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When transferring money from LIRA to a LIF and RRSP, would that result in being taxed twice?
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
Locked-in retirement accounts (LIRAs) come from pension plans—either pensions that are defined contribution (DC) or defined benefit (DB) pensions—that are transferred to you from your employer when you leave a job. In some provinces or territories, these accounts are referred to as locked-in registered retirement savings plans (RRSPs).
They’re locked in because they are intended to provide income throughout your 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. Provinces and territories determine the earliest age of withdrawals, which can be as young as 50, but more commonly not until age 55.
There are exceptions when a locked-in account can be withdrawn, either partially or entirely.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% 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% of that balance, or transfer some or all of it to a registered retirement savings plan (RRSP). The benefit of transferring 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.
When you take a withdrawal from a LIF, Suzanne, that is reported on a T4RIF slip for tax purposes. Since you transferred 50% 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 effectively increase your RRSP contribution room for the year by the amount of the transfer, meaning you do not need to use existing RRSP room. When the transfer is made within 60 days of opening the LIF, which it sounds like that is what happened for you, given the way they reported it on your slip, you can make the RRSP contribution without impacting your available RRSP room, Suzanne.
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 and resulting tax liability.
Generally, transfers between registered accounts like RRSPs, LIRAs, registered retirement income funds (RRIF)s, LIFs, registered education savings plans (RESPs) and tax-free savings accounts (TFSAs) do not have tax implications. The funds transfer over on a tax-free (for TFSAs) or tax-deferred (for other accounts) basis.
Some Canadians may want to access locked-in funds because they need the money immediately. Other Canadians may just want to minimize the amount of money that is subject to maximum withdrawal restrictions.
If your LIRA has a small amount, Suzanne, unlocking a portion may mean the remainder is low enough, or will be in the future, to unlock it under the small balance limits for your province of residence.
In summary, the reporting by the bank looks to be correct. You now just need to report it correctly on your tax return: as $120,000 of income on line 13000 of your T1 tax return, or line 11500 if you were 65 or older in the year of the withdrawal, and an offsetting $120,000 deduction on line 20800.
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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.
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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.