Tax implications of making transfers between registered accounts

Tax implications of making transfers between registered accounts

Suzanne transferred money from her LIRA to a LIF and her RRSP. Now she worries she’ll be taxed twice.

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Q. I had a locked-in pension, which I converted to a Life Income Fund (LIF). I also took advantage of the ability to unlock up to 50% of the LIF within 60 days and put $120,000 into an RRSP. I did not receive any funds—so I was shocked when I received a T4RIF for $120,000, which means I have to claim that as income. I also received an RRSP receipt for $120,000.

I didn’t receive any money, so I’m not sure why I’m being taxed now, as I will also be taxed when I start to withdraw the funds. Did the bank incorrectly issue the T4RIF?
Suzanne

A. Locked-in retirement accounts (LIRAs) come from pension plans—either defined contribution (DC) pensions or defined benefit (DB) pensions—that are transferred to you from your employer when you leave a job.

They’re locked in because they are intended to provide income throughout your life in retirement, so you are limited in how much you can withdraw each year from a resulting LIRA, subject to annual maximums based on your age.

There are exceptions when a locked-in account can be withdrawn, either partially or entirely. Exceptions include extreme financial hardship or a shortened life expectancy; some provinces also allow unlocking based on your age.

In Ontario, you can access up to 50 percent of the balance of your LIRA by transferring it into a Life Income Fund (LIF). Within 60 days of the transfer to the LIF, you can withdraw up to 50 percent of that balance, or transfer some or all of it to a registered retirement savings plan (RRSP)*.

To use an example with numbers, someone with a LIRA worth $10,000 can transfer up to $5,000 of that amount to a LIF. Assuming the maximum amount is transferred to a LIF, within 60 days, that person can withdraw up to $2,500 from the LIF or transfer up to the full $5,000 from the LIF into an RRSP.

The benefit of the transfer to your RRSP is that it can happen on a tax-deferred basis, and the subsequent withdrawals are not subject to the annual LIF maximums.

You can’t open a LIF prior to age 55 in most cases. The minimum age depends on the earliest age a retiree could have started their pension under the terms of the pension plan the LIF came from in the first place.

When you take a withdrawal from a LIF, Suzanne, that withdrawal is reported on a T4RIF slip for tax purposes. Since you transferred 50 percent of your LIF to your RRSP, it should be reported in box 16 as a “taxable amount” as well as box 24 as an “excess amount transferred to RRSP”. This will increase your RRSP room for the year by the amount of the transfer. When the transfer is made within 60 days of opening the LIF, which it sounds like it was, given the way they reported it on your slip, you can make the RRSP contribution without impacting your available RRSP room.

The financial institution was right to issue you an RRSP contribution receipt because you must report the income from the T4RIF slip, and then deduct the deposit to the RRSP as a contribution—it’s a wash in this case.

If you took a withdrawal from your LIF and transferred only some of it to an RRSP, the RRSP contribution and allowable deduction would be less than the full withdrawal, and you would have an income inclusion. In other words, you would have to pay tax on the amount of the withdrawal not transferred to your RRSP.

Generally, transfers between registered accounts like RRSPs, LIRAs, RRIFs, LIFs, RESPs, and TFSAs do not have tax implications. The funds transfer over on a tax-free (for TFSAs) or tax-deferred (for other accounts) basis.

Some people may want to access locked-in funds because they need the money immediately. Others may just want to minimize the amount of money that is subject to maximum withdrawal restrictions. If your LIRA is small, unlocking a portion may mean the remainder is small enough, or will be in the future, to unlock it under the small balance limits for your province of residence.

In summary, Suzanne, I think the reporting by the bank was correct. You now just need to report it correctly on your tax return: as $120,000 of income on line 130 of your T1 tax return, and an offsetting $120,000 deduction on line 208.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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