Pension Tax Credit

Taking Advantage of the Pension Income Tax Credit

June 2016

As many folks can attest to it is not always what you earn that matters it is what you keep. I believe this is definitely true for retirees or those planning to retire soon. Being tax efficient with our savings can make a big difference in the amount of income we receive in retirement.There is a long list of tax credits and that can be helpful, I will highlight the pension income tax credit, as I believe it applies to nearly every retiree. 

If you are 55 or older you can qualify for the pension income tax credit. The credit allows you to deduct the tax payable on up to$2,000 of pension income. Unfortunately it is a non-refundable credit and it cannot be carried forward, so you are in a use it or lose it situation. The federal tax credit rate is 15% and in Manitoba the provincial rate is 10.8%. Combined that is a 25.8% tax savings. So if you are in the lowest tax bracket, the credit allows you to take $2,000 of pension income, tax free. If you are in a higher tax bracket, while you won’t receive the $2,000 of pension income tax free, the credit will significantly reduce your tax burden.

In order to claim the credit you need qualifying pension income. Unfortunately payments from OAS or CPP do not qualify. If you are over the age of 55, but under 65 there is a small list of qualifying pension income.Income from a superannuation or defined benefit pension plan qualifies, as well annuity income arising from the death of your spouse under a RRSP or RRIF qualifies. Once you are over the age of 65 the list of qualifying pension income expands. It includes the items mentioned above, as well as interest from a prescribed non-registered annuity, annuity income out of a RRSP or Deferred Profit Sharing Plan and income from a RRIF. 

If you have a defined benefit pension plan through your employer, and are collecting your pension and over the age of 55, you can claim the tax credit. If your spouse does not have pension income, you can split your pension with your spouse and both of you can claim the $2,000 credit.

If you do not have a defined benefit plan through your employer you will likely have to wait until 65 to start claiming the credit. However after 65 you can convert a portion of your RRSP to a RRIF, payments from a RRIF qualify as pension income and allow you to claim the tax credit. If you are drawing on your RRSP to help fund your retirement, the tax credit can help alleviate some of your tax burden. If you are not drawing on your RRSP, there is an opportunity to take $2,000 out every year with little to no tax. If your spouse does not have pension income and is over the age of 65, both you can implement this strategy. The pension income tax credit can be a tax efficient way to get money out of your RRSP.

If you are unsure if you are currently claiming the pension income tax credit you can check line 314 of your tax return or simply ask your accountant. There are strategies in addition to the ones mentioned above that can take advantage of the tax credit. I encourage folks to review their financial plan and to make full use of the pension income tax credit.

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.