Are You Taking Advantage of the Pension Income Tax Credit?

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.

Comments

  1. RDilworth

    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

      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

        “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?

        • Jim Yih

          It’s the rules. RRIF income does not qualify for the pension income tax credit until age 65.

          • Mary

            Jim, I find this confusing as well. I had a Defined Contribution Pension plan that I converted into an RLIF and a RRIF when I retired. The Pension Administrator initially told me the RLIF would qualify as pension income (and income splitting) as my plan was originally an RPP and federally regulated. When I received my T slips this year they were not T4A (pension income). When I questioned my pension administrator, reminding them of this earlier email discussion, they admitted this was an error on their part. I understand I will qualify for this credit when I hit 65. To confirm, are they correct? Thanks.

      • sorin

        Actually the amount of foreign pension income that is not deductible on line 256 is still eligible pension income under age 65.
        Please see the CRA table in the link below:

        http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/q4-eng.html

    • George Smith

      Jim Yih commented, in part, “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.”

      Please explain what you mean when you say a military pension is an exception. It seems to me that I should be able to claim this credit while receiving a military pension.

  2. TTH

    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

      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

        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. 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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  6. James

    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.

    • TL

      I don’t think there is a maximum withdrawal limit from a RRIF.

  7. perwez

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

  8. William Dunlop

    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.

  9. Dianne

    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.

  10. reg

    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

      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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  12. Edmund Lo

    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?

  13. Mathieu

    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

      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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  15. James L

    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.”

  16. Dave K.

    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.”

  17. Grant Lenski

    Great tax planning strategies involving the pension income credit but pension income depnds mainly on age.if a person is 65 years or older then only tax planning stategies can be included..

  18. Grant Lenski

    Pension income tax is only eligible to that who are 55 years or above having no benifits for the young pensioners. for above 65 pensoners it includes certain policies.also market based investors having no benifits from this.also the pension icome credit is also involed in this….

  19. Jeff Hazlett

    Hi Jim, I notice you mention about military pensions in a response to someone when discussing Pension Income Tax Credit. As your article indicates, a person can claim the tax credit of $2000 at age 55 from a pension plan. I will be drawing an annuity from a military pension plan when I turn 50 years old, am I eligible to claim the $2000 tax credit even though I’m not age 55?

    Thank you.

    Jeff

  20. norm duplissie

    If I transfer $12,000 from my RRSP to my RIFF and claim $2,000 tax free, can I also claim $2,000 on my Federal Tax Schedule I, line 314 or do I put nothing on that line?

  21. J Gerlach

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

    Income from a superannuation or pension plan”

    No, not quite. I an under 65 and have a company pension plan which pays a variable benefit. The plan administrator just issued a revised T4A for 2014, moving my pension income from box 16 to box 133 – meaning it is now NOT eligible for the $2000 pension deduction. Also, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/q4-eng.html states variable benefit payments are only eligible if “Result of death of spouse or common-law partner.”

    Why CRA is so picky about what manner of company pension one receives, I have no idea. Why are variable benefit pension plans not eligible for the pension deduction?

    • J Gerlach

      Is anyone actually monitoring this site? There seems to be no responses to questions. It does not help that none of the posts have dates on them, so one cannot see how stale this site is.

      Mr. Yih, are you there?

      • Alan

        Please bear in mind that Jim could spend his entire work week answering & clarifying questions, offering free advice etc. Good suggestion about adding dates to the posts.

  22. Pra Dar

    Can you clarify the conversion of LIRA to LRIF for a spouse less than 65 years age? What are the rules for withdrawing money from LRIF?

    • J Gerlach

      Pra Dar, I asked my questions above in early 2016. It is now nearly July 2016, and still no responses. Alas, this site appears to be dead.

  23. rudolph

    Hi Jim
    Confused and would love some help.
    I am 65 and have a wife 63..her income is about 20000.
    I am received d pension of 49000 which I have split with her each year.
    We have a son who needs our support so I continue to work fulltime with income of 140000 plus cpp of 10000 and 50% of the 49000 pension.
    We have 200000 in RRSP for my wife and Approx 80000 for myself.
    Question is whether to take 20 our of her pension plan making her income approx. 65 gross and deposit it directly into rrsp for myself…my gross is the 25 pension 10 pension and 140 earned.. Help please..our son’t situation will be life long. thank you

  24. mazhar memon

    Hi Jim

    This may have been discussed and answered already but i am asking again.

    I have 30000 in Alberta Lira and 36000 in federal lira. I am 65 and getting CPP already. I wanted to move as much funds from both liras as possible. I also wanted to claim pension credit, how can I do this? does 50 percent unlocking rule allow me to with draw all money into LIF or RIF , (in 2 steps of course, initially unlock 50 percent and as remaining amount will be less then 21000, that could be unlocked as well.)

  25. James L.

    Does a RDSP qualify for the pension income credit of $2000 when beginning to receive it at age 60?

  26. J Gerlach

    People, do not bother to post any questions to this site. None have been answered for some years now. (Nov. 2017)

  27. Mart

    “Depending on which province you live in, this equates to $440-$720 in actual tax savings each year.”

    How do you get these numbers?

    I am in BC so I get:

    Federal: 15% of 2,000 = 300
    Provincial: 5.06% of 1,000 = 50.60
    Total tax savings = $350.60

    Am I missing something?

    • Bob

      No, you’re not mossing something. This blog post is old as the hills and filled with faulty info and written poorly.
      there’s one comment above where someone is considering their 2012 tax year so that tells you how old. However, i popped up old tax packages and couldnt find a single year where the range of savings he spouts matches the Sch1 or 428.
      Like, his strategy of generating pension income earlier than you normally would have for the credit is good – but there’s a few things here way off. Ill clear them up since he would rather have incorrect info online in his name.
      “Basically, it enables you to deduct, from taxes payable, a tax credit equal to the lesser of your pension income or $2,000.00.”
      ‘basically’ this is wrong. you reduce your tax payable by the credit multiplied by the applicable NRTC rate (15% fed, varies by province), NOT by the amount of your pension or 2000. It also fails to mention that the amount of the credit isnt 2000 for provinces. MB right now for example is 1000 – like youre B.C. example which so easily demonstrates the lack of care put into this post.

      “Depending on which province you live in, this equates to $440-$720 in actual tax savings each year.”
      Im just gonna say ‘citation needed’ here because i checked rates and amounts going back a decade and couldn’t find a single year where the pension tax credit turned into “440-720″ on line 350. So really its a number pulled out of thin air without any backup. To debunk this number, just view SCH1 and your provinces form 428 and follow the math.

      ” This essentially allows you to get $2000 out of your RRSP tax-free for 6 years. ”
      ONLY if you’re in the lowest tax bracket. if you’re not, youre gonna pay tax on the income. it will not be tax free unless you are in the lowest bracket where the tax generated is equivalent to the NRTC.

      • Bob

        wont let me edit my post.
        line 350/6150*

  28. George

    Does Turbo Tax standard calculate this automatically if I selected income splitting?

    thanks

  29. 65 in 18

    2018-04-16 Yes Turbo Tax gives both credits for each of you when you split pension income.

  30. mark

    For GIS won’t the 2000 still be counted as income since there is no provision to offset this amount when declaring income for GIS? It will also be included in Net Income” which may further affect one’s eligibility for other income tested benefits.

    • Doug Runchey

      Hi Mark – You are correct. The $2,000 still counts as income for GIS purposes.

  31. Sarah De Diego

    You state “At age 65 transfer $12,000 to a RRIF and take $2000 out per year from age 65 to 71(inclusive).”

    You then go on to say “This essentially allows you to get $2000 out of your RRSP tax-free for 6 years.”

    According to my calculations, age 65 to 71 INCLUSIVE is 7 years and not 6. Can you please advise as to whether it’s 6 or 7 years.

    Thanks for the article.

    Regards, Sarah.

  32. Brad Forden

    When younger than 65 an annuity from the Saskatchewan Pension Plan (SPP) is a valid source. It’s one of the only valid sources.

    P.S. Despite the name the SPP is available to ALL Canadians. They also offer substantial transfer in values to catchup. 🙂

  33. elsie

    I get a permanent partial disability pension from wsib (for an amputation) and qualify for the disability tax credit. Any use trying to claim the pension credit against this? Or due I have too many perks already?

  34. Paul

    Great article but confusing to me. I have above average amount in RRSP’s, I am 60, should I set up RIF and withdraw through that. I plan to start large withdraws now, defer CPP and try to get our total down before OAS is not an option.
    I would give you more information privately.

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