T2033 doesn't move a pension commuted value: T2151 does, up to a cap

Which form moves which money: T2033 or T2151?

T2151 is the form a pension plan administrator or DPSP trustee uses to record a direct transfer of a single amount under section 147.3 or subsection 147(19) canada.ca. T2033 records a direct transfer under 146(16)(a), 146(21), 147.5(21), 146.3(2)(e) or 146.3(14.1): RRSP or RRIF property moving to another RRSP or RRIF, or buying an eligible annuity canada.ca. A commuted value leaving an RPP is a 147.3 transfer, so it goes on T2151, and the CRA's chart of direct transfers lists T2151 for both defined benefit and money purchase RPP lump sums canada.ca.

Once the commuted value sits in a LIRA or locked in RRSP, it's RRSP property for tax purposes, so every later move between institutions is a T2033 job under 146(16)(a), which allows a direct transfer to an RRSP or RRIF of which your client is the annuitant, or to an RPP for your client's benefit laws-lois.justice.gc.ca.

How does a T2033 transfer between institutions work?

The receiving institution runs the paperwork. Your client fills out Section 1, signs four copies and gives them to the new issuer or carrier (the transferee), which sends them on to the institution holding the money (the transferor). Nobody sends the form to the CRA unless the CRA asks to see it canada.ca.

The annuitant has to be the same person on both sides: an RRSP issuer can transfer to another RRSP or a RRIF having the same annuitant, and a RRIF carrier to another RRIF that has the same annuitant. Your client picks a transfer in cash or in kind in Part B. A transfer to a spouse on a marriage or common law breakdown goes on Form T2220 instead canada.ca.

Locked in money stays locked in. In Section 3 the transferor states the amount the transferee has to continue to administer as a locked in amount, as required by the Pension Benefits Standards Act or a provincial act, so LIRA money moves to another locked in plan, not an ordinary RRSP. The form notes that some provinces let pension funds and locked in RRSP funds move to a locked in RRIF canada.ca.

From a RRIF, paragraph 146.3(2)(e) lets the carrier transfer all or part of the property to the carrier of another RRIF of the annuitant, except property it must keep under 146.3(2)(e.1) or (e.2). Those paragraphs make it retain enough to pay the minimum amount for the year of the transfer, and the minimum amount is nil for the year the fund was entered into laws-lois.justice.gc.ca. The transferring carrier pays your client that year's minimum, so Part B transfers everything except that amount canada.ca.

None of this is income. The transferor doesn't withhold tax or issue a T4RSP, T4RIF or T4A slip, and the transferee doesn't issue a receipt, because your client can't deduct the amount canada.ca.

How much of a defined benefit commuted value can move tax free?

Subsection 147.3(4) lets a defined benefit provision transfer a single amount, with no part of it relating to actuarial surplus, directly to an RRSP or RRIF of which the member is the annuitant or to a money purchase provision, but only up to a prescribed amount laws-lois.justice.gc.ca. Regulation 8517 sets that amount as A times B: A is the annual lifetime retirement benefit given up, and B is a factor for your client's age at the transfer date laws-lois.justice.gc.ca.

The factor peaks at 12.4 for ages 64 and 65 and falls after that, to 3.0 at 96 or over. Where the factor for your client's exact age (including the fraction of a year) is below the factor for the next age up, you interpolate between the two laws-lois.justice.gc.ca. On a transfer in full satisfaction of the entitlement, the prescribed amount is never less than the balance of your client's net contribution account under the provision.

How much of a $240,000 commuted value is taxable at age 52?

Your client is exactly 52 and leaves a defined benefit plan. The plan says the commuted value of an $18,000 annual pension is $240,000, and your client wants it all in a LIRA. The administrator transfers the prescribed amount on T2151 and the rest is the excess laws-lois.justice.gc.ca.

If the $63,600 is paid in cash, the payer withholds at the lump sum rates on the part not transferred directly canada.ca. It's over $15,000, so the rate is 30% outside Quebec: $19,080 withheld, with the balance of the tax settled on the T1 at your client's marginal rate. The rates and Quebec figures are on the lump sum withholding page.

If the $63,600 goes straight to an RRSP instead, it's still income, but the CRA treats it as an RRSP contribution made in the year of the transfer canada.ca. With $25,000 of RRSP deduction room, your client deducts $25,000 on line 20800 and carries the other $38,600 forward. That undeducted $38,600 sits in the RRSP as an excess contribution, and any part of it above the $2,000 cushion draws the 1% monthly tax until new room absorbs it or it comes out, as shown on the T1-OVP page.

How do you report the excess and get it back out?

A transfer within the limit isn't reported in box 018 and the receiving plan shouldn't issue a receipt canada.ca. Your client doesn't report it and claims no deduction for it canada.ca. The excess is different: the administrator reports it in T4A box 018 with code 108, and your client includes it as pension income on line 13000 canada.ca. When the excess goes to an RRSP or RRIF, the receiving carrier issues a contribution receipt for it canada.ca.

To unwind an excess that can't be deducted in time, your client withdraws it from the RRSP or RRIF and claims an offsetting deduction on line 23200, worked out on Form T1043 canada.ca. The deduction is open only if the amount was included in income and not already deducted, and Form T3012A can't be used for it because that form covers unused RRSP contributions, not RPP transfers canada.ca. The legal basis is 147.3(13.1) laws-lois.justice.gc.ca.

The transfer also feeds your client's RRSP room. When membership in a defined benefit provision ends and the commuted value paid is less than the PAs and PSPAs reported, a pension adjustment reversal restores the difference, shown in box 2 of the T10 canada.ca. The calculation is on the pension adjustment page.

What stays locked in after the transfer?

Locking in comes from pension standards law, not the Income Tax Act. For a federally regulated plan, a member who leaves before being eligible for an immediate pension is entitled to move the pension benefit credit to another pension plan that accepts it, to a retirement savings plan of the prescribed kind, or to an immediate or deferred life annuity. A plan may offer the same choices to a member who leaves after becoming eligible to retire, and only then does a transfer to a retirement savings plan need the spouse or common law partner's consent on the prescribed form laws-lois.justice.gc.ca. Provincial plans follow their own pension benefits acts.

The CRA's guide says your client can't withdraw funds from a locked in RRSP holding RPP money, though some exceptions exist and vary by province, and the funds can sometimes move to a locked in RRIF canada.ca. Annual withdrawal limits for those funds are on the LIF maximum withdrawal page.

Ask the administrator two things before the T2151 goes out: the exact prescribed amount it calculated (it needs the annual pension and your client's age at the transfer date), and how the plan pays any excess. The cap is a tax rule: whatever the plan's locking rules say, the excess is income to your client in the year of the transfer.