If you have a defined benefit pension plan, it’s important to understand what the Maximum Transfer Value (MTV) is and how it can affect you. When you leave your current employer, if you decide to take the commuted value you may not be able to tax shelter the entire amount.
Canada Revenue Agency limits the amount that can be transferred on a tax-sheltered basis to a Locked-In Retirement Account (LIRA). The MTV is a limit imposed by the Income Tax Act based on your age. If your plan allows portability (the ability to transfer the commuted value) for members who are retirement-eligible, your entitlement may hit the MTV. Also, with interest rates at an all-time low (the lower the interest rate, the higher your commuted value), your likelihood of hitting the MTV is even greater.
|Attained Age||Present Value Factor||Attained Age||Present Value Factor|
|96 or over|
If you’re under Age 50 the formula for calculating the MTV is pretty straightforward:
MTV = present value factor X annual benefit
For example, if you’re age 45 and your annual benefit at age 65 is $20,000, then your MTV would be:
MTV = 9 X $20,000 = $180,000
As long as your commuted value is less than $180,000, you can transfer the full amount to a tax-sheltered LIRA.
If you’re over age 50 and you have a decent pension plan, it’s quite possible you could hit the MTV and not be able to shelter your full commuted value.
For example, if you’re age 58 and your annual benefit at age 65 is $30,000, then your MTV would be:
MTV = 11 X $30,000 = $330,000
Unfortunately, calculating the MTV isn’t always so easy. If you’re over age 49, the MTV will need to be prorated based on your age at month of interest update.
For example, if you’re born January 2, 1952 and the commuted valued is updated with interest for a payment in March 2013, your age at date of calculation would be 61.1667. Since you’re between age 60 and 61, the factor will need to be prorated. If your annual benefit at age 65 is $35,000, then your MTV would be:
Present Value Factor at Age 61 = 11.7
Present Value Factor at Age 62 = 12
MTV = 11.7 + [(12 – 11.7) X 0.1667] X $35,000 = $411,250.35
If your Commuted Value was $390,000, then:
LIRA = MTV = $390,000
Excess Transfer Amount = $411,250.35 – $390,000 = 21,250.35
When you received your option forms they should state whether you’re over the MTV, although it’s handy to understand how the MTV works.
Excess Transfer Amount
If you’re over the MTV, you should find out if your employer allows you to transfer your excess amount to your RRSP. If not you’ll have to receive the excess in taxable cash subject to withholding taxes, which will be taxed at your marginal tax rate when you file your income tax; this can easily push you into a higher marginal tax bracket if your excess amount is substantial.
Provided your employer allows you to transfer the excess transfer amount to your RRSP, you’ll need to provide your notice of assessment as proof you have sufficient room. The ability to tax-shelter the excess amount should be taken into consideration if you’re thinking about taking the commuted value or a deferred pension.
Have you ever hit the MTV when transferring your commuted value? Do you know if your employer allows you to transfer the excess to your RRSP?
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).