Manitoba Labour and Immigration
Beware of Schemes for Unlocking of Locked-In Pension Funds
Manitoban's should be wary about potentially fraudulent schemes being offered for unlocking pension funds. The advertisements for these schemes typically claim that locked-in funds can be converted into cash on a tax-free basis.
Locked-In Accounts and Loans
The Pension Commission of Manitoba is aware that there are a number of variations to this scheme being promoted. The most typical scheme identified seems to involve transferring locked-in funds to a self-directed RRSP and subsequently purchasing shares in a private company. The company then makes a promise to loan to the owner of the locked-in funds, 70-80 percent of the funds used to purchase the shares. The loan is to be paid back at some future time.
A second scheme identified requires the owner of pension assets to give power of attorney to a trust company. The owner then requests a loan from the company totalling approximately 71 percent of the value of their locked-in assets. The money from the pension assets is transferred to a registered pension plan, an action that is not allowed under the legislation since the individual is not a legitimate employee of the sponsor. The power of attorney is supposedly exercised when the employee reaches age 69.
Taxpayers who respond to these kinds of advertisements risk losing retirement savings. In addition the loans may be taxable. If an RRSP is used as security for a loan, the value of the RRSP will be added to the taxpayer's taxable income. Similarly, if an RRSP is used to purchase shares of a private corporation and the shares are not a qualified investment under the rules, then the value of the shares will be added to the RRSP holders taxable income.
Complete and Partial Transfers
The Pension Commission has recently been advised of a potential unlocking scheme in which locked-in accounts (LIRAs or LIFs) are split and amounts are transferred from one financial institution to one or more institutions for the purpose of unlocking. As a result, the newly established locked-in account(s), and possibly the original locked-in account, each fall below the small amounts prescribed by The Pension Benefits Act (the Act).
Scenario 1 (Complete Transfer)
A financial institution holding a locked-in account is given instruction to split the locked-in account to amounts less than the small amounts provisions under the Act. These amounts are transferred to new multiple accounts at one or more different financial institution(s). A form letter is received soon after by the receiving institution instructing the unlocking and full withdrawal because the account balance is less than the small amount provisions under the Act. Another form letter is presented to the receiving institution and signed by the clien asserting that the member does not have any other locked-in account(s) with any other financial institutions.
Scenario 2 (Partial Transfer)
A financial institution holding a locked-in account is given instruction for partial transfer of the locked-in account. The amount instructed to be left behind is less than the small amounts provision under the Act. Eventually instruction will come to unlock the remaining amount because it is now below the small amounts limit.
THE ACT PROHIBITS THESE SCHEMES - THEY ARE ILLEGAL
We recommend all financial institutions carefully review correspondence instructing the transfer or cashing out of locked-in acoounts in all cases. Any correspondence from any source that appears contrary to the Act should be submitted to our office for review.
Financial Institutions will note the following sections of the Pension Benefits Regulations:
18.1(15)(l) That if all or any part of the balance of the fund is paid out contrary to the Act or this section, the financial institution will provide or ensure the provision of a pension benefit credit equal to that balance.
18.4(2) The pension benefit credit of a member or former member in a retirement benefit plan
may be commuted only if the credit, when combined with the total amount of pension benefit credits in all other retirement benefit plans of the member or former member under sections 18 to 18.2 is an amount that, when compounded annually at a rate of 6% per year for each year by which the age of the member or former member, as of December 31 of the year in which the application is filed, precedes his or her 65th birthday, is less than 40% of the YMPE in the year in which the application is filed. See Update #22, for more information.
Financial Institutions will note Section 38(1) of the Pension Benefits Act:
38(1) Every person who contravenes any of the provisions of this Act or the regulations or who obstructs an office or agent of the commission in the performance of his duties is guilty of an offence and on summary conviction is liable to a fine of not less than $2,000 and not more than $100,000.
The public is reminded that the intent of pension legislation is to safeguard assets so that they are available for pension income purposes. Owners of locked-in pension funds are therefore advised to consult with The Pension Commission of Manitoba, an independent financial advisor or a tax advisor before undertaking any action regarding claims which suggests that pension funds can be unlocked.
Should you have any questions you may contact the Pension Commission of Manitoba by phone at (204) 945-2740 or by e-mail at pensions@gov.mb.ca.
Additional information regarding these schemes can be found on the following websites:
