Eligibity for Pension Benefits Tax Credit

The federal government and all provinces allow a tax credit based on pension income received. The federal tax credit is 15 per cent of the lesser of $2,000 and the eligible pension income of the individual, while provincial percentages and limits vary.

What qualifies as “pension income,” however, is not as clear as one might think, and this question was the basis of a case heard at the Tax Court of Canada in 2014. Mrs. Taylor’s husband passed away in 2008, and she was the beneficiary of his RRSP. Mrs. Taylor withdrew some of the RRSP funds in 2011, which was the year she turned 65, and claimed the pension credit on her tax return for that year. The Canada Revenue Agency denied her claim, and she appealed the tax assessment. The Tax Court dismissed the appeal, ruling that Mrs. Taylor’s RRSP income was not pension income eligible for the credit — i.e., it did not qualify as an “annuity payment” under the RRSP because there was no obligation to make withdrawals on any recurring basis.

The definition of eligible pension income differs for those who have attained the age of 65 before the end of the tax year and those younger than 65.

For those 65 and older, pension income eligible for the pension credit is defined to include the following:

1. A life annuity payment from a registered pension plan
2. An annuity payment under a registered retirement savings plan
3. A payment under a registered retirement income fund
4. A payment from a pooled registered pension plan
5. An annuity or installment payment from a deferred profit sharing plan
6. The taxable portion of a non-registered annuity payment
7. Income reported from a non-exempt life insurance policy

For those who have not yet turned 65, pension income eligible for the pension credit is more limited and is defined to include the following:

1. A life annuity payment from a registered pension plan
2. Any of points two to seven above received as a consequence of the death of a spouse or common-law partner

An individual in receipt of split pension income can qualify for the pension credit if the situation fits one of the definitions outlined above. This can be a double advantage for seniors who opt to split pension income.

The pension credit means tax savings for retirees, and it is important that individuals understand the rules to maximize their financial resources.

E.O. & E.

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Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.