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To Whom Will You be Leaving Half of Your RRSP?
by Kurt Baumgartner, B.Sc., M.Ed., CFP, RHU, CLU, CH.F.C.

Perhaps the most glaring inequity in the Income Tax Act is the discriminatory treatment that gay couples receive at the death of a partner.  The Act allows for a so-called “spousal rollover” of RRSP assets from the deceased to the surviving spouse.  This rollover is not available to gay partners.  The financial implications are huge.

Let’s assume that you are a 40-year old tax-payer with $ 150,000 in your Registered Retirement Savings Plan (RRSP) to which you are contributing $ 6,000 a year and which grows at 8%.  You too have seen the commercials and want  to retire in 15 years.  At 55 your RRSP will be worth $ 561,771 and you convert it into a Registered Retirement Income Fund (RRIF)

Let’s further assume that you retired with a reasonable pension so that you will only withdraw the minimum required from your RRIF in order to minimize income tax.  At age 85, your statistical life span, your RRIF will now be worth $ 1,229,542.  If you were to die at this stage, Revenue Canada would get $ 615,000.  Talk about being a preferred beneficiary!

Now, had you been in a straight relationship, your spouse could have rolled the entire $ 1.2 million into his or her own RRSP.  But this option is not available to you.

There is a way around this, however.  While you cannot deny the government its share, you can protect the integrity of your estate by means of an “insured retirement plan.”  You can purchase a $ 615,000 life insurance plan to offset this tax load.  Your premium for this strategy would be about $ 4,500 a year (or $ 375 a month) - payable for ten years only - for a total cash outlay of $ 45,000, i.e., about 7.3% of the ultimate tax load or less than ¾ of 1% a year for ten years.

There are other ways of keeping the government off the trough; for example, through the use of terminal charitable donations, though they don’t prevent the erosion of your estate.  And there are quite legal ways of "having your cake and eating it too," i.e. saving money in a tax-sheltered way (like an RRSP) and then withdrawing it completely tax-free.  But these are topics for perhaps other columns.

Kurt Baumgartner is a Chartered Financial Consultant with Balmoral Financial Services Inc. in Nepean.  He has been in the financial services industry since 1983.  He may be reached at (613) 224-0236 or kbaumga@istar.ca.