My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, June 17, 2019

Making the most of your pension income tax credit

Say a word for the pension income tax credit. It may pack a comparatively smaller financial punch, but ignore it at your peril. As part of a comprehensive wealth planning strategy, it plays its own modest part in helping Canadians make the most of their retirement savings.

I’ve asked my colleague Jeffrey Smith to break down the ins and outs of this sometimes underappreciated tax credit. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
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What is the pension income tax credit?


The pension income tax credit (PITC) is a tax credit that you can apply to the first $2,000 of eligible pension income, which would result in a tax savings of 15% of eligible income. The maximum savings federally is $300 ($2,000 x 15%), plus a provincial credit depending on the province you live in.

The PITC is non-refundable, so you cannot carry it forward in subsequent years. You use it or lose it.

That may lead to your next question: what is eligible pension income?

Eligible pension income


There are different sources of income that are eligible to claim the PITC. What’s interesting is that age may factor into eligibility. If you’re under 65, the PITC is available for the following pension income from as early as age 55:
  • A life annuity payment from a superannuation
  • Payment from a specified pension plan
  • Annuity payment arising from the death of a spouse under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Deferred Profit Sharing Plan (DPSP).
If the above income is elected split pension income, your spouse or common law partner will qualify for the PITC as well.

If you do not have the income sources noted above, when you reach age 65 there are many new types of income that qualify for the pension amount. These types of income are:
  • Payment from an RRIF
  • Interest from a prescribed non-registered annuity
  • Payment from a foreign pension
  • Interest from a non-registered GIC offered by a life insurance company.

Non-eligible pension income


Clients are sometimes surprised by the list of benefits that don’t qualify for the PITC – especially when it comes to government benefits. Income from the following sources generally does not qualify for the pension amount:
  • Old Age Security
  • Canada Pension Plan
  • Death benefits
  • Quebec Pension Plan
  • Retirement compensation agreements
  • Foreign-source pension income that is tax free in Canada
  • Salary deferral arrangements
  • Income from a U.S. Individual Retirement Account (IRA)

Potential tax savings


Now that we have identified what does and what does not qualify for the PITC, below is an example of the tax savings on the federal level for each marginal tax rate. For the purposes of this discussion, we have ignored federal surtaxes that apply on personal rates.

Federal tax rate
15%
22%
26%
29%
Eligible pension income
$   2,000
$   2,000
$   2,000
$ 2,000
Federal tax
        300
        440
        520
      580
Pension tax credit
    -   300
    -   300
    -   300
  -   300
Net federal taxes payable
$          0
$      140
$      220
$    280

Each province has its own respective tax rates and pension tax credit limits, so the total tax savings will vary by province.

Tax planning opportunities


If you have income that is eligible for the PITC, you should use it. However, if you are 65 or older and do not have eligible income, you can still take action to use this credit for you and your family. Here are three mechanisms on which we advise clients:
  • Transfer $14,000 of an RRSP to an RRIF. This will allow you to draw $2,000 per year and use the PITC from 65 to 71 when your RRSP converts to an RRIF naturally. This is an opportunity whether you need the income or not.
  • Transfer any unused PITC to a spouse who earns pension income greater than $2,000 and has not used the pension credit themselves.
  • Transfer a Locked-in Retirement Account to a Life Income Fund and annuitize.
These recommendations should be reviewed on a case-by-case basis to ensure that any pros and cons have been outlined before making a decision. Reach out to your advisor to assist you with structuring your assets in the most tax-efficient manner.

Jeffrey Smith - CPA, CA, CFP - is a Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

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6 comments:

  1. I have an RRSP, over 65 and still working. Is there any disadvantage for the remaining RRSP after I use $14,000 for a RRIF? Can I set a RRIF up this year (2019) and take advantage of the credit? Thanks.

    ReplyDelete
  2. Hi Ritchie,

    Yes, if you converted $14,000 of your RRSP to a RRIF this year and withdrew $2,000 of it before the end of 2019, that would qualify for the PITC.

    If you were to convert your whole RRSP (unsure of the balance)to a RRIF, the risk would be the minimum withdrawal required each year, which is based on a prescribed table, could create taxable income you don't need and be taxed at a higher marginal rate than you may pay in years when you are not working.

    The goal for utilizing the PITC from 65 to 71 is to create $2,000 of qualifying income, which is why converting the $14,000 would meet that goal.

    ReplyDelete
  3. the $2000 pension amt is a tax credit, not a deduction. So it has nothing to do with your marginal tax rate. Everyone gets the same refund amt of $2000 x 15% = $300, no matter what your income level is.

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    Replies
    1. Hi Martin

      Jeff showed the pension amount as a credit in his example, reflecting a $300 credit in all situations. I think he was trying to show the credit stays constant no matter the marginal rate,

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    2. Thanks Jeffrey for such easily read clear information.
      I never knew why mother in law's adviser had her purchase a GIC from an insurance company. Now I know.

      Interest from a non-registered GIC offered by a life insurance company.

      Thanks to Mark to bring in an expert to inform us all on how to save on taxes. Love your blog.

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