The Alberta Ministry of Finance has issued a warning about offers promising tax-free access to locked-in retirement account savings. The Ministry says, these offers contravene provincial pension legislation and could put retirement savings at risk.

“Advertisements appearing in newspapers in Alberta and other provinces claim to have found a loophole in the federal Income Tax Act allowing the tax-free withdrawal of locked-in pension funds, held in a Locked In Retirement Account, Life Income Fund or Locked-in Retirement Income Fund,” says a Ministry statement. The scheme involves using a LIRA to purchase shares of a private company. Some of the funds used to purchase the shares are then loaned back to the owner of the locked-in account.

“Accessing locked-in funds in this fashion contravenes Alberta’s Employment Pension Plans Act. The Act is aimed at ensuring the financial security of Albertans’ pension benefits upon retirement and requires these funds be used only for a lifetime retirement income. Financial institutions that allow illegal access to locked-in retirement funds, or individuals who contravene the Act by withdrawing their funds illegally, may be found guilty of an offence under the Act and may be subject to fines up to $100,000. Under the Act, financial institutions that allow improper unlocking may also be required to replace the pension that was lost as a result.”

These schemes could also create large, unexpected tax bills. “Canada Customs and Revenue Agency confirms no such tax loophole exists. If a locked-in account is used as security for a loan or is used to purchase shares of a private corporation that is not a “qualified investment” under the Income Tax Act, the money withdrawn from the locked-in account to purchase the shares will be considered taxable income. According to CCRA these shares are not “qualified investments” because the corporation is not actually operating a business.”

Albertans are urged by the Ministry to consult with knowledgeable tax advisors before taking part in any scheme that promises a tax-free withdrawal of retirement savings plan funds.