type account if over 55
and want retirement income to start) (1 time 50% ‘unlocking’ when transfer to LIF)
 3. Transfer the ‘service’ to new employee pension plan (if compatible)
Other pension topics: PAR and PSPA
 PAR – Pension Adjustment Reversal: In DB pensions the PA is not based on the funds actually
contributed. If the benefit when leaving a pension plan is less than the PAs over the years
then the pension room is restored through a PAR (you get RRSP room added back).
 PSPA – Past Service Pension Adjustment reduces RRSP room by the PSPA to maintain the 18%
of income limit. (Ex. If a pension retroactively increases its pensionable service, lose RRSP
room.)
At retirement, a pensioner must select:
 Percent payment to survivor (60%, 80%, 100%). Retirement income is lower if take 100%
 Guarantee period (5, 10 or 15 years) pays if pensioner and survivor die before end of
guarantee

Specials Pensions IPPS, RCAs, SERPS

 IPP - An Individual Pension Plan (IPP) is a defined benefit
pension plan for individuals. The ultimate pension amount is
defined in advance based on a percentage of salary. For
executive or business owners in their late 40s and older, they
can contribute more than what the RRSP rules would allow.
More expensive, need funds.
 SERP - A Supplemental Employee Retirement Plan (SERP) is a
non-registered plan for executives/key employees. It is
implemented when the pension of an employee under a
Registered Pension Plan (RPP) is limited because of the
maximum (18% cont.) tax-free.
 RCA - A Retirement Compensation Arrangement (RCA), a letter
of credit or simply a pay-as-you-go basis, which can be used to
fund supplemental retirement benefits.

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Income Splitting in Retirement (CPP, spousal RRSPs)

 Spousal RRSP: Higher income spouse A uses their RRSP room to contribute to a
Spousal RRSP for spouse B. Spouse A gets the deduction. Any funds withdrawn in
the next three years will be taxed back (attributed) to spouse A. As of 2007, this
lost importance because retirement income splitting became an option.

 Retirement Income Splitting: Now couples can elect how much (up to 50%) RRIF
or pension income to allocate to the other spouse each year. Therefore, spouses
with unequal retirement assets can save thousands per year in taxes
($120,000 income pays ~$31,460 tax vs 2 X $60,000 incomes pays ~ $21,920 tax)

 CPP Pension sharing is different. Spouses must both be collecting CPP and both
apply and get their CPP shared. They can apply to change it later. The part
shared is based on the percent of time they jointly contributed. Ex. Jack’s CPP
500 and Jill’s is 1000 and they were living together 60% of their contributory
years, then Jack gets $650 and Jill $850. If they were together their entire
working lives, then 50/50 split or $750 each. Pensioner does not choose.

Trusts
Inter vivo Trusts (between the living) Set up while the settlor /
grantor is still alive, by way of a “deed”
 Income received & retained in the trust (not paid out) is taxed
at highest tax rate

Testamentary Trusts (instructions in the will) Set up

automatically when the deceased dies according to the will or
intestate laws (in case of a minor child)

 21 Year Rule = deemed disposition of all assets held in a trust

 Cannot defer tax indefinitely by holding assets in a trust
 Spousal and common-law trusts are exempt from this rule

Trusts Purposes
Provide income for current spouse after death
• Preserve capital for children from an earlier marriage
• Preserves the capital should the surviving spouse remarry

 Reduce probate fees

• Assets left in a trust are not subject to probate fees on the death of the 2nd spouse
• Enact an estate freeze (deemed disposition when assets transfer in)
• Protect assets – creditor proof as long as not done to avoid creditors
• Privacy – not a public document
• Make a charitable donation
• Provide professional management for beneficiaries who cannot manage the assets
themselves
• Manage assets for Minor children
• Protect older children who are not ready to manage a large amount of money
• Protect infirm or disabled beneficiaries

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Setting up a Trust – the Three Certainties

 Certainty of Intent, must be a clear intention to create a trust
 Certainty of Subject Matter, must be clear what assets are being transferred to
the trust
 Certainty of Objects, must be clear who the beneficiaries are and the type of
beneficial interest each beneficiary has (income, capital and remainder)

Three Parties
 The settlor (or trustor) contributes to, or “settles” the trust by transferring
assets. (No asset – no trust, sometimes a gold coin).
 The trustee, upon who the trust is settled, who holds and manages the assets
on behalf of the beneficiary(ies). The settlor can be a trustee. The trustee has
title to the assets and “owns” them. A trustee can be a natural person, a
business entity or a public body.
 The beneficiary(ies) benefit from the assets in the trust. They have no
control and make no decisions.

Beneficiaries of a trust (Income, Capital, Remainder)

Income Beneficiary
 Receives income from the trust, taxed at their marginal tax rate
 Can guarantee a source of income, with no claim to the capital property

Capital Beneficiary
 Receives capital (property and/or assets)
 Based on the settlor’s orders, the capital can be drawn down. Can receive income and
capital

Life Tenant / Life Interest Beneficiary = beneficiary who has a life interest
 has the right to use the asset for a specified time period (usually their life)
Remainder Beneficiary = Capital Beneficiary where there is a life interest beneficiary
 Remainder Interest = a capital interest that does not come into effect until the person
having a life interest dies (Ex. A second spouse could be an income beneficiary
 And children from the settlor could be remainder beneficiaries)

Types: Commercial vs. Personal Trusts

Commercial trust: The beneficiary has received their interest by paying
something for it...

Mutual fund trust: only undertaking is the investing, acquiring,

maintaining, leasing, or managing of its funds (not real property).

Segregated fund trust: a.k.a. Insurance segregated fund trust

 Inter vivo trust that is a related segregated fund of a life insurer for
life insurance policies. The fund’s property is trust property, the
fund’s income is trust income, and the life insurer is the trustee.
 Interest, dividends and capital gains are distributed to beneficiaries,
otherwise taxed at the top marginal tax rate.

 Personal trust: no beneficiary has attained an interest by paying for

it, the main types being considered here

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Special Inter vivo Trusts

Alter Ego Trust: Grantor/Settlor must be single person over age
65. Only Settlor can receive income and capital. Capital gain on
assets transferred to the trust is deferred (no deemed disposition)
Joint Spousal / Partner Trust: Grantor must be over 65. Same as
above but lasts until death of second partner

Purpose: avoids probate, confidential, avoids Wills Variation Act in

BC. Must pay inter vivo tax rates on income remaining in trust.
Cannot use charitable donations or capital losses at death of settlor

Spousal Trust – Strategy for the Family Cottage

Leave it in a spousal trust

 Only for use of spouse during her/his lifetime. No one else has the right to
use it, no one else can have claim to income or use of the capital
 Once spouse dies, the children are capital beneficiaries. Protects assets to
pass to the children (issue) of the settlor, in the event the surviving spouse
remarries

Qualifying Spousal Trust (if requirements above are met)

 Can be testamentary or inter vivo. Rollover assets at ACB to spousal trust =
Spousal Rollover = tax-free rollover – no capital gain recognized at transfer
Tainted spousal trust
 A criteria above is not met, for example adult children are given the right to
use the property (cottage) intermittently
 Also applies to common law partner trusts

Henson Trust Providing for Disabled Children

Henson Trust : absolute discretionary trust designed to benefit disabled people
 protects the right of the disabled person to collect government benefits and
entitlements when they accumulate considerable assets (by inheriting them)
 trustee has absolute discretion in deciding whether to pay out funds to the
beneficiary, and how much
 assets do not belong to the beneficiary and thus cannot be used to deny
means-tested government benefits
 Can supplement an RDSP. No eligibility criteria, no contribution limits, can
have residual beneficiaries. No restrictions on the timing of payments from it
Note:
 If the beneficiary is capable of managing their own money and is not receiving
social assistance payments, a Henson Trust would not likely ne advised.