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Origins of the LIF
Since the 1990s, Life Income Funds (LIFs) have been available as investment options in Canada. Within a span of four years, all Canadian provinces swiftly adopted these financial vehicles. Quebec led the way, soon joined by several other provinces including Manitoba, Nova Scotia, British Columbia and New Brunswick.
The original intent behind the creation of LIFs, as outlined by lawmakers, was to provide Canadians with access to a financial instrument that would allow them to receive regular income from their own savings. This solution offers flexible retirement income, enabling better management of retirement funds.
The LIF and its jurisdiction
Each LIF is governed by specific rules under precise legislation. This means that two LIFs held by the same individual may be subject to different legislative frameworks; for example, one may fall under federal jurisdiction while the other is governed by provincial jurisdiction. The origin of the legislation governing a LIF is determined by the origin of the funds.
When an employee leaves an employer, they have three options:
- They can withdraw the portion of their pension plan from their former employer that belongs to them.
- They can leave the funds to grow with the former employer until retirement.
- They can choose to transfer the funds to a Locked-In Retirement Account (LIRA).
Once transferred to a LIRA, the funds corresponding to the portion of the pension plan from the employer that belongs to the employee are placed in a growth vehicle where they will generate investment returns until the individual decides to convert the LIRA to a LIF. In other words, the conversion occurs when the holder is ready to begin withdrawing the funds.
A LIRA is a vehicle for locked-in funds, whereas a LIF is a withdrawals vehicle, similar to a Registered Retirement Income Fund (RRIF). Both can contain various investment options.
Since a LIF results from an employee’s participation in a pension plan from a former employer, which was converted into a LIRA, the jurisdiction of the LIF depends on the jurisdiction of the former employer. For example, for a former employer such as the federal government, a bank or a railway company, the LIF would fall under federal jurisdiction and be governed by the Pension Benefits Standards Act, 1985.
In contrast, if an individual worked for an employer such as a hospital or an educational institution, the LIF would then fall under provincial jurisdiction. In the case of a LIF governed by Quebec law, it would be subject to the Supplemental Pension Plans Act of Quebec. It is essential to verify the legislation governing each LIF and to ensure its proper registration with the financial institution.
Being aware of the legislation governing a LIF is crucial, as they are not all the same. For instance, a federal LIF does not allow the entire amount to be withdrawn in a single transaction. Under certain conditions, it is possible to unlock up to 50% of the funds from a federal LIF, similar to LIFs governed by the legislation of several provinces; however, the criteria vary from one province to another. Finally, regarding LIFs, it is important to note that the application of succession rights also varies significantly by province.
Once the desired disbursement is made, the LIRA is converted into a LIF, which serves as a disbursement tool designed to provide retirement income from accumulated savings.
New changes applicable to LIFs under Quebec law
As of January 1, 2025, LIFs under Quebec law (LIF-QC) have undergone significant modifications. These new rules bring major adjustments for holders aged 55 and older, as well as for those under 55, by removing certain restrictions and simplifying withdrawal calculations. These changes aim, in part, to reflect the original intent behind the creation of LIFs 35 years ago, which was to offer greater flexibility to holders.
Holders aged 55 and older
A LIF-QC provides multiple withdrawal options, which can be combined.
The life income is the standard form of income associated with the LIF, which is a yearly income paid until the holder’s death.
Until December 31, 2024, holders of a LIF-QC could withdraw funds within a range determined by:
- The maximum withdrawal amount, calculated based on:
- The balance of the LIF at the start of the year;
- The holder’s age on December 31 of the previous year; and
- An annual reference interest rate set by Revenue Quebec.
- The minimum annual withdrawal amount was determined by a fixed percentage linked to:
- The LIF balance on December 31 of the previous year; and
- The holder’s age on December 31 of the previous year.
This rule constrained holders to withdrawals that might not meet their needs, thus failing to provide the flexibility desired by many.
Removal of the withdrawal ceiling
Holders of a LIF-QC aged 55 and older may now withdraw the entire amount from their account. This change provides unprecedented flexibility.
Temporary income, an additional amount that could be withdrawn from a LIF-QC, allowed holders to access additional funds beyond the maximum allowed by the rules mentioned above. With the new rules in effect, the concept of temporary income, as well as the option of a lump-sum withdrawal for retirees aged 65 and older, is no longer relevant.
The concept of the minimum annual withdrawal remains in place; however, the amounts have been adjusted upward.
Holders under 55
Enhancement of maximum withdrawals
Prior to 2025, LIF-QC holders had to respect both minimum and maximum annual withdrawal amounts. The calculation of withdrawals for temporary income and the life income upper limit was based on the following formulas:
- Temporary income:
- 50% of the maximum pensionable earnings (MPE) - 100% of estimated income.
- Life income upper limit:
- Factor set in Appendix 0.6 of the Supplemental Pension Plans Regulation × LIF-QC balance - maximum temporary income / factor set in Appendix 0.7 of the Supplemental Pension Plans Regulation.
These calculations allowed for withdrawals while maintaining some structure to avoid excessive withdrawals.
With the new rules taking effect on January 1, 2025, the temporary income withdrawal maximum is maintained for this group of holders, but with an upward adjustment. The calculation for temporary income is now based on 50% rather than 40% of the MPE providing holders with access to significantly larger amounts annually.
The calculation for life income withdrawals has been simplified, now using a prescribed rate instead of a regulatory factor.
Estimated income is now fully considered at 100%, compared to 75% until the end of 2024.
The LIF Quick Calc tool, available on the Retraite Quebec website, allows users to visualize possible withdrawal scenarios based on the details of each LIF-QC holder.
Removal of transfers to certain registered accounts
Previously, holders could transfer the equivalent of their maximum LIF-QC withdrawal to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) annually. This option was removed for all holders as of the new rules’ implementation on January 1, as it is no longer relevant following the abolition of the maximum withdrawal amount.
As a result, “flip-flop” strategies — methods for transferring sums from a LIF-QC to an RRSP to circumvent certain tax limitations and offer more flexibility in managing withdrawals — have lost their relevance. With the new rules in place as of January 1, 2025, holders of LIF-QCs aged 55 and older can now withdraw amounts without restriction, making the “flip-flop” method obsolete.
Non-residents of Canada for at least two years
The possibility of withdrawing funds from a LIF-QC for a holder who is no longer a Canadian tax resident is no longer permitted once the individual has held non-residency status for two years. Any transfer of LIF-QC funds outside of Canada beyond the two-year non-residency period must first involve converting the LIF-QC into a LIRA.
Estate planning opportunities
LIF-QC holders aged 55 and older are now allowed to make withdrawals based on their needs. This presents an opportunity to alleviate financial stress. However, this new flexibility for LIF-QCs also brings an increased responsibility for an individual and their family when it comes to tax and estate planning.
An unforeseen expense or an investment opportunity could deplete a holder’s retirement funds, potentially compromising their own retirement period or significantly reducing the funds available for their estate.
Large withdrawals could also result in a modification of the applicable tax rate for the LIF-QC holder in a given year. Such a change could also potentially affect an individual’s eligibility for social programs. Thorough planning is essential to ensure not only the long-term sustainability of the funds but also the comfort level of the retirement period for LIF-QC holders.
Priority for the spouse
Under Quebec legislation, the funds in a LIF-QC upon the death of the holder are primarily paid to the surviving spouse. This legal provision includes married spouses, civil union partners and common-law partners who meet the definition of a spouse. The surviving spouse can transfer the funds to their RRSP or RRIF without immediate tax implications. The surviving spouse may refuse the funds from the LIF-QC by notifying the financial institution holding the LIF-QC. This can be done either during the holder’s lifetime or posthumously, at any time before the funds are transferred.
This legal priority for the surviving spouse in relation to LIF-QC funds overrides the wishes expressed in the deceased holder’s will. In the case of a blended family, this provision can be used in the holder’s estate planning. For example, the holder could withdraw and allocate a certain amount to children from a previous union during their lifetime, rather than bequeathing the entire balance of their LIF to their spouse at death by application of the legal priority to the spouse.
Coordination with other sources of income
With the possibility of unrestricted withdrawals from a LIF-QC, holders can choose to delay the start of their government pensions. This approach allows for a substantial increase in future benefits.
The Quebec Pension Plan (QPP), Old Age Security (OAS) and the Canada Pension Plan (CPP) are the most well-known pensions, offering the advantage of increased benefits if the start of their withdrawal is deferred. The QPP can provide up to a 58% increase if payments are deferred until age 72. A 36% increase for OAS is possible if delayed until age 70, and an additional 42% can be gained by requesting CPP at age 70.
Since the option to transfer from a LIF-QC to an RRIF was removed as of January 1, 2025, it has become even more important to develop an integrated strategy to manage these two types of accounts. To avoid unexpected tax rates, it is essential to closely monitor withdrawals from the LIF-QC throughout the year.
Various retirement income sources are added together to form taxable income for the retiree. Careful planning is required on an annual basis since an increase in taxable income could affect an individual’s eligibility for certain social programs, such as the Guaranteed Income Supplement (GIS). This is even more reason for LIF-QC holders to be proactive in their retirement planning in order to optimize the coordination of available income sources.
The changes announced by the Quebec Minister of Finance and the minister responsible for Retraite Quebec, which have been in effect since the beginning of the year, have introduced unprecedented flexibility into the LIF-QC system to maximize financial and tax benefits. Time will tell whether stable and long-term income, which was the primary intent behind the creation of Life Income Funds in the 1990s, will be preserved.
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