Pension Income Tax Credit

 

If you or your spouse are 65 or older and do not have income from a RRIF or private pension plan, there is another alternative to take advantage of the pension income tax credit.

What is the Pension Income Tax Credit?

Great question, as a number of people do not know that it exists. If you receive pension income, you are entitled to deduct from your taxes, a federal tax credit equal to 15% on the first $2,000 of pension income received. This means up to a $300.00 tax savings at the federal level, plus the provincial tax credits.

What type of Income Qualifies?

Under age 65, only income received directly from a pension plan or other registered income received because of the death of your spouse qualifies for the pension income tax credit. Income from other registered plans such as RRIFs and RRSP annuities are only eligible for the credit if you are age 65 or older. Government plans such as CPP and OAS do not qualify.

Generally, income from non-registered investments will also not qualify for the pension income credit. One exception is the income received from a Guaranteed Interest Contract (GIC) offered by insurance companies. A GIC from a life insurance company reports the interest accrued as annuity income which qualifies for the pension income tax credit beginning at age 65.

The following chart shows the amount of non-registered savings required at various interest rates to generate $2,000 of interest (reported as annuity income) from an insurance company GIC to claim the pension income tax credit.

Annual Interest Rate	Non-Registered Savings Required
3%	$66,667
4%	$50,000
5%	$40,000
6%	$33,333
7%	$28,570

 

 

Income Splitting Where Both Spouses are age 65 or older

If both you and your spouse (or common law partner) is age 65 or older, you can invest double the amount of non-registered savings required in an insurance company GIC and make an election on your tax returns to each claim $2,000. Each of you will then be able to maximize the tax benefits of the $2,000 pension income amount and thereby double your tax credit.

Transferring Unused Credits to a Spouse

 

If you are at least age 65 and have eligible income but are unable to use the full credit because you have reduced your taxes to zero, you can transfer the unused portion to your spouse (or common law partner). Only you as the original recipient of the eligible income must be age 65 or older. The spouse receiving the transferred credit can claim it at any age and does not have to have eligible income to take advantage of the transferred credit.

If you would like more information on this topic or would like a review of your current financial plan, please call 778-478-9759, or e-mail [email protected]

 

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.