Question

Marnie plans to purchase a 10-year annuity with pre-tax payments of $2,466 at the end of each year. The cost of the annuity is $20,000. She is uncertain whether she will use funds directly from her RRIF or funds directly from her non-registered investments to purchase the annuity. Which of the following statements is correct?

a) If Marnie purchases the annuity with funds from her non-registered investments, none of the annuity payment received each year will be taxable.
b) If Marnie purchases the annuity with funds from her non-registered investments, $466 of the annuity payment will be taxed each year.
c) If Marnie purchases the annuity inside her RRIF using existing RRIF funds, $466 of the annuity payment will be taxed each year.
d) If Marnie purchases the annuity inside her RRIF using existing RRIF funds, $2,000 of the annuity payment will be taxed each year.

Answer 1

The correct answer is that if Marnie purchases the annuity inside her RRIF using existing RRIF funds, $2,000 of the annuity payment will be taxed each year as RRIF withdrawals are fully taxable, whereas only the earnings portion of annuity payments from non-registered funds would be taxable.

Step-by-step explanation:

The question pertains to how funds should be used to purchase an annuity and the tax implications of using different sources of funds. The correct statement is:

• If Marnie purchases the annuity inside her RRIF using existing RRIF funds, $2,000 of the annuity payment will be taxed each year.

This is because withdrawals from an RRIF (Registered Retirement Income Fund) are fully taxable at the individual's marginal tax rate. When purchasing an annuity with funds from a non-registered account, the part of each annuity payment that represents a return of capital (original investment) is not taxable, but the rest, which is considered earnings on the investment, is taxable.

Considering the annuity cost of $20,000 and an annuity payment of $2,466 per year for 10 years, the portion of each payment considered a return of capital would be $2,000 ($20,000/10 years), and the remaining $466 ($2,466 - $2,000) would be taxable as income.