# Taking the CV and paying an enormous amount of tax



## bill (Jul 8, 2015)

I will be retiring at the start of 2016 for the most efficient way to save tax. I have to pay 106000. Is there any better ideas out there that will help ease this burden. It is almost criminal. It is our pension money. Is this the Canadian way? :upset: Anything?


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## Davis (Nov 11, 2014)

Why isn't your pension being rolled into a locked-in retirement savings plan (LIRSP)? That is what is normally done. Then you are only taxed when you withdraw money from it each year, rather than being taxed all at once. Taking the Commuted Value out as a cash is generally not recommended because of the immediate taxation.

You do remember that when the money went into your pension plan, it wasn't taxed, right? So it is going to be taxed when it is withdrawn, just like other pensions and RRSPs. 

That is the way it is done in Canada, the US, the UK, and pretty well everywhere.


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## bill (Jul 8, 2015)

*Thank you.*

Thanks for the input. Sometimes you cant see the forest for the trees.




Davis said:


> Why isn't your pension being rolled into a locked-in retirement savings plan (LIRSP)? That is what is normally done. Then you are only taxed when you withdraw money from it each year, rather than being taxed all at once. Taking the Commuted Value out as a cash is generally not recommended because of the immediate taxation.
> 
> You do remember that when the money went into your pension plan, it wasn't taxed, right? So it is going to be taxed when it is withdrawn, just like other pensions and RRSPs.
> 
> That is the way it is done in Canada, the US, the UK, and pretty well everywhere.


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## fraser (May 15, 2010)

Yes, you may in fact have to pay tax on a portion of your commuted value.

CRA has maximums on DB pension contributions. These are based on salary levels. IF your salary has exceeded these levels, a portion of your CV will be taxable. If you employer has a supplemental DB pension the commuted amount will be taxable.

I took my pension entitlement two years ago. About 25 percent of the CV amount would have been taxable according to my pension documents.

As I recall, the threshold is based on an income of about $115K year.

One way to avoid this may be to have your employer pay the taxable amount out over three tax years.


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## Beaver101 (Nov 14, 2011)

^


> *fraser:* ... One way to avoid this may be to have your employer pay the taxable amount out over three tax years.


... +1. 


OTOH, do you need to take the cv? Since you'll be retiring in a year's time, wouldn't it be better to leave it in the pension plan?


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## Eclectic12 (Oct 20, 2010)

bill said:


> I will be retiring at the start of 2016 for the most efficient way to save tax.
> 
> I have to pay 106000.
> 
> Is there any better ideas out there that will help ease this burden. It is almost criminal. It is our pension money. Is this the Canadian way? :upset: Anything?


Where it is a pension ... you should have the choice of taking it as a pension instead of the lump sum payment. The numbers would be lower where the smaller amounts paid will be income and taxed as usual.

Is there some reason (ex. poorly funded pension, company that is in a downward spiral etc.) what you are choosing to take a lump sum?


Secondly, are you sure the income tax is $106K? 

Or is it additional income of $106K, on top of what you've making?
If I estimate a bad case of making $100K and having the pension payout add the additional income of $106K where it's the 2013 Ontario tax forms, with no deductions at all - the tax bill is something over $75K.

Again assuming the second case (i.e. the $106K is income, not income tax) - is there a way the company can make the payment in 2016 when you have no employment income (ideally no other income)? If so, this one timing change drops the income tax down to $29K.




Davis said:


> Why isn't your pension being rolled into a locked-in retirement savings plan (LIRSP)?
> That is what is normally done...


YMMV depending on a lot of variables.

For my first pension that I took the CV, more was put into the plan between the employee & employer contributions so some could have been taken as cash, where it would be immediately taxed. As you point out, income tax was not paid on the contributions so it is fair that income tax is assessed. This part was about 10%.

Something like 70% was rolled into a locked in RRSP (LIRA) where there was income tax to pay until it eventually is taken out as income. The remainin 20% was rolled into my RRSP without affecting RRSP contribution room.


For my second pension, the numbers were so small that everything rolled into the LIRA, no taxes to pay at all. 


The other option that is not being talked about in the OP is that there may be the possibility of taking the pension as a pension ... in which case the payments will be income but in much smaller amounts.




fraser said:


> Yes, you may in fact have to pay tax on a portion of your commuted value.


+1 ... though with such high numbers plus no mention that taking the pension avoids anything other than run of the mill income tax for the smaller pension $$$ paid, I'm not sure a complete picture is being presented.




fraser said:


> One way to avoid this may be to have your employer pay the taxable amount out over three tax years.


+1 ... or if there's any sort of choice that sets the payout to a low income period.


Cheers


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## fraser (May 15, 2010)

I took the DB pension entitlement, ie a monthly pension. It was my employer's policy to pay out the supplemental portion of that pension as a CV. 

They spaced the payment out over three tax years. 

The funds inside the supplemental pension are not in a regulated pension plan, provincial or federal. Rather they are paid out of ongoing company revenues. There is always a risk that the firm becomes insolvent. In that case, any supplemental pension payments would fall well below other secured creditors. Some Nortel employees were unfortunate enough to experience this.


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## Eclectic12 (Oct 20, 2010)

^^^^

Good to know and a reminder of why the details are needed to better understand the situation.


For two of the three DB pensions I participate(d) in, use working stiffs did not have access to a supplemental bit. The third that allows everyone employed to participate in the supplemental bit clearly states the supplemental is a regulated pension.


The other tidbit is that none of the three have allowed a CV, except where the employee quits then chooses to leave the DB/supplemental pension. This is unlike other DB pensions which give the employee a choice of DB pension or CV at other points in time.


Just like investing or mortgages, pensions have a lot of variation to them.


Cheers


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