Province Advises Public to be Wary of Pension Unlocking Schemes

Mar 5, 2010 | Government News

Jennifer Howard (2nd) (260 x 260)

The Honourable Jennifer Howard

Substantial Value Losses Possible for Locking-in RRSP Owners: Howard 

Manitobans who hold locked-in registered retirement savings plans (RRSPs) should be cautious of schemes that promote unlocking of these funds, Labour and Immigration Minister Jennifer Howard, minister responsible for the Pension Commission of Manitoba, advised today. 

“Manitobans should be wary about potentially fraudulent schemes being offered for unlocking pension funds,” said Howard.  “The advertisements for these schemes typically claim that locked-in funds can be converted into cash on a tax-free basis.”

Funds held in these locked-in RRSPs are intended to remain intact to provide pension income to the RRSP holder. When employees leave a job, their pension funds are required to be transferred to a locked-in retirement account (LIRA).  These are the plans that will be targeted by unlocking schemes. 

The Pension Commission of Manitoba advises there are a number of variations to this scheme.  The most typical tactic involves transferring locked-in funds to a self-directed RRSP then purchasing shares in a private company.  The company then makes a promise to return to the owner of the locked-in funds 70 to 80 per cent of the funds used to purchase the shares through a loan.

 The loan is to be paid back at some future time. 

A second scheme 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 per cent 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 pension holder, if taken in by these various schemes, risks losing a large portion of the fund and potentially faces significant tax consequences, said the minister. 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 a RRSP is used to purchase shares of a private corporation and the share are not a qualified investment under the rules, then the value of the shares will be added to the RRSP holders taxable income.

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