LIFS are not government money!"
Article By: Bill Gleberzon and Judy Cutler, co-directors of Government Relations
CARP campaigns to unlock Locked-In Funds (LIF) in Ontario 100 per cent.
CARP, the Ontario Society (Coalition) of Senior Citizens’ Organizations and the Ontario Coalition of Independent LIF Holders have joined forces in a campaign to persuade the Ontario Government to unlocked Locked-In Funds (LIFs) 100 per cent. In the 2007 Ontario Budget the Government proposed to unlock them 25 per cent.
What is a LIF?
Joe leaves his job which has a corporate or occupational pension. The terms of the pension fund allow him to roll over his portion of the pension into a LIF – a form of pension in which the principle can only be accessed under certain conditions.
In some cases, the regulations force him to roll over only some of his pension into a LIF with the balance taken in cash which is assessed as part of Joe’s annual income and is taxable at the rate commensurate with the amount. In other words, a pension that may have taken him many years to accumulate is treated for tax purposes as one year’s salary!
Unfair? To say the least.
Or, Joe is told that if he elects to transfer his portion of the pension fund into a LIF, it is “suggested that you keep these funds separate from any other RRSP monies,” in the words of one corporate pension form. If Joe chooses this course, he eventually discovers what his pension officer didn’t tell him – he has no choice in the matter. Locked-in funds are locked-in – that is, they must be separate from any other RRSP monies since the principal cannot be directly accessed unless Joe can meet designated specifications. For example, if the total amount is below a certain amount (currently $17,480), Joe can withdraw all of it.
Or, if he can prove dire health or financial distress to a bureaucratic agency of the Ontario Government called the Financial Services Commission of Ontario (FSCO) he may be able to withdraw some or all of the principal – in the latter case especially if he can prove that his life expectancy is limited to two years. (As far as we know, the bureaucratic rules do not specify what happens to that money if the successful applicant lives beyond that designated time period!) However, if a LIF-holder’s total annual income is over $29,131, s/he cannot withdraw any funds on the grounds of financial hardship.
If he is successful in his quest, he must pay the Commission 2 per cent of the amount withdrawn (between $200 and $600) in order to offset the administrative costs which enabled him to get his money. CARP estimates that between 2003 and 2006 FSCO may have realized as much as $15.8 million for allowing applicants to have access to their own money.
Raising income from seniors who are certified by FSCO as vulnerable is despicable!
Moreover, as one of Canada’s leading tax experts, Professor Jack Mintz, pointed out, this bureaucratic procedure has proven unnecessary because only 52 of the 30,000 applicants to the FSCO between 2003 and 2006 were denied access, while 26,300 were successful. The others withdrew their application. (1)
Another option is that at age 71 Joe must withdraw a certain percentage of his LIF as mandated by the income tax act.
Joe’s most drastic option is to die.
If his/her spouse or common law partner is still alive, the latter can access 100 per cent of the balance in the LIF without having to pay any tax. Other heirs would be taxed.
On the other hand, if Joe is still alive at 90, he can access 100 per cent of his LIF.
Unlocking LIFs 100 per cent is not without precedent in Ontario. In 1999 sixty-one MPPs were given that right in regard to their Legislative pension. Some of these MPPs still sit in the Legislature.
In 2007 NDP MPP Andrea Horwath introduced a private members bill to unlock LIFs 100 per cent. Her Bill was supported in the Legislature by PC MPP Hon. Bob Runciman who was one of the fortunate 61 MPPs. He argued that it was only fair that all Ontarians should enjoy the same privilege that he does. CARP also endorsed Ms. Horwath’s initiative.
CARP and its allies do not begrudge those sixty-one MPPs for having this right. However, we do begrudge the fact that this right is not available to all Ontarians with LIFs.
Moreover, CARP proposes that the unlocked funds should be rolled into a RRIF in order to reduce the excessive income tax that was paid for by the Ontario taxpayers -- to the tune of $20 million - when the sixty-one MPPs had their LIFs unlocked 100 per cent.
The opposition to allowing if LIF-holders access to 100 per cent of their principal is mainly based on the belief that they will squander the money and become wards of the state. But no supporting evidence is given for this supposition. Such a concern was not raised in regard to the special sixty-one MPPs. Nor was it raised in Saskatchewan when that province unlocked LIFs 100 per cent -- and after five years there is no evidence to support this fear. Nor is it raised in regard to RRSPs or RRIFs. Indeed, paying additional income tax on withdrawn funds will naturally deter people from making excessive withdrawals.
In fact, unlocking LIFs 100 per cent will generate more income for Queen’s Park through income and sales taxes derived from withdrawals and expenditures. Moreover, it may also generate more funds through fees for financial institutions since ex-LIF holders could take more interest in growing their accessible retirement savings – as they do in regard to their RRSPs. It will also drastically reduce the paper work generated for financial institutions when they deal with LIFs.
Professor Mintz estimated that there may be as many as one million Canadians who have this sort of pension. If this estimate is right, then about 450,000 of them could live in Ontario since Ontario accounts for 45 per cent of our country’s population. However the actual number of LIF holders is unknown so there could be – and likely are – many more than these estimates suggest.
Unlocking LIFs 100 per cent will enhance the well-being, quality of life, dignity, security and independence of Ontarians who will no longer be in thrall to paternalistic, outmoded and unneeded policies and procedures because they will be in full control of their own retirement income—and destiny.
What can you do to help CARP win this battle?
Join with Malcolm Hamilton, one of Canada’s leading actuaries, and with Gordon Pape, one of our country’s most prominent financial writers (and a contributor to CARP’s magazine, CARP for the Fifty-Plus), to publicly support this campaign.
E-mail your local MPP, Premier McGuinty, Finance Minister Sobara and the Minister Responsible for Seniors Bradley as well as John Tory and Howard Hampton to express your endorsement. You can reach them all through CARP’s E-voice on this website. And ask your friends and family to do so too.
To sign a petition on Unlocking Locked-In Funds 100% that will be sent to the Ontario Government, please click on the link below.
