Suzanne transferred money from her LIRA to a LIF and her RRSP. Now she worries she’ll be taxed twice.
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There are exceptions when a locked-in account can be withdrawn, either partially or entirely.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.
Compare the best savings accounts in Canada
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. He does not sell any financial products whatsoever.
Compare the best savings accounts in Canada
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
It may not be a good idea to save up unused RRSP contributions in order to save on future...
The rates offered on guaranteed investment certificates have skyrocketed over the past two years. Here are considerations for investors...
There is no avoiding risk. Even a high-interest savings account could lose its purchasing power. So, what’s the safest...
Seniors with large retirement accounts face a big tax-deferred liability. Which tax and estate planning strategies might help?
Investment income is subject to tax in Canada, including in some tax-sheltered accounts. Find out more about how passive...
Should you open a margin account with your broker, or opt for an RRSP loan? Read about the potential...
A person who moves to Canada in middle age won’t be entitled to the maximum Old Age Security pension....
Many automakers have had problems with faulty continuously variable transmissions (CVTs). Here’s what to do if your car has...
With planning and the right documents, the capital gain tax owing on a family cottage can be lowered. Here...
Can an RRSP be used to reduce the mortgage on a current home, or to help with the purchase...
Thank you for the clear answer on how to report the T4RIF on the above.
I like to know by reporting box 24 on the T4RIF “excess amount transferred to an RSP”, does this allow RSP deductions in future years. My on line tax program automatically reduced my income by the deductible amount the following year even though I did not make any contribution.
I unlocked 50% of my LIRA (by first transferring it to a RIF) having our bank transfer the 50% to an existing RSP account. I received a T4RIF and a RSP contribution for the same amounts. When I did income tax (I use QuickTax software), specifying the amount under “excess amount” on the T4RIF form the amount was treated as income and most of my RSP contribution amount was rejected since it exceeded my available RSP amount. My return showed I would owe revenue Canada over 51K… quite a sinking feeling that I thought at first a mistake was made during the unlocking process.
The step to tak for my income tax was to record the RSP amount under “designated transfer of eligible income amount”. This caused that RSP contribution amount not to be negated due to my (small) available RSP room, so the amounts on the T4RIF and RSP off-set and then I got the tax assessment I expected. On my RSP form there was a short note “RE: SEC.60L(V) ITA 50% UNLOCKING”.
This would demonstrate that the contribution was a result of LIRA 50% unlocking transfer, and not a mistaken over-contribution.
Hey Jason, I have a question about doing a transfer between a LIRA and a TFSA… Is that even possible?
Presently I can withdraw/transfer these funds because they fall below the small amount rule but I’m not wanting to pay the withholding tax on them to do so. My next best option is to slipt the withdrawals over two tax years in order to decrease the tax rate by 50% but I’d rather not give up and money if possible.
TIA
Response from the MoneySense editorial team:
Hi Steve, thanks for asking.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
This passage is a bit confusing:
“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.”
Can you confirm a transfer from an RRSP, LIRA, or LIF to a TFSA account is tax free?
Thanks for your question, Warren. We have contacted Jason Heath, the author, who had this to say: “To clarify, a transfer between an accountholder’s tax deferred registered accounts – RRSPs, RRIFs, etc. – is generally tax deferred. So, if you want to transfer your RRSP from one bank to another bank, an RRSP to RRSP transfer is tax deferred and not considered an RRSP withdrawal if done with the proper process and paperwork. Likewise, if you have two financial institutions transfer funds directly between two TFSAs in your name. But you cannot transfer money from an RRSP to a TFSA on a tax deferred or tax-free basis. That would constitute an RRSP withdrawal, which is taxable income. You could then make a TFSA contribution if you were so inclined but it wouldn’t prevent the RRSP withdrawal from being taxable.”
Hi Jason, Thanks for this example. I think one key aspect not addressed, is the requirement to take minimum LIF payments following the conversation. At age 56, my understanding is the amount is about 2.9%/annum, which slowly increases each year thereafter. Obviously if you are working, additional taxable may not be advantageous.