To transfer a Locked-In Retirement Account (LIRA) to an ex-spouse in Ontario without paying massive taxes, you must use CRA Form T2220. While the bank administrative fee to move the funds is typically only $50 to $150 CAD, drafting the legally required Separation Agreement through a family law firm usually costs between $1,500 and $3,500 CAD.
When an Ontario marriage ends, all assets accumulated during the relationship must be divided fairly through an equalization payment. 💵 Often, the most valuable assets a couple shares are their retirement savings. If one spouse has a Locked-In Retirement Account (LIRA)-usually originating from a former employer’s pension plan-dividing it presents a unique challenge. You cannot simply withdraw cash from a LIRA to pay off your ex-spouse, as Ontario pension laws strictly “lock in” the funds for your retirement.
Instead, the funds must be transferred directly into another locked-in retirement vehicle owned by the receiving spouse. To do this without triggering an enormous tax bill from the Canada Revenue Agency (CRA), the transfer must be executed as a “tax-free rollover.” We will explain the mandatory steps, the required federal tax forms, and the real-world costs of navigating this financial family law process in Ontario.
Step-by-Step Process for LIRA Transfers in Ontario
Whether you are dealing with a financial institution in Toronto, London, or Sudbury, the rules surrounding locked-in funds are governed by both the provincial Pension Benefits Act and federal tax law. You must complete these steps in the exact correct order to protect both spouses from unnecessary taxation.
Step 1: Drafting a Binding Separation Agreement
Banks will not transfer locked-in funds based on a verbal promise. 📄 The absolute first step is to have an Ontario family law firm draft a formal, signed Separation Agreement, or obtain a court order from the Superior Court of Justice. This legal document must explicitly state the exact dollar amount or percentage of the LIRA that is being transferred to satisfy the equalization of net family property.
Step 2: Opening a Receiving Locked-In Account
The receiving spouse cannot take the transfer in cash or into a regular RRSP. They must contact their own financial institution and open a corresponding locked-in account. In Ontario, this is usually another LIRA or a Life Income Fund (LIF). The receiving account must be subject to the exact same provincial locking-in rules as the original account.
Step 3: Completing CRA Form T2220
This is the critical federal tax document. 📝 Form T2220 is titled “Transfer from an RRSP, RRIF, PRPP or SPP to Another Eligible Plan on Breakdown of Marriage or Common-law Partnership.” Both spouses must fill out and sign this form. It acts as a declaration to the CRA that the transfer is happening solely due to a relationship breakdown, qualifying it for a tax-free rollover under the Income Tax Act.
Step 4: Submitting the Package to the Relinquishing Bank
Once the T2220 form is signed, the receiving spouse’s bank will usually send the complete package-along with a certified copy of the Separation Agreement-to the institution holding the original LIRA. The relinquishing bank will process the paperwork, deduct their administrative fees, and securely transfer the funds to the new account.
How Much Does it Cost in Ontario?
While the CRA does not charge a tax on the transfer itself, the administrative and legal fees to set up the rollover properly can add up. 💰
- Bank Administrative Transfer Fees: Most Canadian financial institutions charge a flat fee to process the transfer and close or adjust the LIRA. Expect to pay between $50 and $150 CAD, plus applicable HST.
- Family Law Firm Fees: Drafting a legally sound Separation Agreement that properly addresses pension division generally costs between $1,500 and $3,500 CAD. If the separation is highly contested, litigation in the Superior Court can push legal fees well over $10,000 CAD.
- Financial Advisor Fees: If you require a Certified Financial Planner (CFP) to help structure the receiving account, they may charge hourly rates of $150 to $300 CAD.
How Long Does the Process Take?
Moving locked-in money requires significant bureaucratic processing. Drafting and negotiating the initial Separation Agreement typically takes 2 to 4 months. Once the final agreement is signed and the CRA Form T2220 is submitted to the bank, the actual financial transfer usually takes 4 to 8 weeks to complete. If the paperwork has even a single error, the bank’s compliance department will reject it, resetting the clock.
Understanding the T2220 Transfer Rules
| Requirement | Standard RRSP Transfer | Locked-In (LIRA) Transfer |
|---|---|---|
| CRA Tax Form Needed | Form T2220 | Form T2220 |
| Receiving Account Type | Any RRSP or RRIF | Must be another Locked-In Account (LIRA/LIF) |
| Can it be Cashed Out? | Yes (but triggers immediate income tax) | No (Subject to strict Ontario pension laws) |
Frequently Asked Questions (FAQ)
Who pays the tax when the LIRA is eventually withdrawn?
Because the T2220 rollover is tax-free at the time of the transfer, the receiving spouse assumes all future tax liabilities. When they eventually retire and withdraw funds from their newly created LIRA or LIF, they will pay income tax on those withdrawals at their own marginal tax rate.
Can we just write a letter instead of a Separation Agreement?
No. The CRA and the financial institutions are incredibly strict. A legally binding Separation Agreement or a formal court order from the Superior Court of Justice is an absolute legal requirement to qualify for the tax-free rollover.
Is it possible to unlock the LIRA during a divorce?
Generally, no. A divorce or separation does not magically “unlock” retirement funds. The money remains subject to the Ontario Pension Benefits Act, meaning it can only be used for retirement income, barring a few rare financial hardship exceptions.
Can I transfer 100% of my LIRA to my ex-spouse?
Under the Ontario Family Law Act, a spouse is typically only entitled to a maximum of 50% of the pension value accumulated during the marriage. Any transfers exceeding this limit may face intense scrutiny or rejection by the pension plan administrator.
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