December 20th 2008: While Ottawa yielded to pressure from seniors by granting a 25% cut in forced withdrawals from registered retirement income funds, many large financial institutions are balking at obliging seniors with this break.
Some plead the proroguing of Parliament into January prevents them, while others blame their back-office computer systems.
Either way, seniors are frustrated and confused, says Carol Libman, advocacy consultant for CARP. “I’ve been fielding the calls. Lots are irate.” She says some institutions, such as Mackenzie Financial Corp. and the Royal Bank, are already accommodating seniors who wish to withdraw only 75% of the mandated minimum.
“The Bank of Montreal said it can do it for accounts with mutual funds and term deposits. Some others are saying they’re not set up to do it.”
Susan Eng, CARP’s vice-president of advocacy, gives the example of the United States, which recently introduced a one-year moratorium on required minimum distributions from retirement accounts in 2009. Withdrawals next year will be optional rather than mandatory. Eng says the U. S. managed to pass its one-year moratorium “without any fuss at all.”
Meanwhile, Canadian seniors are getting the worst of both worlds. First, they see their monthly statements and get upset by the heavy losses. Then, they go to the bank at one of the busiest times of the year and are told they can’t get the 25% reduction in the withdrawal rate because the banks haven’t got their systems ready. They’re told to come back in the spring.
“Our position is they should eliminate the minimum withdrawal altogether or at least start with a moratorium,” Eng says.
Adrian Mastracci, president of KCM Wealth Management Inc. in Vancouver, says most of his customers are experiencing this problem. He says clients are being told to withdraw the whole mandated minimum (100% rather than just 75%) until the law is formally passed, then deposit back the 25% in the new year.
Mastracci says most clients have already taken out the 100% minimum anyway, so it’s only the people who are withdrawing in December who are affected. “I agree it’s a pain, but on the flip side, you can tweak the RRIF or tax situation by being able to put the 25% back.”
Seniors accustomed to making quarterly withdrawals could simply not make the last withdrawal of the year. But most clients withdraw only once a year.
Gordon Pape has been fielding plenty of calls from worried seniors. In his newsletter, Internet Wealth Builder, Pape said the Department of Finance confirmed the one-time 25% reduction will be honoured by the Canada Revenue Agency, even in the absence of enabling legislation. “This is consistent with past practice relating to tax announcements. Historically, the CRA applies all tax changes as soon as they are announced.” The problem in this instance is that the Liberal-NDP coalition “raised serious questions about whether any or all of the tax proposals would stand if a new government took over.”
In an interview, Pape said the 25% measure is “rapidly turning into one of the most worthless tax breaks of all time if the big financial institutions can’t get on board. There are a lot of unhappy and frustrated people.” He says retirees can choose to withdraw only 75% of the total they would normally be required to take out of a retirement income fund in 2008. Those who receive equal quarterly payments from their RRIF can tell the plan administrator to withhold the last quarter’s payout since that would amount to the 25% reduction.