Many clients are not aware they can transfer funds in their existing RRSPs for pension buybacks offered by their workplace defined-benefit pension plans.sesame/iStockPhoto / Getty Images
Some clients worry that transferring funds from a registered retirement savings plan (RRSP) will result in an automatic tax trigger. But that’s not necessarily the case in certain situations.
Here are five ways assets in RRSPs can be transferred on a tax-deferred or tax-free basis.
In-kind transfers
Switching financial institutions or moving to a new advisor? RRSP assets can transfer from one institution to another without triggering any tax consequences, says David Burnie, certified financial planner (CFP) and partner at Ryan Lamontagne Inc. in Ottawa.
The money stays in the account and in the same investments and it’s considered a straight transfer instead of a withdrawal, which would be taxable, he adds.
Pension buybacks
Many clients are not aware they can transfer funds in their existing RRSPs for pension buybacks offered by their workplace defined-benefit pension plans.
Nadege Koskamp, CFP at IG Wealth Management in Toronto, considers this strategy for clients just returning to work after a parental leave or sabbatical. Pension contributions temporarily stop during these leaves.
When clients come back to work, they can “buy back” a period of service not funded to increase their pensions. Ms. Koskamp notes clients are often strapped for cash to fund a buyback, especially new parents getting accustomed to child care expenses and other big-ticket items for the family.
She sees using RRSP assets to fund the buyback as a no-brainer as the money is already available for clients to access.
“The [pension administrator] doesn’t need the buyback to be new [money invested], they just need it to be dollars,” Ms. Koskamp says. “And there are no tax consequences for making that transfer from your RRSP.”
In theory, she notes the client could contribute to their RRSP, get the tax refund and then use that money for a pension buyback. However, the buyback must be later than the RRSP deadline of March 1 to be effective.
Mr. Burnie also has helped clients use their RRSPs and registered retirement income funds to buy pensionable time. Once the transfer is complete, he says the client will receive a past-service pension adjustment from the Canada Revenue Agency (CRA).
He says the adjustment is to ensure clients don’t benefit unfairly from acquiring a pension using their RRSP contributions, keeping their former RRSP contribution room.
“They’ll still come up with a past service pension adjustment to preclude you from contributing to your RRSP for a period of time until you’ve used up that past service pension adjustment,” he says.
Divorcing couples
Transferring assets from an RRSP can also occur in the case of a marital breakdown. Mr. Burnie says a couple often needs to equalize their assets to meet the terms of their separate agreements.
He gives the example of one spouse having a larger RRSP than the other. The spouse with the larger RRSP may have to transfer part of their RRSP to their spouse so they each have similar balances.
“They won’t suffer any adverse tax consequences for doing so,” Mr. Burnie says. “There’s a mechanism for doing so without having to withdraw the money and pay taxes on it.”
Certain estate situations
Another tax deferral with RRSP transfers occurs upon the death of the first spouse in a couple. The deceased partner’s RRSP assets roll into the surviving spouse’s RRSP without affecting their contribution room or tax consequences. Taxes are deferred until the second spouse passes away.
“It’s just a deferred transfer. When they withdraw the money eventually, it’ll be taxed as it normally would be,” Mr. Burnie says.
RRSPs can also pass to an infirm, financially dependent child or grandchild under the age of 18. Mr. Burnie notes he doesn’t see many of those cases anymore since there’s now the registered disability savings plan.
In any case, clients in this situation could leave their RRSP to them and then the money could be used to buy a term annuity that expires when the child turns 18.
Mr. Burnie also notes that a deceased parent’s RRSP can be rolled over into a financially dependent child’s registered disability savings plan (RDSP) if the child qualifies for the disability tax credit. The maximum lifetime contribution limit for an RDSP, including rollovers, is $200,000, and any amounts already contributed or rolled over reduce this limit. The rollover is tax-deferred but does not attract government grants or bonds.
HBP and LLP
For clients who withdraw assets from their RRSPs to participate in the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP), these transfers allow them to withdraw the funds tax-free and pay back the amounts over time.
Through an HBP, a first-time home buyer can withdraw up to $60,000 from their RRSP tax-free to fund the home purchase. Then, the client is responsible for paying back a specified amount to the RRSP every year for up to 15 years.
In a similar vein, the LLP allows a person or their spouse to withdraw $10,000 in a calendar year tax-free toward a full-time training program or education. The amount is repaid every year until the tax-free loan is paid off.
Mr. Burnie says in situations in which the funds are not repaid to the RRSP when they should be, the CRA will deem that the client must pay taxes on what they didn’t repay.