Based on current Canadian demographics, Canada’s baby boomers are retiring at a significant pace putting extra pressure on both the Old Age Pension Plan (OAS) as well as the Guaranteed Income Supplement (GIS). At this point, both these plans are funded from business owners and employees through general tax revenues. Because of the population shift, there are more Canadians in, or going into retirement than there are entering the workforce. This results in a dangerous imbalance related to governments lack of ability, and capacity, to continue to finance these benefits at this current level. There is inherent pressure for the Government to increase business contributions to the Plans.

In the event the government must reduce or restrict OAS and GIS, it will put a significant dent in the purchasing power of retired Canadians, thus having a negative impact on the economy, its growth, and other social services.

The other compelling scenario is the large amount of assets transitioning between generations never before seen in history. According to Mackenzie Financial, the projected average intergenerational transfers between 2016 and 2026 will be $1.1 trillion dollars. Of this, 33% will be real estate, and 67% will be financial wealth. Saying that, one of the least understood concepts in Canada is the cost of dying. Although we have no “Inheritance Tax” per say, the cost of dying and intergenerational asset transfer is significant. An example being that 100% of an intergenerational transfer (last surviving parent to children) of a RRIF is generally taxed at the highest marginal tax rate of 53% on the deceased’s final tax return (Deemed disposition tax), before it is made available to the beneficiaries of the estate. This tax goes to general revenues and is not guaranteed to be set aside to support OAS and GIS.

In order to ensure the OAS and GIS is not oversubscribed, and that Canadians will have more dependable income going forward, we should look at the implementation of the Locked-In Estate Trust. This model would essentially allow individual families to take increased control over their retirement savings approach and be less reliant on the government managed programs.

The LIET would be created by the contributor/subscriber, who currently has assets to pass on to future generations in the form of investments, or real estate investment. This could be created during their lifetime, or upon death, similar to a Testamentary Trust. The mandate of the Trust would be to allow the transfer of assets to the trust, on a tax deferred basis – specifically defer the Deemed Disposition Tax. While still alive, the contributor will be able to draw income from the trust for his or her benefit, which would continue to be taxed as withdrawn, similar to any Registered Retirement Income Fund (RRIF), or the proceeds of revenue generated from investment real estate, or “rental property”.

The key difference is that on the death of the contributor, the assets in the Trust will now be eligible to be paid to the named beneficiaries (i.e., children), without the assets in the Trust being subject to a Deemed disposition and related taxes. The Trust becomes an instrument similar to a Locked-In Retirement Account (LIRA) that restricts the amount of income being withdrawn on an annual basis. The amount eligible is typically 6-9% per year. The amounts withdrawn and paid to beneficiaries is taxed when withdrawn.

On balance, the government may generate a higher tax collection, albeit deferred in time, as follows:

  • Personal real estate assets would be subject to tax exemption on deemed disposition, but would be taxed fully (income and capital gains) within the LIET, and
  • Income assets would have incurred as deemed disposition on death and any unrealized gains earned over time would be subject to tax. While in the Trust such gains, would be deferred until withdrawn from the Trust.

The generational benefit to this instrument is that, when professionally managed, the growth will be equal to or better than the withdrawals therefore providing income to the beneficiaries in perpetuity, and for all future generations.

By locking in the Estate Trusts, the retirement assets are not being used for general purposes, which provides increased security for future generations. The beneficiaries who are able to draw from their Trusts will not be relying on government sponsored programs.


That the Federal Government:

  1. Convene a special committee to determine the feasibility of implementing the Locked-In Estate Trust in the context of Canada’s overall retirement savings framework and that this study and review be completed within a 2- or 3-year period.