How the Pension Income Tax Credit can benefit you

You work hard for your money. You want to keep every penny of it that you can, especially when you’re approaching your retirement years!

One of the ways you can do this is through the Pension Income Tax Credit.  Even if you’re still actively working, there are several ways you can take advantage of this tax credit.

What is the Pension Income Tax Credit?

The Pension Income Tax Credit enables anyone 55 and up to save on their taxes. Anyone who qualifies for it can apply for a tax credit on their first $2,000 pension income.

To qualify for the Pension Income Tax Credit, you must be:

• 55 or older (however, you must be 65 or older to have a broader range of income qualify)

• Earning income that qualifies as pension income

The Pension Income Tax credit is non-refundable, and you cannot carry it over.

What does the government consider eligible pension income?

That depends on your age.

If you are over 55 but below 65, then only the following count as pension income:

• Annuity income you receive due to the death of your spouse – for example, from an RRSP, RRIF, or a DPSP.

• Income from a superannuation, Canadian pension plan, and certain foreign pensions

• Income received from splitting pension income

If you are 65 or over, then all of the following count as pension income:

• Income from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) or Locked-in Retirement Fund

• Income from a superannuation or pension fund

• Annuity income from an RRSP or a Deferred Profit-Sharing Plan (DPSP)

• Income received from splitting pension income

• Interest from regular annuities

• Income from foreign pensions

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

How can I take advantage of the tax credit?

Even if you are still actively working at 65, it makes sense to take advantage of the Pension Income Tax Credit.

Here are four ways you can do it if you are not part of a pension or superannuation plan.

• Open a RRIF. Put $12,000 into it from your RRSP. You can then take out $2000 each year tax-free from it.

• Transfer money from a LIRA to a LIF. As with the RRIF, you can withdraw up to $2000 each year tax-free.

• Purchase a GIC through a life insurance company. To claim the full credit, you’ll have to invest enough that you would earn $2,000 in interest each year.

• Transfer the credit to a spouse if you cannot use it.

The Takeaway

Even if you are still working at 65, it makes sense to take advantage of the Pension Tax Income Credit. There are a variety of ways to bring extra income into your life tax-free! Contact us or your tax advisor for more information about how to get started.