Increase Guaranteed Interest Income, Prescribed Annuity Tax Changes - Situational Financial Planning, Legal & ID Shield, Halifax, Nova Scotia, Canada

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Increase Guaranteed Interest Income, Prescribed Annuity Tax Changes

Tax - What about me?
Increasing After Tax (for those that like guaranteed interest)
Are you 55+ Avoid having to say: I wish I had know about grandfathering
Imagine if there was a tool available that could increase your after tax income by 50, 60, 70% or more.

If your preference is for a guaranteed interest income, a Prescribed Annuity can do just that. Prescribed annuities, with their guaranteed payments and estate benefits are often used by retirement and estate planners. If you are over age 55 and have not been exposed to them yet, chances are you will.

The amount of income from a prescribed annuity that must be included as taxable income is going up though. The percent increase varies as shown in the examples from 17% to 165%* (Table 1). You will pay more tax!

The good news is that you can lock-in or grandfather the current tax rules if the plan is issued before the end of 2016.

You have a window of opportunity!
If you decide to learn more, you will probably have questions such as:
What are Prescribed Annuities? How do they work? What qualifies?  What are the potential benefits?  Examples? What is changing? What does it mean to you? What does it mean to you?

A Prescribed Annuity is a payout annuity, where in exchange for a lump sum of money you receive a guaranteed flow of income for a specified number of years or an income for the rest of your life.

How do they work?

Prescribed Annuities enjoy special taxation (Section 304 of Income Tax Act). They are taxed on a straight line basis rather than on an accrual basis. Interest earned on a Guaranteed Investment Certificate (GIC), for example,  is taxed as it “accrues” or earned whether it is taken as income or not.
If you qualify for a prescribed annuity then total amount of "expected" interest is averaged based on the number of payments. This, as shown in the examples, can provide a significant advantage.

What qualifies?

Non-registered funds used to purchase an annuity qualify if:
·        Life annuity or guaranteed annuity not to exceed age 91
·        Payments cannot be indexed
·        Income starts before December 28 the year following purchase.  
Other tax benefits include:
·        Income splitting. Qualified annuity income can be split between spouses.
·        Old Age Security clawback. A large portion of the income is considered return of capital and not taxable income.
·        Pension tax credit. A prescribed annuity may meet the qualifications. This means the spouses could each earn the first $2,000 income tax free.
·       Probate / Estate Taxes. If there is a named beneficiary on life annuity with a guarantee period or a term certain annuity, the annuity bypasses the estate. (Bypassing estate ensures privacy)


Prescribed annuities are used in several financial planning strategies often in combination with other products. (Additional strategy resources at ProtectandGrow)
There is, however, no one "cookie cutter" plan or product solution. The process involves understanding your overall objectives, determining your needs and then based on your individual situation, deciding how your resources should be allocated. As such, the examples provided are for educational purposes and should not be acted on before consulting with your professional advisors.
The life annuities were illustrated with rates from May, 2015. The 3% GIC rate was used for comparison purposes only. A 45% marginal tax rate was assumed.


Dick and Jane are now both age 71 and have a total of $200,000 in Guaranteed Investment Certificates (GICs). Their objective is to create the most income possible, while ensuring their investments have little or no risk. Although their primary concern is guaranteed income, they would like to leave a legacy for their children and grandchildren.

$200,000 GIC Investment earning 3%                                  
Annual Income                  $6,000
Taxable Amount                $6,000
Tax Payable                        $2,700

Annual CASH FLOW         $3,300
Example 1

$200,000 Prescribed Annuity (Dick –male, NS, age 71)
Annual Income                         $15,172
Taxable Amount                            $745
Tax Payable                              $      335
Cash Flow before life ins.       $14,837                                                                                                                                                                         
Insurance Premium                 $  9,022

Annual Net CASH FLOW   $       5,815

Pre-tax rate of return needed to provide similar cash flow: 5.29%
The life insurance replenishes 100% of the capital for Jane, children, grandchildren or his estate. The taxes on non-registered income is reduced and guaranteed is increased.

Example 2
$200,000 Prescribed Annuity (Jane – female, NS, age 71)
Annual Income                         $13.435
Taxable Amount                            $811
Tax Payable                              $      365
Cash Flow before life ins.       $13,472                                                                                                                                                                         
Insurance Premium                 $  7,827

Annual Net CASH FLOW   $   5,645

Pre-tax rate of return needed to provide similar cash flow: 4.77%
The life insurance replenishes the 100% capital for Dick, children, grandchildren or her estate. The taxes on non-registered income is reduced and guaranteed income is increased.

Example 3

Allocate $100,000 to exchange for a Joint Last Survivor annuity (non-reducing income at first death) and invest $100,000 into a Guaranteed Investment Fund (GIF) with a 100% Death Benefit Guarantee.

1.  $100,000 Prescribed Annuity (Joint: Dick M 71, Jane F 71)
Annual Income                    $5,888
Taxable Amount                  $      0
Tax Payable                        $      0

Annual CASH FLOW   $        5,888

Pre-tax rate of return needed to provide similar cash flow: 10.71%

2.  $100,000 Guaranteed Investment Fund (GIF) with 100% Death Benefit Guarantee
Guaranteed Investment Funds (GIF) are investment funds issued by insurance companies and as such have maturity and death guarantees of 75% or 100%. Utilizing the built-in guarantees of a GIF, the portfolio could be positioned to provide growth opportunities while keeping the capital secure at maturity and death.
Some companies also offer resets that lock market gains to maturity. Funds are invested at policyholder’s risk. See the fund’s information folder for more information.  
Please note that product features differ between companies, so if your financial or retirement planner cannot access them for you, checking around would be prudent.
This option provides an increase in guaranteed income. At the first death, the income would continue for the survivor and not be reduced. The original investment in the GIF could be guaranteed at the 100% at death and maturity.
Example Summary

There are advantages and disadvantages to each of the examples shown. It really does depend on what the objectives are. You can though, see how powerful a prescribed annuity strategy can be.
Additional strategy resources - I want to .... How do I...?
 What is changing?

Effective for annuities issued after 2016 the mortality tables used to determine the capital element of the payment are being updated to reflect that we are living longer. This change will result in an increase in the taxable portion of income payments.

Table 1

*The amount of change varies by age and sex. The tables below are based on rates from September 2014 for a $100,000 Life Annuity with a 10 year payment guarantee. They are being provided for educational purposes to illustrate type of change.

AGE          Increase in Taxable Portion.

55          31.43%
60          41.83%
65          53.40%
70          67.01%
75          84.29%
80        100.00%

AGE          Increase in Taxable Portion.

55           17.74%
60          23.32%
65          36.46%
70          60.52%
75          109.80%
80          165.71%

What does this mean to you?

Even with the change, Prescribed Annuities will still be powerful financial planning tools, just not as powerful. There will be more tax paid.  
Action Required

1. If you are over age 55, review and determine if a prescribed annuity is right for you. Make an informed decision. If it is appropriate, put it in place before the end of 2016, it will then be locked in or “grandfathered”. Plans purchased after that WILL attract more tax!

2. Implementing a strategy involving annuities, is sometimes complicated; however, it is always permanent.  Currently, in most provinces in Canada anyone can call themselves a financial advisor or financial planner. It is your money, so be prudent and check credentials and qualifications. Look for life insurance brokers with professional designations like a CFP (Certified Financial Planner) or CLU (Chartered Life Underwriter).

3. Whether you are 55 or not, spread the word, share this article, let your friends and family know. Although ignorance might be bliss, it can be costly”.

Your friends and family would appreciate being like you, to be able to say:
"I now know about Grandfathering!”
Thank you for reading my post. If you would like to read my future posts then please feel free to also connect via LinkedIn, Twitter, Google+, Facebook and Tumblr. If you would like to ask me a question or more information, you can contact me via Social Media or the contact details available at


Paul Wilson is a Halifax, Nova Scotia based Certified Financial Planner and Chartered Financial Consultant with over 30 years of experience.

© 2015 J. Paul Wilson, CFP, CHFC

Paul is a Certified Financial Planner (CFP) licensed by the Financial Planners Standards Council.

The information contained in this website is intended to provide general guidelines only. The application and impact of the law can vary widely from case to case based on the specific or unique facts involved. Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Users are encouraged to consult with their professional advisers for advice concerning specific matters before making a decision.

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