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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
Transferring money from a LIRA into a LIF
Locked-in retirement accounts (LIRAs) are funds that come from an employer pension plan—either a defined contribution (DC) or a defined benefit (DB) plan—when you leave a job. In some provinces these accounts are called locked-in RRSPs. The money is “locked in” because it’s intended to provide retirement income, so withdrawals are restricted and usually limited by annual maximums tied to your age. Provinces and territories set the earliest age you can begin withdrawals; while some allow access from age 50, most commonly the minimum age is 55.
When can you withdraw from a locked-in account in Canada?
There are limited exceptions that allow partial or full unlocking of a locked-in account. Common reasons include severe financial hardship or a shortened life expectancy. Some provinces also permit unlocking based on age. In Ontario, for example, you can transfer a LIRA to a life income fund (LIF) and then, within 60 days of opening the LIF, withdraw up to 50% of the LIF balance or transfer some or all of that amount into an RRSP. Moving the unlocked amount into your RRSP is often done on a tax-deferred basis, which keeps those funds outside the LIF’s annual withdrawal limits.
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What happens when you withdraw from a LIF
When you take a withdrawal from a LIF, that withdrawal is reported to the Canada Revenue Agency on a T4RIF slip. In your case, Suzanne, the institution issued a T4RIF showing $120,000. That amount will typically appear as a “taxable amount” (box 16) and, when transferred to an RRSP within the allowed 60-day period, will also be reported as an “excess amount transferred to RRSP” (box 24). That reporting reflects the fact that you must include the $120,000 as income, and then claim a deduction for the RRSP contribution so the transaction nets out for tax purposes.
Because the transfer into your RRSP was made within the prescribed 60 days, the tax slip and the RRSP receipt together show the required reporting: the T4RIF reports the taxable withdrawal, and the RRSP receipt documents the contribution that offsets that income. In practical terms, you report the $120,000 as income and then claim the $120,000 RRSP deduction. That makes the transaction tax-neutral for the year it occurred—there’s no double taxation now. Later, when you withdraw from the RRSP or transform it into a retirement income vehicle and take payments, those withdrawals will be taxed at that future time.
If you had withdrawn money from the LIF and only moved part of it into an RRSP, the portion you didn’t transfer would remain taxable in the year of withdrawal and could trigger a tax liability.
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Transfers between registered accounts: Do you pay tax?
In general, transfers among registered plans—RRSPs, LIRAs, RRIFs, LIFs, RESPs and TFSAs—are either tax-deferred or tax-free, depending on the account type. That means moving funds between these registered vehicles typically does not trigger immediate tax, provided the transfers follow the rules for each account type. The key distinction in your situation was that the LIF withdrawal was reported as income, but that income was immediately offset by the RRSP contribution deduction because of the 60-day transfer rule.
Some people choose to unlock a portion of their LIRA for immediate needs, while others use the unlocking option to move funds into an RRSP and avoid the LIF’s annual withdrawal limits. If the remaining LIRA balance is small, unlocking a portion now could bring the balance below your province’s small-balance threshold, allowing full unlocking under those rules.
In short, the financial institution appears to have reported the transaction correctly. For your tax return, you should include the $120,000 on line 13000 of your T1 return (or line 11500 if you were 65 or older in the year of the withdrawal) and claim an offsetting $120,000 deduction on line 20800. That pair of entries will properly reflect the taxable inclusion and the RRSP deduction so the transfer itself doesn’t leave you with extra tax for the year it occurred.
Read more about personal income taxes in Canada:
- How to calculate the taxable amount for a cashed-in whole life insurance policy
- Can you file multiple years of income taxes together in Canada?
- Canada’s income tax brackets for 2023, plus the maximum tax you’ll pay based on income
- How to fill out a personal income tax return