# Pension payout (father to daughter)



## Addy (Mar 12, 2010)

Does anyone here know if there's ways to minimize taxes on a pension pay out? It's not a defined benefit pension, it's the other kind (not sure what it's called) if that makes a difference in Canada (I realize it does in the States). 

Can a child transfer some of the pension pay out into their RRSP? I have read a CRA bulletin that says a surviving spouse can but I can't see anything to verify if surviving children can.


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## MoneyGal (Apr 24, 2009)

Addy. I meant to reply to this earlier. 

The short answer is no - you usually cannot transfer money from the tax-deferred account of a parent into a child's hands tax-free. 

There are only a few circumstances in which this is not true - specifically if the child is a minor and/or disabled. I'm not totally up to date on the RDSP transfer provisions (which came into effect on July 1), but they would not apply in your case anyways. 

You are specifically looking at section 147 of the Income Tax Act, which governs transfers between registered plans. (Your dad had a Defined Contribution or "money purchase" pension plan. For tax purposes it isn't important whether it is a DB or DC plan; just that it is a Registered Pension Plan.)

Here is a detailed look at section 147: http://www.taxwiki.ca/IT-528+Transfers+of+Funds+Between+Registered+Plans

Here is the up-to-date guide from CRA on registered plans for retirement and transfers: 

http://www.cra-arc.gc.ca/E/pub/tg/t4040/t4040-10e.pdf


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## Addy (Mar 12, 2010)

Thanks MoneyGal! The links were very helpful.

It's interesting about the chance of transfer if I have a disability. I actually do but can't find a healthcare practitioner in Ontario so I can't apply for disability  I do have a referral in to a specialist but it only went in yesterday so I imagine it will be at least a few months until I see him, which may be too late as far as the pension pay out goes. I could hold off on the pension pay out and hope for the best, or I could try and find a way to minimize the taxes on the payout.

There is about $160,000 pre-tax payout. I'm not sure if it has to be paid out in one lump sum or if I have options. I have about $45K available of RRSP room, and my husband has $16K approximately. We could put the money into maxing our RRSP's to try and shelter a chunk of it. The other problem is I plan to give a large portion of this pay out to the grandchildren of my dad (two kids) and somehow shelter it for education purposes. With our daughter there's no issues, but with my brothers child I am waiting to see who holds control over the child's RESP (I don't want the parents withdrawing it and spending it!).

Is the best thing right now just to wait and see what options if any are available to me? The paperwork is being sent to me this week so hopefully it will shed some light on any options possible.


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## Four Pillars (Apr 5, 2009)

Addy said:


> The other problem is I plan to give a large portion of this pay out to the grandchildren of my dad (two kids) and somehow shelter it for education purposes. With our daughter there's no issues, but with my brothers child I am waiting to see who holds control over the child's RESP (I don't want the parents withdrawing it and spending it!).


You can set up your own RESPs for your nieces and nephews. That's probably the best option.


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## MoneyGal (Apr 24, 2009)

Addy - the criteria for rolling over money to a disabled dependant are pretty stringent. 

Here are the conditions you must meet:

- You must be the child or grandchild of the RPP owner, and you must be financially dependent "by reason of physical or mental infirmity" on the RPP owner. 

- In order to qualify as "financially dependent," your income for the taxation year proceeding the year of death cannot exceed the basic personal amount used for that preceding year (currently $10,382).

- You must qualify for the disability tax credit. That means a qualified practitioner certifies that you have a "severe and prolonged" disability that essentially prevents you from earning income. If you have earned income beyond the basic personal exemption during the period you are claiming the DTC, CRA may disallow the claim. 

- *Only if all those conditions are met*, can you transfer proceeds of an RPP tax-free - and you can only transfer the proceeds into an RDSP (Registered Disability Savings Plan) the proceeds of which are taxable upon withdrawal. 

The reality is that in most cases, proceeds of an RPP are taxable as if they were disposed of at the death of the annuitant or owner. Tax-free rollovers are permitted to spouses and dependent minor children, but there are very few circumstances in which other tax-free transfers are possible.


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## Addy (Mar 12, 2010)

Four Pillars said:


> You can set up your own RESPs for your nieces and nephews. That's probably the best option.



Thanks FP, I will have to educate myself more on this. I'm worried about going over the max limits if there's more than one RESP open, and how to have this all reported correctly if there's not great communication between us and the parents of said child.

MoneyGal, thanks for that clarification. I'm realizing now there is no way I'm qualifying for transfer of any money into my RRSP or Disability RSP or anything similiar. 

The tax will be painful because the tax on $160,000 is going to be huge, plus I'm pulling Employment Insurance right now so I'm afraid the pension pay out (and insurance which is in my name but being split between me and my two siblings) will cancel out any EI benefits I'm getting. I have to look into this as well, hopefully EI has something online stating their policy on life insurance and pension pay outs while on EI.


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## Addy (Mar 12, 2010)

"However, other moneys and payments for benefits not related to employment do not constitute earnings for benefit purposes, for example, alimony payments, lottery winnings or inheritances."

Thank goodness! I'm assuming the pension pay and life insurance policy will both fall under "inheritances". Or at least I hope they do!


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## Four Pillars (Apr 5, 2009)

Addy said:


> Thanks FP, I will have to educate myself more on this. I'm worried about going over the max limits if there's more than one RESP open, and how to have this all reported correctly if there's not great communication between us and the parents of said child.


I heard there is a good book on the topic. 

You raise a good point. There has to be communication about contributions otherwise you run the risk of making contributions and no grant being paid.


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## MoneyGal (Apr 24, 2009)

Addy said:


> Thank goodness! I'm assuming the pension pay and life insurance policy will both fall under "inheritances". Or at least I hope they do!


They do. The proceeds of a life insurance payout are not taxable to anyone. 

The proceeds of the RPP are taxable to your father's estate. You can sometimes minimize the tax payable by doing a series of final returns. 

Once the tax has been paid by his estate, there is no tax payable when the remainder is transferred to you - there's nowhere to even report this income on a tax return for you. 

I'm sorry for your loss. I hope you are getting what you need in terms of support and advice.


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## OptsyEagle (Nov 29, 2009)

On the RESP issue, I believe only one plan can apply for the CESG. So the child can have multiple plans but only one will ever get a CESG. If you are not the legal guardian of the child, then you must get that legal guardians permission to apply for the CESG of the RESP.


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## Addy (Mar 12, 2010)

MoneyGal said:


> The proceeds of the RPP are taxable to your father's estate. You can sometimes minimize the tax payable by doing a series of final returns.
> 
> Once the tax has been paid by his estate, there is no tax payable when the remainder is transferred to you - there's nowhere to even report this income on a tax return for you.


Thanks MoneyGal, yours posts are very informative! I've tried following up on the estate paying taxes bit; I've been trying to find a CRA directive of any sort that addresses the issue of who pays taxes on a lump-sum RPP pay out (ie estate or the beneficiary) and I'm having a heck of a time finding anything that's reasonably clear. I've read a few directives on it but nothing really tells me who pays the taxes (I'm assuming what you're saying is true and that it's the estate, I just want to read it myself so I can explain to others).

Anyone have any info for me please and thank you?


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## MoneyGal (Apr 24, 2009)

Addy - it isn't really true that "the estate" pays the tax due (if any) on the lump sum pension payment - the lump sum will be recorded on your dad's "final return." 

Here's more information on how lump sum payouts from an RPP are included on a tax return:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/130/lmpsm-eng.html

And here's more information on the final return:

http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/fnl/menu-eng.html

The short answer is that your dad('s estate) will be issued a T4A with the lump sum amount on it. That's the amount that will be recorded on his final return. It is actually payable to him and included in his final return - and then the after-tax proceeds are subject to distribution by his legal representative (I think that's you) per his will.


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## Addy (Mar 12, 2010)

MG you continue to amaze me, thank you so much!


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## MoneyGal (Apr 24, 2009)

You are welcome. This will sound strange, but I've had two fathers-in-law die, and I've been through this exact process in very careful detail.


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