More Questions Answered About Canadian Retirement Accounts

02/23/2011 9:59 am EST


John Heinzl

Reporter and Columnist,

Have questions about LIFs, RRIFs, or LIRAs? Worried about tax liability? Part two of a Q&A between John Heinzl, reporter and columnist for, and Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management, explores the most effective ways of maximizing your retirement investments.

I transferred 50% of the value of an Ontario new life-income fund (LIF) directly into my RRSP and subsequently received a contribution receipt. I was under the impression this allowable transfer didn’t affect my deduction limit. The transfer put me over my allowable limit. Will I be tagged with the 1% per month tax on this? -R.B.

Locked-in funds originate from pension-plan assets that have been transferred out of the plan by the former employee, who was at one time a pension plan member. New rules introduced in Ontario recently created the “New” life-income fund (LIF). A LIF is basically a RRIF with certain locking in restrictions. Like a RRIF, a minimum payment must be made each year after the year the LIF is opened, but unlike a RRIF, there is an annual maximum amount that can be withdrawn.

A feature of the New LIF is that it allows an individual who is at least 55 years of age to “unlock” up to 50% of the value within the first 60 days of transferring funds from the pension plan—or a locked-in retirement account (LIRA)­­—to the New LIF.

The unlocking occurs by way of a transfer from the New LIF to the (unlocked) RRSP, which is done as a direct transfer payment under the Income Tax Act. Because it’s specifically permitted under the Tax Act, no RRSP contribution room is required or used up and no withholding tax is applied. The amount transferred is reported by the transferring financial institution on a T4RIF slip and is included in your taxable income, but an offsetting RRSP contribution slip is then issued which allows you to claim the corresponding tax deduction on your tax return.

As a result, you will not be hit with the 1% per month penalty tax.

I am retired and age 68. I have an Ontario locked-in retirement account (LIRA) which I acquired when I retired early at age 59. My understanding is that the LIRA requires the holder to buy an annuity when funds need to be withdrawn, and naturally payments will cease on my death (or on my wife's death if I choose that option). On the other hand, RRSPs/RRIFs will have some value on our deaths once the government taxes the 50% of assets at my marginal tax rate. From an estate basis it would appear that RRSPs/RRIFs have an edge over LIRAs given their residual value. I understand that the payments are fixed on the annuity but will vary on the RRSP/RRIF dependent on its asset value at the beginning of each year. My question is: Can one transfer funds from a LIRA into an RRSP without any tax consequences before age 71? If that is possible, what forms or guidelines does one have to follow? -P.R.

You don’t have to buy an annuity to withdraw funds. Instead, you may wish to consider transferring the funds to the Ontario New LIF, provided you have your spouse’s consent.

As discussed above, subject to certain requirements, at the time of transfer from the LIRA to the New LIF, you may transfer up to 50% of this amount to an RRSP or RRIF if you so desire. The remaining 50% stays in the New LIF. Upon death, your spouse would then be entitled to the remaining funds in the New LIF.

If you have no spouse at the time of death or if your spouse has renounced her rights, the New LIF funds can be paid to the beneficiary or the estate.

On Nov. 21, 2008, Finance Minister Jim Flaherty announced that seniors could transfer stocks out of their RRIFs to another account without having to sell them. This was to be done “at no cost to clients.” Flaherty suggested that some financial institutions “may not be advising clients of this option where it exists.” My question is this: Was this a one-time option because of the financial collapse in 2008 or is it still viable? I am anxious to find out. -Y.B.

Good news! It’s still (and has always been) a viable option.

To clarify: Flaherty announced that for 2008 only, owing to the market decline, the minimum RRIF withdrawal amount would be reduced by 25%. However, this should not be confused with the ability to make the minimum RRIF withdrawals “in-kind,” which has always been allowed.

With an in-kind transfer, you don’t sell the stock. You are merely transferring the shares from one account to another. Mr. Flaherty actually wrote to financial institutions in November, 2008, asking them to ensure that in-kind RRIF withdrawals can be done without cost “and that RRIF clients will be made aware of this option.”

Note that while there is no withholding tax on the minimum RRIF withdrawal, the amount of the “in-kind” withdrawal is added to your taxable income.

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