## Archived - Regulatory Changes Related to Federally Regulated Life Income Funds and Locked-in Registered Retirement Savings Plans, Effective May 8, 2008

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The purpose of this backgrounder is to provide an overview of the new regulatory provisions related to federally regulated Life Income Funds and federally regulated locked-in Registered Retirement Savings Plans that have recently been adopted, and may be of interest to financial institutions and intermediaries, pension plans, pensioners, and other interested parties. Individuals interested in the precise details of the new regulatory regime should consult the actual regulations.

### I. Overview

The Government has amended the federal Pension Benefits Standards Regulations, 1985, following through on the commitment made in Budget 2008 to increase the choices available to holders of federally regulated Life Income Funds (LIFs) with regard to unlocking their funds. Moreover, in the interest of reducing the administrative burden upon some of the individuals that the changes are intended to benefit, regulatory changes have also been made with respect to locked-in Registered Retirement Savings Plans (locked-in RRSPs). These amendments are effective May 8, 2008.

The three new options, which are now available, are as follows:

1. One-Time 50 Per Cent Unlocking: Individuals 55 or older will be entitled to a one-time conversion of up to 50 per cent of LIF holdings into an unlocked tax-deferred savings vehicle.

2. Small Balance Unlocking: Individuals 55 or older with small total holdings in federally regulated locked-in funds of up to $22,450 will be able to wind up their LIFs or convert them to an unlocked tax-deferred savings vehicle. 3. Financial Hardship Unlocking: Individuals facing financial hardship (that is, low income, or high disability or medical-related costs) will be entitled to withdraw up to$22,450 per calendar year.

With the coming into force of these regulations, those with existing contracts will be able to unlock their funds as soon as their financial intermediary can make the necessary amendments.

Individuals who do not wish to use this new flexibility, however, are under no obligation to purchase a new contract. These changes will not affect their existing LIF contracts or locked-in RRSP contracts.

For individuals who do not currently have a LIF or locked-in RRSP but are in the process of establishing such funds, transitional provisions will allow for a six-month adjustment period during which LIF and locked-in RRSP contracts will be permitted to be drafted under the old rules. After this six-month period, financial intermediaries will be required to include new provisions as set forth in the amended regulations into all new contracts related to LIFs and locked-in RRSPs.

Further, the regulatory changes also set forth the terms and conditions for two new types of contracts-Restricted Life Income Funds (RLIFs) and Restricted Locked-in Savings Plans (RLSPs)-that will be permitted under the new regulatory environment.

Under the new regulatory regime, extraordinary withdrawals in circumstances of reduced life expectancy or permanent departure from Canada will be retained for LIFs and locked-in RRSPs, and further will be extended to RLIFs and RLSPs.

Financial institutions and interested individuals should also be aware of the attestations, consents, and forms that will be required under the regulations in order for individuals to avail themselves of the new options for unlocking funds: these will be contained in a new annex to the Pension Benefits Standards Regulations, 1985, contained in Schedule V to those Regulations.

Pension plan administrators should be aware of the changes to the terms of prescribed savings plans to which pension benefit credits may be transferred, and of the new option for transferring pension benefit credits to an RLIF that will be made available. Plan administrators should also be aware of the changes to the form that a member is required to provide to a plan administrator prior to the transfer out of the pension plan of a pension benefit credit of a member or survivor (Form 3 of Schedule I of the Pension Benefits Standards Regulations, 1985).

### II. Details of the Changes

#### A. One-Time 50 Per Cent Unlocking

Subject to the transitional provisions, LIF contracts entered into after May 8, 2008 must include the option of permitting funds in a LIF to be transferred into a new type of locked-in retirement investment fund called a Restricted Life Income Fund (RLIF).

In the year that they turn 55, or in any subsequent year, individuals will be allowed, upon the creation of an RLIF, to transfer 50 per cent of the RLIF's value into a tax-deferred plan with no maximum annual withdrawal limit (that is, either an RRSP or an RRIF), as long as this transfer happens within 60 days of the creation of the RLIF. After this point, the RLIF will be subject to the same limits upon maximum and minimum annual withdrawals, and to the same limits on extraordinary withdrawals, as a LIF.

These regulatory changes will also serve to permit the direct transfer of funds from a locked-in RRSP contract entered into after May 8, 2008 to an RLIF, as well as the direct transfer, under certain circumstances, of pension benefit credits to an RLIF for the purpose of 50 per cent unlocking of such funds provided the age requirements are met.

Individuals will not be permitted to transfer the remaining funds in an RLIF back to a LIF, nor can these monies be transferred back to a locked-in RRSP. Should the holder of an RLIF wish to transfer the funds back to a locked-in savings vehicle (for example, because they do not want a steady stream of retirement income at that time), a new instrument called a Restricted Locked-in Savings Plan (RLSP) has been provided for in the amendments, into which funds from an RLIF can be transferred.

Funds transfers from an RLSP by the holder will only be permitted if they are into another RLSP, into an RLIF, into a life annuity, or under certain circumstances, to a pension plan if the pension plan permits such a transfer.

Funds transfers from an RLIF by the holder will only be permitted into another RLIF, into an RLSP, or into a life annuity.

These changes to the regulatory structure will ensure that the 50 per cent unlocking provision will only be applied once by any individual on any one locked-in fund.

Any individual who meets the basic requirements of this provision, and who wishes to use this option at the creation of an RLIF, will be required to provide, to the carrier of the RLIF, an attestation from his or her spouse or common-law partner indicating that they also assent to this transfer. If an individual who wishes to use 50 per cent unlocking does not have a spouse or common-law partner, they will be required to provide an attestation to that effect.

Everyone who uses this new option to unlock funds will be required to sign an attestation to the effect that they are aware that (1) funds that are unlocked in this manner may lose the protection from creditors, (2) funds that are withdrawn may be taxable, and (3) they should seek professional advice about the financial and/or legal implications of a withdrawal of this nature.

The required format for these attestations-which must be made before a notary public, commissioner, or other person authorized to take affidavits-will be contained in a new annex to the Pension Benefits Standards Regulations, 1985, in Schedule V to those Regulations.

The changes will permit the funds, at the death of the holder of an RLIF or RLSP, to be paid to the survivor of the holder, in any of: a locked-in RRSP, an RLSP, a LIF, an RLIF, or to an immediate life annuity or a deferred life annuity. Additionally, at the death of the holder, the funds in an RLSP will, under certain circumstances, be allowed to be transferred into the federally regulated pension plan of the survivor, if the pension plan permits it.

Subject to the transitional provisions, contracts for LIFs, RLIFs, and RLSPs that are entered into after May 8, 2008 must include the option of permitting individuals, in the year that they turn 55, or in any subsequent year, and whose total holdings in federally regulated LIFs, locked-in RRSPs, RLIFs and RLSPs are less than the small balance limit of 50 per cent of Yearly Maximum Pensionable Earnings-in 2008, this 50 per cent limit stands at $22,450-to transfer all the funds into a tax-deferred plan with no maximum annual withdrawal limit (that is, either an RRSP or an RRIF), or to withdraw these funds as cash. Note that this initiative will only allow for transfers and withdrawals from LIFs, RLIFs, and RLSPs, and will not apply to locked-in RRSPs. Any individual who meets the basic age and small total balance requirements of this provision, and who wishes to make use of this option, will be required to provide an attestation, to the carrier of the LIF or RLIF, or issuer of the RLSP, showing their total holdings in federally regulated LIFs, locked-in RRSPs, RLIFs and RLSPs, with all financial intermediaries, and attesting that this total is less than the limit for the current year. (Note that this individual will not be required to list or include in this total any holdings that he or she may have in similar funds that are subject to provincial regulation.) Any individual who wishes to use this option will be required to provide, to the carrier of the LIF or RLIF, or issuer of the RLSP, an attestation from his or her spouse or common-law partner indicating that they also assent to this transfer or withdrawal. If an individual who wishes to use small balance unlocking does not have a spouse or common-law partner, they will be required to provide an attestation to that effect. Everyone who uses this new option to unlock funds will be required to sign an attestation to the effect that they are aware that (1) funds that are unlocked in this manner may lose the protection from creditors, (2) funds that are withdrawn may be taxable, and (3) they should seek professional advice about the financial and/or legal implications of a withdrawal of this nature. The required format for these attestations-which must be made before a notary public, commissioner, or other person authorized to take affidavits-will be contained in a new annex to the Pension Benefits Standards Regulations, 1985, contained in Schedule V to those Regulations. #### C. Financial Hardship Unlocking Subject to the transitional provisions, contracts for LIFs, locked-in RRSPs, RLIFs and RLSPs that are entered into after May 8, 2008 must include the option of permitting individuals who meet one or both of the conditions for financial hardship set forth below to withdraw as cash an amount up to 50 per cent of Yearly Maximum Pensionable Earnings (YMPE)-in 2008, this 50 per cent limit stands at$22,450-from any combination of federally regulated LIFs, locked-in RRSPs, RLIFs or RLSPs, within a calendar year, as long as all withdrawals are done within 30 days.

Such withdrawals will be permitted by anyone, regardless of age, who holds a federally regulated LIF, locked-in RRSP, RLIF or RLSP created subject to the new regulations.

Condition 1-Medical or disability related expenditures: This option is available to individuals that expect to make expenditures of more than 20 per cent of their income in any given calendar year upon medical treatment or upon assistive technology or other expenditures related to a condition or disability that has been attested to by a licensed Canadian physician. These individuals will be allowed to withdraw the total amount of their expected expenditures in any given calendar year, subject to the maximum 50 per cent of YMPE noted above.

Condition 2-Low income: Any individual that expects to earn less than the low income limit of 75 per cent of YMPE-in 2008, \$33,675-will be allowed to withdraw an amount based upon their expected income in any given calendar year. This maximum permitted withdrawal is calculated as (50 per cent YMPE) less (two-thirds of expected income for the year (less financial hardship withdrawals)).

Note that withdrawals based upon financial hardship will be permitted for those who meet both of these conditions, but total permitted withdrawals for any calendar year, regardless of reason, will not be permitted to exceed 50 per cent of YMPE.

Any individual who meets one or both of the basic requirements of this provision, and who wishes to use this option, will be required to provide certain attestations, to the carrier of the LIF, or RLIF, or issuer of the locked-in RRSP or RLSP.

Individuals making withdrawals based upon medical or disability related needs must provide:

• a certification signed by a licensed Canadian physician that the treatment or assistive technology is required to accommodate a condition or disease (the form of this certification is not specified in the regulations, and is left to the discretion of the physician), and
• an attestation by the holder of the LIF, locked-in RRSP, RLIF or RLSP that he or she expects to make expenditures greater than 20 per cent of his or her income, which must also disclose the amount of these expected expenditures.

Individuals making withdrawals based upon low income must provide an attestation that they expect their income to be less than 75 per cent of YMPE in the calendar year (not including financial hardship withdrawals), which must also disclose their expected income for the year.

Any individual who wishes to make use of this option will be required to provide, to the carrier of the LIF or RLIF, or the issuer of the locked-in RRSP or RLSP, an attestation from his or her spouse or common-law partner indicating that they also assent to this transfer. If an individual who wishes to use financial hardship unlocking does not have a spouse or common-law partner, they will be required to provide an attestation to that effect.

Everyone who uses this new option to unlock funds will be required to sign an attestation to the effect that they are aware that (1) funds that are unlocked in this manner may lose the protection from creditors, (2) funds that are withdrawn may be taxable, and (3) they should seek professional advice about the financial and/or legal implications of a withdrawal of this nature.

The required format for all these attestations-which must be made before a notary public, commissioner, or other person authorized to take affidavits-will be contained in a new annex to the Pension Benefits Standards Regulations, 1985, contained in Schedule V to those Regulations.