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What to know about RRSP/pension transfer

Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.

Are you thinking about moving your pension or retirement account to another financial institution? There are different types of retirement savings accounts in Canada, and each has specific rules around what you can and cannot transfer, and when you can do it. Here's a step-by-step guide to help you.

Why move your retirement account to another financial institution?

Some of the reasons could include:

  • You want to consolidate all your accounts with one financial institution to make money management simpler.

  • You want to move to a financial institution with lower fees to save money and keep more of your money working for you.

  • You want to move to an institution with a wider range of investment options, a self-directed or robo-advisor option or better financial planning advice and access.

Whatever your reasons, you need to follow the rules or you could end up with a nasty tax bill the next time you file your income tax.

Types of retirement savings account

Let's run down some of the common types of retirement savings accounts.

Registered Retirement Savings Plan (RRSP)

RRSPs have several tax benefits associated with them: Investment earnings are tax-sheltered until funds are withdrawn, and contributions receive a tax receipt which reduces the amount of income tax payable at tax time. RRSPs can be opened by any Canadian resident over 18, and can be opened at age 16 by a parent who holds the funds in trust until age 18. Limits are set by the Canada Revenue Agency (CRA) every year. Your RRSP contribution room will be listed on the Notice of Assessment you receive when you file your income tax return.

Only financial institutions registered with the CRA are permitted to sell RRSPs. If you aren't sure, ask your financial representative for the specimen plan number of their RRSP product. This information allows you to avoid having to pay taxes on the full balance of the account when transferring funds.

You can make RRSP withdrawals, but the full amount will be included as income in the year you make the withdrawal, and that can create a hefty tax bill.

Registered Pension Plans (RPP)

Once upon a time, employees worked for one company their entire career, and they were rewarded with a lifetime pension at the end of their service to the company. But many companies no longer offer RPPs for their employees. Nontheless, RPPs continue to be the most popular employer-sponsored retirement plan in Canada, and if you are lucky enough to have an RPP as part of your employee benefits, there are some things you will need to know.

There are two types of RPPs:

  1. Defined Benefit (DB) RPP: This used to be the most common type of pension plan. Employers and employees made contributions to a pooled fund based on a percentage of each employee's salary. At retirement, an employee was paid a pension based on a formula which took into account years of service and best years of earnings. The problem with DB plans is they are expensive to administer and require convoluted calculations by actuaries, and sometimes the investment returns of the fund was not enough to cover the pension payment obligations, and the pension fund fell into arrears or fell apart completely. (e.g., Nortel, Sears Canada...)

  2. Defined Contribution (DC) RPP: Many employers have opted to convert their DB plan to a DC plan. In a DC plan, an employer deposits a percentage of the employee's salary into that employee's pension account, and employees often have the option of making a matching contribution, which an employer may match to a set percentage. Employees can see at a glance how much their pension is worth on a given day, because the balance in the account is what the pension will be based on, including investment earnings. What you see is what you get. Most employers give their employees investment decision-making, although some limit the employer portion to a certain number of lower-risk investments.

There are also Individual Pension Plans for high-income executives.

There is a product called a Deferred Profit Sharing Plan (DPSP) that was sometimes available to certain classes of employee. DPSP may have vesting rules like a pension, but they are permitted to be transferred to an RRSP. Consult your financial professional for assistance if you have a DPSP.

No matter what type of pension you have, there are very specific rules that pension plans must follow, and it can vary by province. Pension rules cover things like:

  • Eligibility: The guidelines establishing employees are entitled to belong to the pension plan, usually it is full-time, permanent employees, but it could be members of a collective bargaining unit, or certain job levels. The pension plan document and the employee handbook will spell it out, and you can always ask your Human Resources contact if you need help.

  • Vesting: Vesting refers to when an employee has a right to any employer contributions made to the employee's pension account. Under the pension legislation of most Canadian jurisdictions, employer-sponsored plans offer immediate vesting: As soon as you are eligible to participate in the pension plan, you are entitled to any employer contributions made on your behalf. You are always entitled to your own contributions. Vesting can also be based on years of service. The employee handbook and pension plan document must specify what the vesting rule is. If you leave before you are fully vested, you will only receive your own contributions back.

  • Locking-in: This is one of the biggest, and most confusing differences between an RPP and RRSP. After a certain period of time, usually based on years of plan membership or years of service, the funds in the pension plan become “locked-in,” and the funds can no longer be withdrawn in cash until the retirement age specified in the pension plan document. Many employers vest and lock-in the employer contributions at the same time. Some provinces have exceptions to the locking-in rules for accounts with small balances, in cases of financial hardship or shortened life expectancy due to critical illness. Locking-in applies to both employer and employee funds. This information is important to know if you are trying to transfer your pension funds elsewhere.

Another difference between RPP and RRSP is that you are not permitted to make withdrawals from your RPP while you are employed with the company. Funds can only be removed from the pension account when an employee reaches early or normal retirement age, terminates employment or dies. If an employee terminates employment prior to reaching retirement age, the funds must remain locked-in under the pension legislation that regulates that plan. If a pension is split during a relationship breakdown, locking-in rules will continue to apply even after the funds have been transferred to the spouse. Often, if the employee still works for the company, the former spouse is not allowed to move the funds out of the plan until the employee is entitled to.

We wrote up this handy article with more information about different types of retirement savings account.

How to transfer a retirement savings account to another financial institution in Canada

Transferring retirement funds from one financial institution to another is straightforward as long as you follow the rules.

RRSP transfers

In order to transfer your RRSP from one financial institution to another without tax consequences, you need to complete a form T-2033 Direct Transfer Under Subsection 146.3(14.1), 147.5(21) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e). Your financial institution will have a supply of these forms. If they do not know what the form is, ask what the specimen RRSP plan number is. If they do not have that information, they may not be registered with CRA and you will not be able to transfer your RRSP to them without tax consequences. If you cannot remember the name of the form, “RRSP transfer form” will usually do the trick. Either the institution who has your RRSP, or the institution who is going to receive the RRSP can initiate the transfer request.

You will need the following information:

  • Form T2033 Direct Transfer Under Subsection 146.3(14.1), 147.5(21) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e), which you can get from either the transferring or receiving financial institution. Without this form, the financial institution will treat it as a normal withdrawal which could cause a huge tax bill.

  • The name and account number of the plan you want to transfer, the name of the financial institution and the branch address.

  • The name and account number of the plan you want to transfer the funds into, the name of the financial institution and branch address. (The new RRSP must be open before the transfer can be initiated.)

  • A recent statement showing the balance in the account (unless it is a partial RRSP transfer.)

  • Your name and Social Insurance Number (SIN), and your partner's name and SIN if it is a spousal account.

  • Whether you are doing a full or a partial transfer, and whether you are transferring “in cash” or “in kind.” The most common approach, an “in cash” transfer means your financial institution will sell all your investments and transfer the resulting balance to your new RRSP account “in cash”. An “in kind” transfer means you are transferring the various investments as they are from one account to another. This is only possible if the receiving financial institution has the same investments available.

  • NOTE: If you have designated an irrevocable beneficiary, they must consent to the transfer. In order to do that, they must be of legal contractual age for the province your RRSP is located in (usually age 18 or 19). In other words, if you designated your 5-year-old as irrevocable beneficiary to make sure your ex couldn't get their grubby paws on the money, then you will be out of luck until the child turns the legal age required in your province.

  • If it is a spousal RRSP, you need the signature of your partner, and the receiving RRSP must also be a spousal account.

  • Once the paperwork is complete, one financial institution will contact the other and the transfer will be initiated. It can typically take 5-10 days for the transfer to be completed and show up in your new account.

RPP transfers

Money can be transferred from a pension plan only if the employee has terminated employment, has retired, or the employee is deceased. You cannot make withdrawals from a pension plan if you are still working for the company.

You will need the following information:

  • The name and account number of the plan you want to transfer, the name of the financial institution and the branch address.

  • The name and account number of the plan you want to transfer the funds into, the name of the financial institution and branch address.

  • A statement showing the accumulated value of your DC plan benefits, or an actuarial statement showing the commuted value if you have a DB plan. Your HR department or benefits administrator will provide that to you. The statement will also indicate which province the funds are locked-in under.

  • A form T-2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3 which you can get from the receiving financial institution. The transferring institution will indicate the locking-in provisions on the transfer form.

  • Your name and SIN number.

  • If you have not reached the retirement age specified by your pension plan document, and the funds are locked-in, the funds must be transferred into a Locked-in Retirement Account (LIRA) , a Locked-in RRSP, a Life Income Fund (LIF) if available in your province of residence, or a locked-in RRIF (LRIF) if available in your province of residence.

  • IF your funds are not locked in, you can transfer them to an RRSP or withdraw them in cash, subject to normal income tax rules.

  • DPSPs are transferred using a T-2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3 but there are no locking-in provisions.

Rules for transferring retirement savings

  • Know what type of retirement savings plan you have before you go to your financial institution to request the transfer. The easiest way is to bring a recent statement with you to avoid delays due to missing paperwork. The right form must be sent to ensure that the Income Tax Act and any provincial pension rules are followed.

  • You cannot transfer RRSP funds to a locked-in account, and you cannot transfer locked-in funds to an unlocked account. You can transfer locked-in funds to a LIRA, LIF, LRIF or Locked-in RRSP, but you cannot make new contributions.

  • You must provide the correct form to initiate the transfer, or it will be treated as a normal withdrawal and be subject to normal tax withholding and be included in your income.

  • Direct transfers of registered accounts do not trigger any tax withholding and you do not need to declare the amount on your income tax. If you have unlocked funds, and you take them as a lump sum payment, it must be included in your income when you file your income tax, and you will receive a T4A form showing the amount withdrawn and any income tax withheld at source.

Transfers of registered funds to another person

Transfers of registered funds are only permitted between accounts owned by the same person. There are a couple of exceptions:

Relationship breakdown

If you are dividing your pension or RRSP funds due to relationship breakdown, you will need to provide a copy of the separation agreement or court order, as well as the completed T2220 Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership for RRSP funds or a T2151 for RPP funds.

Pension funds and relationship breakdown

Things are a little more nuanced when it comes to pension funds:

  • If the owner of the funds (annuitant) is still employed and pension funds are being divided, the funds cannot be transferred until the employee has terminated employment, reached normal or early retirement age or is deceased (more on that in a minute). Often, the plan administrator will set up the partner with their own account within the pension plan, and the transfer of assets to that account, while leaving the funds in the plan.

  • Any locking-in provisions which apply to the employee will continue to apply to the pension funds that were divided.

  • When the funds can be withdrawn, the former partner must provide a completed form T-2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3, and a copy of the separation agreement or court order.

  • The funds must be transferred to a LIRA, LIF, LRIF or Locked-in RRSP until the former partner reaches the early or normal retirement age specified in the employee's pension plan contract.

Spousal RRSP and Relationship breakdown

If the RRSP funds being transferred are from a spousal account, where the contributor gets the tax receipt, there are some additional rules to follow:

  • You must provide a T2220 Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership for RRSP funds.

  • You must provide a copy of the court order or separation agreement which specifies how the account is to be divided.

  • The contributor and partner must be living separate and apart at the time of the transfer.

  • There cannot have been any contributions to the spousal account in the year of the transfer request or the two previous years.

  • There cannot have been any withdrawals from the spousal account during the year of the transfer request.

  • Once the conditions are met, the funds will be transferred to an account for the spouse, and the spousal designation will be removed from the account if there are any funds remaining.

Death of Annuitant

Here's what you need to know about RRSP and RPP transfers when the annuitant has died.

RRSP

  • If the annuitant of an RRSP dies, and has named a partner as beneficiary, they are entitled to a tax-free direct transfer of the annuitant's RRSP proceeds to their own RRSP. If the beneficiary designation is “estate” on the RRSP account, a tax-free direct transfer will not be possible, even if the partner is named beneficiary in the will. Registered plans and insurance policies are generally excluded from probate and can be transferred immediately. However, if the designation is “estate” the proceeds become part of the estate assets and must be probated.

  • You must provide a completed T2033 Direct Transfer Under Subsection 146.3(14.1), 147.5(21) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e)

  • If the annuitant has a named spouse, and a common-law partner who does not meet the definition of “spouse” in the Income Tax Act, the proceeds may be paid to the named spouse. (These situations can turn ugly quickly so check your beneficiary designations if your previous relationship ended in separation or divorce...)

  • If the named beneficiary is a child or grandchild of the annuitant and who was financially dependent on the annuitant because of physical or mental impairment, the child/grandchild is entitled to transfer the funds on a tax-exempt basis, but the funds can only be used to purchase a term annuity.

  • If the beneficiary is anyone other than partner or dependent child, CRA considers the account to have been terminated as of the date of death, and the proceeds must be withdrawn as cash, and subject to normal tax regulations. The value of the account will be include the proceeds of the estate for income tax purposes.

RPP

Just like pretty much everything else to do with pension funds, there are (very!) specific rules around the death of an annuitant. Here's what you need to know.

  • If the annuitant of an RPP dies and has a named partner who meets the definition of spouse in the governing pension legislation, the proceeds of the pension account MUST be paid to the spouse, even if there is a different beneficiary designation in a will or on the account. (This will also apply if the annuitant and spouse were separated at the time of the annuitant's death, and there is a common-law partner who does NOT meet the definition of spouse under the governing pension legislation. Things can get complicated if the funds are transferred to the common-law partner and then the legal spouse comes forward. )

  • Pension payouts to the partner can be transferred to an RRSP, a RRIF, or an annuity. IF the named beneficiary has a Registered Disability Savings Plan (RDSP), they may transfer the proceeds to the RDSP.

  • If the named beneficiary is a child or grandchild of the annuitant and who was financially dependent on the annuitant because of physical or mental impairment, the child/grandchild is entitled to transfer the funds on a tax-exempt basis, but the funds can only be used to purchase a term annuity.

  • The partner must provide form T-2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3 and a copy of the death certificate and Will.

  • If the named beneficiary is not the partner, the pension proceeds will be paid out in a lump sum and subject to normal income tax rules and tax withholding. The amount will be documented on a T4A.

How long does it take to transfer retirement funds

Normally, straightforward transfers will be completed within 5 to 10 business days. However, if there are forms missing, or a discrepancy between the named beneficiary and the regulations (for example, RPP has a partner who meets the definition under the terms of the provincial pension regulations, but had named someone other than the partner as beneficiary, there could be delays.)

It's always a good idea to consult a financial professional to ensure you have all the correct requirements and documentation to avoid delays.

How to transfer a U.S. pension into Canada

If you have been working in the U.S. for a period of time, you may have amassed retirement savings in a 401K or IRA. IF you are moving to Canada, you have four options:

  1. Leave the funds in the U.S. account and have a financial advisor manage it for you. Canadian residents are allowed to defer tax on U.S. retirement accounts until they begin to withdraw the funds. However, if you have terminated employment, you may be required to transfer any 401K proceeds to an IRA, and there are taxes associated with that. If you are older than age 59.5, you could pay 20% in withholding taxes on the balance, and if you are under age 59.5, you may have to pay 30%. You should consult with a U.S. tax expert to determine your best option.

  2. If you choose to collapse the account and withdraw it as a lump sum, this will trigger a taxable event. How much you will have to pay depends on your country of residence when the withdrawal is made. If you are still a U.S. resident, U.S. tax rates will apply. If you have moved to Canada, Canadian tax rates will apply. You may have to provide a W8-BEN to the U.S. plan administrator. Before considering this option, you should talk to a tax professional with expertise in US-Canada tax law.

  3. If you are of eligible retirement age, it might make sense to start drawing a pension. You will still be taxed, but it will be on the amount of the pension payment, rather than the full value of the account. The applicable tax rate will depend on your country of residence when the payments are made.

  4. Transfer your U.S. account to a Canadian RRSP. This gets complicated quickly so hang on:

Step 1

Open an IRA and transfer your 401K to it while you are still a U.S. Resident. Consult a tax professional to determine which type of IRA makes the most sense for you in your particular situation. Canada does not recognize Roth IRAs as “foreign pension arrangements”, which could have complications when you try to transfer it to Canada, so make sure you speak with a tax professional with expertise in U.S.-Canada transfers.

Step 2

Move to Canada (eh) and open an RRSP.

Step 3

Here's where it gets complicated:

  • Canada and the U.S. have a reciprocal tax treaty to avoid double taxation. Tax rates depend on the country of residence of the taxpayer so you only pay taxes in one country.

  • To transfer an IRA to the RRSP, the full value will have to be cashed in and transferred. How much tax will be withheld will depend on your age: if you are over age 59.5, the tax treaty charges 15% tax on pension payments. If you are under age 59.5, you will be assessed an additional 10% penalty for early withdrawal, which is unfortunately unrecoverable.

  • Convert the value to Canadian dollars. Take a deep breath.

Things you should know:

  1. The full value of the lump sum transfer, in Canadian dollars, will be added to your income in the year the transfer is completed. The 15% tax that was paid to the IRS becomes a Foreign Tax Credit that you can claim back in Canada.

  2. The additional income from the value of the lump sum transfer will create RRSP room which can offset the additional tax adding the lump sum transfer to your income triggered. That additional RRSP room must be used in the year it is created, and unlike normal RRSP room, it cannot be carried forward. Use it or lose it.

  3. If you have enough income, you can also start claiming the Foreign Tax Credit back, but depending on your level of income, it could take several years to recoup the full amount.

Your specific situation could differ from this general information, and cross-border financial transactions can go sideways quickly. It is best to seek the advice of a professional with expertise in cross-border transfers to ensure that everything works to your benefit.

Wealthsimple offers a host of retirement and non-retirement options that can help you build your wealth and make your money work hard for you. Check us out today.

Last Updated June 13, 2019

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