Q&A: Objects to Tax Rate

Gordon Pape | November 11th, 2013

This reader has been told she’ll have to pay 50% on withdrawal from her LIRA.

Q – I am 58-years-old. Over 20 years ago, my employer disbanded and my pension earnings were put into a LIRA (locked-in retirement account). I invested in the stock market.

The original investment was approximately $130,000 and I have sold the stock (still sitting in the LIRA), which is now worth approximately $260,000. I have a shortened life expectancy (signed form from the doctor) and want to transfer the $260,000 to an interest bearing account. The financial institute holding the account advised me that they would take 50% of $260,000 for income tax purposes and I was also not able to write off my losses throughout the years.

Someone playing the stock market is only taxed on half the profits they make so why do they suggest I have to pay 50% on my entire amount? I was under the impression the banks could only withhold tax on a specific scale and my current salary is less than $15,000 a year. Every time I call CRA or meet with the financial company, I get different answers and in the meantime my money is sitting there making no interest. I am so frustrated…any assistance would be very much appreciated. – Brenda L.

A – For starters, I suggest you verify the exact meaning of the 50%. All withdrawals from registered plans are subject to withholding tax but the maximum (except in Quebec) is 30%. However, some jurisdictions will only allow you to withdraw 50% from your LIRA and I wonder if there is not some confusion there. Ask for clarification on this point.

The withholding tax is not the bottom line of what you will be assessed. That amount will be determined when you file your income tax return. You may have to pay more or you may get a refund depending on your final marginal rate. As for the rate of tax, the rules are that all money coming out of a registered plan is taxed at your marginal rate no matter how it was earned.

Taking a large amount of money out of the LIRA at one time is a bad idea because it will drive up your income level to the highest bracket. You should only withdraw the money as needed in order to minimize taxes. Ask about transferring part or all of the LIRA to a regular RRSP. This is a tax-free transaction.

As for the interest you are so worried about, you don’t have to take the money out of a registered plan in order to obtain it. Since you have been investing in stocks you must have a self-directed plan. Ask the financial institution to move the money into a high-interest savings account or a GIC, within the LIRA or RRSP. If they don’t have those options (which would greatly surprise me) switch the plan to another company that does.

It appears no one has taken the time to clearly explain all this to you. Ask for a meeting with the branch manager of your financial institution, show him/her your question and my response, and I am sure this will get squared away. – G.P.

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