Q: My house burned down in the Fort McMurray fire. I am currently unemployed and my husband and I are struggling to pay the mortgage on top of the rent. Our savings have now been exhausted, as has the insurance money – the tenement house was part of the apartment and is being rebuilt.
We have a significant amount tied up in LIRA and it seems ridiculous for our mortgage to go into foreclosure (as it will soon) before we have a chance to sell it and get the money back when it is finally rebuilt next year. Are there loopholes in the LIRA for people who lost their homes in the wildfires? Can we take money out of LIRA now to help us financially?
—Karen
AND: Karen, the Fort McMurray fire is a disaster in many ways. There has been massive property damage, displacement, infrastructure disruption and employment disruptions. The biggest burden has to be the speed at which this will all be resolved. How do you cope financially when you have constant living expenses and job opportunities suddenly become limited?
I’m so sorry this happened to you, Karen. Paying your mortgage and rent with your insurance benefits expiring is extremely difficult. Relief funds are necessary but not helpful in your case because they are diverted to recovery efforts. Where does this leave you as a broker?
LIRA (Lock-In Retirement Account) is subject to provincial pension legislation. It was designed to provide a source of income after years of work. In Alberta, LIRA can be unlocked once you reach age 50+
There are also five hardship provisions that you can use to apply to unlock your LIRA money.
- Income over the next 12 months is expected to be less than $36,867
- Risk of foreclosure of main home
- Eviction for rent arrears
- First month’s rental fee and deposit
- Medical costs
It looks like point 2 applies to Karen’s situation. Use this Government of Alberta form and send it to the financial institution holding your LIRA, along with the required mortgage and income information.
The LIRA distribution will be considered taxable income in the same year. In the long run, this can prove to be an effective tax planning exercise. If you find yourself in a low-income situation in the same year that you withdraw your LIRA, the amount of tax you have to pay will be much lower. This can be calculated at taxtips.ca. Then, when you’re finally able to sell the townhouse, you can put $52,000 of those funds into your TFSA and the rest into an investment account. If you let these funds grow until retirement, the tax you will pay will be much lower than with a LIRA. Tax planning may not be your personal priority right now, but it is something to look forward to in the future.
Before you proceed to withdraw, take some time to review how your LIRA funds are invested. Ask your investment advisor to outline the potential fees resulting from liquidating your LIRA funds. Ask for a reduction in these potential fees.
Tom Feigs is a retirement expert and certified financial planner at Money Coaches Canada
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