By Canada Life | April 14, 2023
Advisors, like you, frequently ask questions about the pension income tax credit. Wondering which of your clients are eligible to take advantage of this strategy? We’ve developed this article so you can feel confident in your client conversations.
- Who can claim it?
- How much can your clients claim?
- Two important considerations
- What clients over the age of 65 qualify for
- What clients under the age of 65 qualify for
- What doesn’t qualify for the pension income amount?
The pension income tax credit allows a taxpayer to claim a non-refundable federal tax credit on up to $2,000 of eligible pension income.
Your clients may be able to claim up to$2,000 if they have:
- Eligible annuity
- Eligible pension income
- Received annuity payments
- if they were65 yearsof age or older onDec. 31, 2022, or
- if they’ve received annuity payments because of the death of their spouse orcommon-lawpartner (regardless of age)
To quickly check if your clients qualify, use the tool on the Government of Canada website.
- The federal tax credit rate is at 15%.
- The maximum federal tax savings available is $300. This is based on $2,000 × 15% (the capped rate).
- There are also provincial pension income amounts.
- Lower tax bracket: Clients can claim and receive the first $2,000 of their pension income on a tax-free basis if they’re in the lowest tax bracket.
- Higher tax bracket: If they’re in a higher bracket they’ll pay tax on the pension income, but at a reduced rate.
- Age: Clients over 65 have easier access to the pension tax credit. This is because they have more eligible sources of income. The eligible income under age 65 is restricted. If clients report amounts on lines 11500, 11600 or 12900 of their federal tax returns, they may be eligible for the pension income amount.
- Pension income splitting: Income-splitting rules allow taxpayers to split up to 50% of eligible pension income with a spouse or common-law partner. When splitting with a spouse, the age of the spouse doesn’t come into consideration, it’s the age of the recipient that drives the ability to split. It’s important to determine if their pension income is eligible when meeting with your clients.
- Life annuity payments from a superannuation or pension plan. This includes income from life income funds (LIFs) and locked-in retirement income funds (LRIFs).
- Registered retirement income fund (RRIF) payments (any portion that’s transferred to a registered retirement savings plan (RRSP), another RRIF, or used to purchase an annuity doesn’t qualify for the pension income amount).
- RRIF payments received because of the death of a spouse or common-law partner.
- Annuity payments from an insured RRSP (those typically offered by insurance companies) or from a deferred profit-sharing plan (DPSP).
- Payments from a pooled registered pension plan (PRPP).
- Regular annuities and income averaging annuity contacts (IAAC).
- Certain foreign pension payments.
The list of qualified pension income for purposes of claiming the pension income amount (and pension income splitting) is more restricted. Only a few of the items listed above are available. They include:
- Life annuity payments from a superannuation or pension plan.
- Regardless of your client’s age, they’ll qualify for the pension income amount if they’re receiving annuity payments from an employer pension plan. But it’s important to note that when a client commutes a pension to a locked-in retirement plan, the income from these plans (for example, LIFs, LRIFs) will not qualify for the pension income amount until the client reaches age 65.
- Canada Revenue Agency’s position is that income from a locked-in plan is simply a retirement savings plan, not a pension plan, and that the pension income amount shouldn’t be available until age 65. Unless this changes, it may impact whether your clients decide to commute their pensions when they retire.
- Payments from an RRIF, or annuity payments from an RRSP, DPSP or PRPP received because of the death of a spouse or common-law partner.
- For clients under age 65, RRIF income, DPSP income, annuities, PRPP income, income-averaging annuity contracts, or RRSP income will only qualify for the pension income amount if they’re received because of the death of a spouse or common-law partner.
- For clients under age 65, RRIF income, DPSP income, annuities, PRPP income, income-averaging annuity contracts, or RRSP income will only qualify for the pension income amount if they’re received because of the death of a spouse or common-law partner.
- Some clients receive a foreign pension and may wonder if they qualify for the pension income amount. In general, foreign pensions reported on line 11500 of the client’s tax return may qualify for the pension income amount regardless of age, but only for the portion of pension income that’s taxable.
- For example, clients receiving U.S. social security benefits are permitted a 15% deduction on their Canadian tax returns due to specific provisions in the Canada-U.S. tax treaty. In this case, only the taxable portion of the Social Security Benefit is considered pension income and qualifies for the pension income amount.
- For example, clients receiving U.S. social security benefits are permitted a 15% deduction on their Canadian tax returns due to specific provisions in the Canada-U.S. tax treaty. In this case, only the taxable portion of the Social Security Benefit is considered pension income and qualifies for the pension income amount.
- Old Age Security benefits
- Canada Pension Plan benefits
- Quebec Pension Plan benefits
- Death benefits
- RCA payments
- Benefits from Salary Deferral Arrangements
- Income from a U.S. Individual Retirement Account (IRA)
This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Investors should only borrow money to make such an investment if they have the financial resources to assume the risk of the loss of their investment as well as the repayment of any such loan.
All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circ*mstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of January 2023.
Canada Life and design, and Canada Life Investment Management and design are trademarks of The Canada Life Assurance Company.
