Here’s something to consider as you prepare your annual tax return. The Federal Pension Income Credit is a non-refundable tax credit which you are allowed if you receive pension income. Federally, you are allowed a credit of up to $2,000 each year, while provincially the amount varies. Note that a similar credit is available in Québec for up to $2,090 of pension income. However, some particularities apply to the Québec credit.

The federal credit is calculated on the lowest tax rate of 15 per cent; thus a $2,000 credit produces a federal tax savings of $300. This credit is not indexed and is dependent on your eligible pension income. If the eligible pension income received is under $2,000, then the credit is based on the actual amount received. In addition, if you have pension income that qualifies for the federal credit, you can “split” up to 50 percent of this income with your spouse or common-law partner, under the “pension income-splitting” provisions.

Income eligible for the federal pension income credit
Generally you have to be 65 years of age or older to be entitled to the credit for an amount equal to the lesser of $2,000 and the pension income.

“Pension income” includes:

1. Life annuity or periodic payments out of or under a superannuation or pension plan (includes taxable foreign pensions)

2. Annuity payments under a registered retirement savings plan (RRSP) including a locked-in retirement account (LIRA) or locked-in RRSP

3. Payments out of or under a registered retirement income fund (RRIF), including a life income fund (LIF), locked-in retirement income fund (LRIF) and a prescribed retirement income fund (PRIF)

4. Annuity payments under a deferred profit sharing plan (DPSP)

5. Interest component of the payments under an annuity contract purchased with non-registered funds

The Federal Government has proposed that periodic payments under a money purchase provision of a registered pension plan will also be eligible for the federal credit where the recipient is at least age 65. However, this will not be effective until it is proclaimed into law.

If you are under age 65, you are entitled to the federal credit if you have “qualified pension income”, which means income from the following sources:

1. Life annuity payments or periodic payments from superannuation or pension plans

2. Annuity payments under a RRSP, RRIF or DPSP arising by virtue of the death of your spouse

3. Income portion of any annuity payment arising by virtue of the death of your spouse or common-law partner under the law

Unlike the federal pension income credit, there is no age restriction in Québec, so that the Québec amount is available to any individual who receives an “eligible pension income”. This credit is reduced by 15 per cent when the family’s net income exceeds a certain threshold.

Income that is not eligible for the federal and Québec credit

The following payments are not included as pension income:

1. Old Age Security (OAS) benefits and Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments

2. Death benefits

3. Retirement Compensation Arrangements and Salary Deferral Arrangement Payments

4. Unfunded Supplementary Employee Retirement Plan benefits

Payments from a LIF, LRIF or PRIF are not “qualified pension income” and will not qualify for the credit until the owner of the LIF, LRIF, or PRIF reaches age 65. (However, these payments do qualify as pension income in Québec for an individual who is under 65.)

Planning opportunities

Some planning opportunities are:

1. If you are under 65 and you are a recipient of a RRIF by virtue of the death of your spouse, you may want to increase your annual withdrawals to $2,000, as they will be fully eligible for the federal credit.

2. If you are over 65, you can create pension income by converting part of your RRSP plan into a RRIF or life annuity. Note that there is no such age restriction in Québec.

3. You may want to make spousal RRSP contributions so your spouse has qualifying income when they reach the age of 65.

However, income eligible for the pension income credit is not necessarily “tax-free”. If your income exceeds the lowest federal and Québec tax brackets, then you will still owe some taxes with respect to the pension income received. In addition, the pension income will be added to your net income and this may impact your taxable income.

Key Points

• In general, you must be 65 years or older to qualify for the tax credit.
• However, if you are under the age of 65, you are entitled if you have qualified pension income.
• In Québec, there is no age restriction, so the amount is available to anyone who receives an eligible pension income.

If you have any questions about the Federal Pension Income Credit, I would be happy to help!

Christina Gilbert
Investors Group Financial Services Inc.
101 – 4400 Chatterton way, Victoria BC V8X 5J2
Phone (250) 727-9191 ext.501
Fax (250) 727-3222
Email Christina

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