Know the income-splitting rules before commuting your pension

Know the income-splitting rules before commuting your pension

I have recently decided to retire early and will convert my locked-in retirement account (LIRA), which was set up with the commuted value of my defined benefit pension, into a life income fund (LIF). My understanding is that income from an employer-sponsored pension plan upon retirement is eligible for income splitting regardless of age. Is this correct? Does this also apply to an LIRA converted into an LIF? I am a few years away from turning 65, but I would like to start pension splitting with my spouse soon if possible.

I asked Lea Koiv, a tax, pension and retirement expert with Lea Koiv & Associates, to answer your question. Here’s her response:

“The reader is correct that regular monthly pension payments from a registered pension plan qualify for pension splitting, regardless of age. (One notable exception: Quebec has an age 65 requirement.) The amounts can be paid from the plan itself, or from an annuity acquired directly with plan funds. The spouse or common-law partner to whom the income is allocated can also be of any age. Each will also be able to claim the pension credit – up to a maximum of $2,000 for federal tax purposes – regardless of age. (The pension credit varies for provincial tax purposes.)

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“Unfortunately, income from an LIF or RRIF (registered retirement income fund) does not qualify for splitting until the year in which the LIF/RRIF owner attains age 65. The pension credit of up to $2,000 can also be claimed in that year. The spouse or common-law partner to whom LIF/RRIF income is allocated can be of any age, but will only be able to claim the pension credit of up to $2,000 where they have attained age 65 by the end of that year. For LIF/RRIF income, there is an exception to the above rules where the amount is received as a consequence of the death of a spouse or common-law partner.

“Before commuting their pensions, plan members need to consider many factors, including the potential tax savings available from pension splitting.”

We are approaching age 71 and will soon be converting our registered retirement savings plans into registered retirement income funds. To meet minimum annual withdrawal requirements, I understand we can transfer out equities from the RRIF “in-kind” to our regular investment account. Can you explain the tax consequences of doing so and also what the adjusted cost base will be so that we can calculate our capital gain when we eventually sell the securities?

The fair market value of the shares that you withdraw in-kind will be added to your taxable income for the year. You may also have to pay withholding tax if your RRIF withdrawal exceeds the minimum annual percentage based on your age. Any tax withheld is credited toward your taxes owing for the year. When shares are withdrawn in-kind, the market value of the shares at the time of the withdrawal becomes the adjusted cost base for the purposes of calculating any future capital gain or loss.

I am thinking of investing in bitcoin. Any advice?

Yes. Don’t. Buying a cryptocurrency isn’t investing, it’s speculating. Bitcoin doesn’t have any intrinsic value or generate any income. What’s more, the market is largely unregulated and subject to extreme boom and bust cycles. Buyers who were drawn in by bitcoin’s massive rally in 2020 were greeted by a two-day plunge of 26 per cent earlier this week. Bitcoin later rebounded, but let’s not forget 2018, when it plummeted about 80 per cent. If such volatility doesn’t scare you away, perhaps this stark warning from Britain’s Financial Conduct Authority will: “If consumers invest in these types of products, they should be prepared to lose all their money,” the FCA said in a statement this week.

My understanding is that I should hold U.S. dividend-paying stocks in a registered retirement savings plan, instead of a tax-free savings account, to avoid the 15-per-cent U.S. withholding tax on dividends. My question: Does this same advice also apply to Canadian-based ETFs (for example from Vanguard Canada or iShares Canada) that focus on U.S. dividend-paying stocks?

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No. Canadian-listed exchange-traded funds are not exempt from the 15-per-cent U.S. withholding tax, regardless of the account in which they are held. Only U.S.-listed ETFs held in a registered retirement account (such as an RRSP, RRIF or LIRA) qualify for the exemption from withholding tax under the Canada-U.S. tax treaty.

E-mail your questions to I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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Published at Fri, 15 Jan 2021 23:00:04 +0000

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Written by Riel Roussopoulos


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