A hidden $2,000 gem…
the Annual Pension Income Tax Credit.
The pension income amount allows a taxpayer to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income.
There are also provincial pension income amounts. By claiming it you will receive the first $2,000 of pension income on a tax-free basis, but only if you are in the lowest tax bracket (since the tax credit rate is capped at 15%). If you are in a higher bracket you will pay tax on the pension income, but at a reduced rate.
Income-splitting rules allow taxpayers to split up to 50% of eligible pension income with a spouse or common-law partner. The important issue is determining what type of pension income qualifies.
Age is an important factor. Those over 65 have easier access to the pension income amount since more sources of income qualify. If you report amounts on lines 115, 116 or 129 of the federal tax returns, you should be eligible for the pension income amount.
Here’s what qualifies if you are over 65:
- Life annuity payments from a superannuation or pension plan. This includes income from life income funds (LIFs) and locked-in retirement income funds (LRIFs)
- RRIF payments (any portion that’s transferred to an RRSP, another RRIF, or used to purchase an annuity does not qualify for the pension income amount)
- RRIF payments received as a result 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)
If you are under the age 65:
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:
1) Life annuity payments from a superannuation or pension plan.
Regardless of your age, he or she will qualify for the pension income amount if they are receiving annuity payments from an employer pension plan. But it’s important to note that if you commute a pension to a locked-in retirement plan, the income from these plans (e.g. LIFs, LRIFs) will not qualify for the pension income amount until you reach age 65.
2) Payments from a RRIF, or annuity payments from an RRSP, DPSP or PRPP received because of the death of a spouse.
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.
It’s also important to know what does not qualify 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)
Your Rothenberg Investment Advisor is knowledgeable and will be pleased to assist you so you can benefit from the Pension Income Tax Credit each year.