How to qualify for the Pension Tax Credit

April 9, 2015

By Sheryl Smolkin

One of the perks of growing older is that there are some additional tax credits you can take advantage of when you file your income tax return. For example, the pension income tax credit is available to you if you are under age 65, but the amounts that qualify for this tax credit are different, depending on whether you are pre or post age 65.

The federal non-refundable tax credit applies to up to $2,000 of eligible pension income. That means you will get back a maximum of 15% or $300. Provincial tax savings are in addition and can bump up your total savings by an additional $350 to $700 depending on your province of residence.

Since you can transfer up to 50% of pension income to your spouse for tax purposes, a couple can each access this tax credit even if only one of the pair is receiving an eligible pension.

If you are younger than age 65, the only pension income that is eligible for the pension tax credit is either from a superannuation/pension plan, annuity payments from the Saskatchewan Pension Plan or annuity income you are receiving because of the death of your spouse or common-law partner. The income you receive in these circumstances might be in the form of Registered Retirement Income Fund (RRIF), Registered Retirement Plan (RRSP) or Deferred Profit Sharing Plan (DPSP) income, but only if you have been receiving this income since your spouse passed away. 

If you are 65 or older eligible income can be:

  • Income from a superannuation or pension plan.
  • RPP lifetime benefits.
  • RRIF income.
  •  DPSP income.
  • RRSP annuity income.
  • EBP benefits.
  • Regular annuities.
  • Elected split pension income.
  • Variable pension benefits.
  • Foreign pension income unless the foreign pension income is tax-free in Canada because of a tax treaty or income from a United States Individual Retirement Account.

For a more detailed list of pension and annuity income eligible for the pension tax credit, check out CRA’s Eligible Pension and Annuity Income (less than 65 years of age) and Eligible Pension and Annuity Income (65 years of age or older) charts.

The following income does not qualify as pension income for the pension income tax credit:

  • Old Age Security or Canada Pension Plan benefits
  • Quebec Pension Plan benefits
  • Death benefits
  • Retiring allowances
  • RRSP withdrawals other than annuity payments
  • Payments from salary deferral arrangements, retirement compensation arrangements, employee benefit plans, or employee trusts.

A recent decision of the Tax Court of Canada in Taylor v. The Queen clarified the meaning of “annuity income from an RRSP.” Sarah Taylor began withdrawing money from an RRSP when her husband died. According to the terms of the RRSP she had total discretion with respect to the timing and the amounts of the withdrawals.

To minimize withdrawal fees, she decided to take funds out only once a year. In 2011 she withdrew funds a second time to make an unusual tax payment. The two payments to her were $12,500 and $6,250. Her accountant argued that once she turned 65 in 2011 these amounts and other similar annual withdrawals should be treated as annuity payments as required by the definition of “pension income” for the purposes of the pension tax credit.

Madame Justice Judith Woods ruled that withdrawals made by Taylor from her RRSP were not annuity payments and did not qualify for the pension tax credit because her financial institution had no obligation to make payments on a recurring basis.

The lesson to be taken from this court case is to be certain you understand the rules with respect to RRIF withdrawals and the pension tax credit.  Some people who do not have eligible pension income at age 65 opt for an interim approach. If you move $12,000 into a RRIF and then withdraw $2,000 a year for six years, these withdrawals will allow you to qualify for the full pension tax credit.

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