Busy summer for tax planning

National Post


Summer is traditionally a slow period in the tax business, but there have been a couple of important developments in the RRSP world worth noting.

First is the introduction of federal unlocking rules, which were formally adopted back in May. The rules allow individuals who have funds in federal locked-in RRSPs and life income funds (LIFs) to have greater access to their money beyond current maximum withdrawal limits.

Individuals can now access funds from their LIFs in three situations: small balances, financial hardship and a onetime 50% unlocking.

Individuals who are at least 55 years of age with locked-in RRSPs and LIFs worth less than the small balance limit ($22,450 in 2008) can wind up their accounts and take the cash (which would be fully taxable) or transfer the funds to another tax-deferred savings vehicle, such as an RRSP or RRIF in which there are no maximum withdrawal limits.

This change allows individuals with small holdings to consolidate their pension assets into a single registered vehicle, thereby minimizing administrative costs or other burdens associated with multiple small accounts.

Under the "financial hardship" option, any LIF holder, regardless of age, who is facing a job upset, medical or disability-related expenses can unlock up to the small balance limit ($22,450).

Finally, and perhaps most beneficially, is the new opportunity for those at least 55 years of age to unlock up to 50% of their LIF holdings and either cash them out (fully taxable) or transfer the funds into an RRSP or RRIF.

When can you begin unlocking? Check with the financial institution that administers your LIF to see if it has made the necessary amendments to allow such unlocking.

July also ushered in changes to the federal Bankruptcy and Insolvency Act. As I've written about before, the new legislation contains the long-awaited change extending creditor protection in the event of bankruptcy to all RRSP and RRIF savings in Canada.

Before the change (and depending on specific provincial exemptions), only employer-sponsored registered pension plans and insurance-based products such as segregated funds, enjoyed protection from the claims of creditors upon bankruptcy.

The new law formally exempts all RRSPs and RRIFs, including registered bank deposits, registered mutual funds and self-directed plans, from being liquidated on behalf of creditors when an investor declares personal bankruptcy.

The only condition is that any RRSP contributions made in the 12 months prior to bankruptcy will not be exempt from seizure unless your provincial law states otherwise. This is a major win for professionals and business owners.