Defined Benefit Plan (DBP) – Maximum Transfer Value

Upon termination of employment, if you choose to take the Commuted Value of your Defined Benefit Plan (DBP) a formula by the Income Tax Act is used to calculate your Maximum Transfer Value. This amount can be transferred tax deferred to a Locked-in Account. Amounts above the maximum transfer value, or the excess amount, is to be withdrawn as “cash” and will be taxed as income.

Example: You have worked for a company for 30-years. Your termination statement states that your commuted value is $1.5 million and that your maximum transfer value is $500,000. You are only permitted to transfer $500,000 into a locked-in account. The excess amount of $1,000,000 is taken as “cash” and fully taxed.

Tips on Reducing Tax:

  • If you have RRSP Contribution Room, the after-tax dollars received can be used to make a RRSP Contribution. The tax deduction will help offset the taxable income.
  • If you have a spouse or common-law partner and they have RRSP contribution room, you can gift the after-tax funds. They can make a RRSP contribution reducing taxes paid as a household.