Are You Taking Advantage of the Pension Income Tax Credit?

As many Canadians can attest, it’s not always what you earn that counts, it’s what you get to keep. This is especially true if you are currently retired or are planning to retire in the near future. To make the most of your retirement income, it makes sense to become familiar with the numerous tax credits that are made available through the Canada Revenue Agency (CRA). One of those tax credits is the Pension Income Tax Credit.

What is the Pension Income Tax Credit?

The Pension Income Tax credit is available to you if you are 55 years of age or older. Basically, it enables you to deduct, from taxes payable, a tax credit equal to the lesser of your pension income or $2,000.00. Depending on which province you live in, this equates to $440-$720 in actual tax savings each year.

The pension income tax credit is non-refundable and may not be carried forward each year. In other words, you need to use it or lose it.

In order to claim the credit, the taxpayer must be in receipt of certain specified income. The definitions of “pension income” are therefore important.

What is eligible pension income?

Eligible pension income depends on your age. If you were 65 or older in the year, pension income includes:

  1. Income from a superannuation or pension fund
  2. Annuity income out of a RRSP or a Deferred Profit Sharing Plan (DPSP)
  3. Income from a Registered Retirement Income Fund (RRIF)
  4. Interest from a prescribed non-registered annuity
  5. Income from foreign pensions
  6. Interest from a non-registered GIC offered by a life insurance company.

If you are younger than 65 for the entire year: Pension income includes:

  1. Income from a superannuation or pension plan
  2. Annuity income arising from the death of your spouse under a RRSP, RRIF, DPSP

What is not eligible pension income?

  • Investment income from market based investments
  • Interest income from GICs with banks, trust companies and credit unions
  • OAS and CPP
  • Lump sum death benefits
  • Lump sum withdrawals from RRSPs
  • Retiring allowances

Tax planning strategies involving the pension income credit

If you are over the age of 65 and you are not part of a superannuation or pension plan, you may be able to create qualified pension income to save taxes.

  1. Transfer RRSP to a RRIF. At age 65 transfer $12,000 to a RRIF and take $2000 out per year from age 65 to 71(inclusive). This essentially allows you to get $2000 out of your RRSP tax-free for 6 years. Whether you need the income or not, it is an opportunity you do not want to miss.
  2. Transfer Locked-in Retirement Account (LIRA) assets to a Life Income Fund (LIF) and then annuitize. In most cases, you can transfer your LIRA to a LIF or LRIF once you reach the age of 55. To make the most of this strategy, you must transfer the LIRA to the LIF and then to an annuity in order for the income to be reported as eligible pension income. If you purchase the annuity directly from the LIRA, the annuity is considered a RRSP annuity, which only qualifies for the pension income credit after age 65.
  3. Buy a GIC from a life insurance company. If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, there is a relatively easy way to make a GIC qualify for the Pension Income Tax Credit. Simply purchase a GIC through a life insurance company because it is considered eligible pension income. To determine how much principal you would require to be able to claim the full credit, divide $2,000 by the applicable interest rate for the term you want. For example if you wanted a 5-year term and the current annual rate was 4.0% you would need to invest $50,000 (2000 divided by 4.0%=$50,000).
  4. Transfer of Unused Credit to a Spouse. Unused pension income credit is transferable to a spouse or common-law partner. The ability to transfer this credit should be explored in circumstances where one spouse is earning pension income in excess of $2,000, and the other spouse is not otherwise fully utilizing his or her pension income credit.

If you are over the age of 65, take a look at line 314 in your tax return to see if you are taking advantage of the Pension Income Tax Credit. If not, consider one of these tax savings strategies.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

27 Responses to Are You Taking Advantage of the Pension Income Tax Credit?

  1. RDilworth says:

    The strategy for those age 55-64 is unclear. Should we transfer, at age 55, $32,000 from RRSP to RRIF and take 2000 per year for 16 years, age 55-71?
    Thanks!

    • Jim Yih says:

      Not quite! You can only take advantage of the pension income tax credit if you have a pension (defined benefit or defined contribution) and you take income from that pension. That can be done as early as age 55 with some exceptions like a military pension.

      If you do not have a pension, the income from a RRIF or an annuity can qualify for the pension income credit but you have to wait till your 65 to do the strategy of creating pension income.

      I hope that clarifies it.
      Jim

      • xhguo says:

        “but you have to wait till your 65 to do the strategy of creating pension income.” This part is not clear. Since income from RRIF is eligible at age 55, why we can still not be able to use the pension income tax credit at 55?

  2. TTH says:

    I am 65 (working full time) and my wife is 60 (working part time). Your strategy to transfer $14,000 from RRSP to RRIF and withdraw $2,000 pa in order to take advantage of the pension tax credit from 65 – 71, are the following allowed:
    1.Split 50% with my wife so she can utilize the pension credit of $1,000
    2.Instead of withdrawing cash, transfer the annual $2,000 in kind back to RRSP so as to use this as a current year’s contribution to reduce my earned income
    3.Can I double up the transfer to $28,000 and withdraw $4,000, split 50% with my wife so that both of us can utilize the full $2,000 pension tax credit

    • Laura Thompson says:

      Hi TTH,
      I noticed this question wasn’t answered, so thought I’d go ahead and try to answer all your questions. I am a Certified Financial Planner, with over 12 yrs experience.
      1. Since you ar 65 + and receiving pension income that would not be eligible for the pension credit if received by a person under 65, your spouse will not be eligible for the pension credit based on the transferred pension income.
      2. Yes, with the correct paperwork, you can transfer-out $2K from your RRIF in-kind, and move back into a Spousal RSP, or another Individual RSP. I have often used this strategy of redeeming from an individual’s RSP when their income is low, and having the money deposited back into the higher income spouse’s RSP, or in most cases, into a Spousal RSP.
      3. No, as per#1 above, given that we are talking about RRIF proceeds, your wife has to be 65 to also receive the pension tax credit. IF the funds came directly from a defined Benefit or defined Contribution pension plan, then you would be able to split that pension income with her.

      Hope that helps!
      Laura

      • TTH says:

        Thank you for your response to my questions.

        Jim’s blog mentioned that the Pension Credit is available to someone who is 55 years of age or older. In a related post at the bottom of his blog, “Tax Planning Strategies involving the pension income credit” there is a mention of the spouse using the transferred pension to benefit from the credit (points 4 and 5).

        This is a strategy that not many financial planners care to divulge to their clients, possibly as they are not familiar with it.

  3. B says:

    Hi Jim,
    What about the OAS clawback for people at higher income brackets? To receive the savings you could potentially generate a $300 clawback on the extra income.

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  7. James says:

    I’d like clarification regarding strategy 1. If I’m 65 and convert $12K of my RSP into a RIF and then withdraw $2000, wouldn’t that exceed the maximum RIF payout which would be $480 (12K x (1/25)). I thought “eligible pension” in this case would be based on the RIF payout. Assuming I have no other pension and I covert only 12K in to a RIF and withdraw more than my RIF payout will it still qualify for the $2000 pension credit? or only $480.

    I want to know if any lump sum withdrawal from a RIF qualifies as “eligible pension” or only the minimum RIF out.

    Please clarify. Thanks.

  8. perwez says:

    hello there
    does rrsp income qualify for to put in rrsp back at the end of a year

  9. William Dunlop says:

    I believe there is an error at the top of this page. It states that one must be 55 years old to qualify for the $2000 tax credit. My inforation is that you must be 65 years old. If I am correct you should change it immediately to save people from issues with CCRA.

  10. Dianne says:

    I am starting to think about the taxes I am going to have to pay for 2012 and what should I be doing about it? Last year after the accountant helped us with our tax returns I had to pay over $5000 tax and probably this year will be the same. I receive over $1900 income per month with my work pension and about $650 per month CPP. Should I just have more tax deducted at source (and if so how much) or can I contribute to registered charities to lower the tax I will have to pay? (at least then the government doesn’t get it all) This issue is new for us but probably many people that draw a good pension income must be faced with the same thing! ? Would like to hear your advice. My husband is still employed. Can I use $2000 of his pension tax credit as well as my own to lower my tax consequences. I am 60 years of age and my husband is 61.

  11. reg says:

    I am confused on this. You say that once you turn 65, you can take 2,000 out of a RRIF and claim up to 2,000 tax free. It’s really not tax free is it if all you get is 17% of it as a non-refundable tax credit, right?

    I love when they say “tax free” when it really means, we’ll allow you this much. Tax free would mean dollarl for dollar to me. I would appreciate your comment.

    • Wendy says:

      Exactly, Reg. We “took advantage” of this credit thinking it would be dollar for dollar. However, because I am still working it actually cost us money. Jim really needs to clarify this! It would only be a dollar for dollar advantage for really low earners.

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  15. Edmund Lo says:

    I will be returning 65 in May next year. Can I transfer my RRSP to a RRIF in order to qualify the Pension Income Tax Credit of $2,000pa, or do I have to wait the new year to do it?

  16. Mathieu says:

    Hi Jim,
    Great article but was just wondering about point 2 (transfer LIRA to LIF then annuitize). Are you saying that if someone was 58 and they transferred a LIRA to a LIF and then bought an annuity, the income would qualify as pension income, even before age 65? Thanks.

    • Tim says:

      If you are under 65, only certain types of pension amounts qualify for the pension credit. See the following document on the CRA website re amounts that qualify for the pension credit: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/lgbl-eng.html

      If you convert the LIRA to a LIF and use the LIF funds to purchase a LIF annuity you won’t be able to claim the pension credit.

      Usually the only types of pension income that are eligible for the pension credit if you were less than 65 in the year are:

      (1) Payments from superannuation or pension plans provided they are life-annuities and not lump sum payments; and,
      (2) Annuity payments arising by virtue of the death of your spouse under an RRSP, RRIF, MPP, PRPP, DPSP.

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  18. James L says:

    Jamie Golombek from CIBC explains it well.

    “Who claims the $2,000 pension income amount?
    Both the recipient and transferee each may potentially claim the $2,000 pension credit. While the recipient will certainly qualify for the credit (as it’s a prerequisite for splitting pension income in the first place), the recipient spouse or partner may not qualify. That’s because eligibility for the credit can also depend on the age of the recipient. For example, say Jack, age 65, decides to split his RRIF withdrawals with his wife, Jill, who is only 62.

    While the RRIF income certainly qualifies in Jack’s hands for the pension income credit (and thus permits him to split up to 50 per cent of it with Jill), the allocated amount won’t qualify for an additional $2,000 credit in Jill’s hands since she is not yet 65 years of age.

    On the other hand, if Jack were to have a defined benefit pension plan instead of a RRIF and were to begin receiving his monthly pension, the income would qualify for the pension credit in both Jack’s and Jill’s hands.

    How, if at all, will pension splitting affect income-tested benefits, such as the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, Canada Child Tax Benefit (CCTB), and other provincial benefits and tax credits, such as the Old Age Security (OAS) program?
    Since allocating pension income to a spouse or partner merely reduces one spouse or partner’s net income while simultaneously increasing the other’s net income, benefits and credits that are income-tested based on the combined income of both spouses or partners will not be affected. Such credits include the GST/HST credit, the CCTB and related provincial or territorial benefits.

    Pension splitting, however, does have the ability to affect other credits and benefits that are solely based on one spouse or partner’s net income, such as the age amount, the common-law partner amount and any OAS clawback.

    Consequently, transferring pension income from a high-income spouse or partner who is subject to the OAS clawback (i.e., net income over $63,511 in 2007) to a spouse or partner whose income is below the OAS threshold can provide an ideal way to preserve otherwise clawed back benefits.”

  19. Dave K. says:

    Dear Jim; I am retired and receive a defined company pension, I will be turning 65 in 2014.My total income from all pension sources will be less than the $33884.00 quoted in the following article. I have rsp’s and am considering converting all into a riff at 65. I don’t have a TFSA, so am considering withdrawing $6720.00 annually from the RIFF& putting it into a TFSA…..why $6720.00? this is an article from a Canadian Investment firm.Is my strategy flawed, am I over assuming something, what would be a better strategy to whittle down the RIFF before age 71 to lessen the tax at 71?
    “Claim the Age Amount – This is a non-refundable tax credit available to Canadians age 65 and older. If your income for 2012 is under $33,884, you will be entitled to a tax credit claim of $6,720. Once your income exceeds this level, the amount of the age credit is clawed back until income reaches $78,684 (2012 figure), at which point the age amount is completely eliminated. The maximum federal tax savings from the age amount is equal to $1,008.”

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