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.
___________
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?
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:
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:
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:
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.
Each province has its own respective tax rates and pension tax credit limits, so the total tax savings will vary by province.
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:
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.
Please note the blog posts are time sensitive and subject to changes in legislation.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
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.
___________
What is the pension income tax credit?
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 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
- 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.
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.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
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.
ReplyDeleteHi Ritchie,
ReplyDeleteYes, 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.
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.
ReplyDeleteHi Martin
DeleteJeff 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,
Thanks Jeffrey for such easily read clear information.
DeleteI 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.
THX
DeleteAt age 58 I'll have income from a DB pension plan, and I'll have plenty of income to benefit fully from the pension income tax credit. As my wife will have no income, I'll be splitting my pension with her on the tax return(s). Will this assigned pension income be eligible for the pension income tax credit? Thanks
ReplyDeletesee this discussion of the pension credit application and eligibility
ReplyDeletehttps://www.advisor.ca/columnists_/lea-koiv/pension-splitting-special-rules-and-planning-opportunities/