Tax Managed Strategy 14
If you or your spouse¹ are 65 or older and do not have income from a RRIF or private pension plan, there is another alternative to take advantage of the pension income tax credit.
What is the pension income tax credit?
If you receive eligible pension income, you are entitled to deduct from your taxes payable, a federal tax credit equal to 15 per cent on the first $2,000 of pension income received. This means up to $300 in tax savings at the federal level, plus the provincial tax credits.
What types of income qualify?
Under age 652, only income received directly from a pension plan, income received from a Registered Retirement Income Fund (RRIF) as a result of the death of your spouse or an annuity as a result of the death of your spouse qualifies for the pension income tax credit. Income from RRIFs and annuities purchased from a Registered Retirement Savings Plan (RRSP) or a Deferred Profit Sharing Plan (DPSP) are only eligible for the credit if you are age 65 or older. Government plans such as Canada/ Quebec Pension Plan and Old Age Security do not qualify.
Generally, income from non-registered investments will also not qualify for the pension income credit. One potential exception is the income received from an annuity, including a Guaranteed Interest Account (GIA) provided by an insurance company. A GIA from a life insurance company may report the interest accrued as annuity income, which qualifies for the pension income tax credit beginning at age 65. The interest element of a non-registered annuity contract (prescribed & non-prescribed) is another exception for those age 65 or older.
John Natale, LL.B., BComm, EPC, CFP
Head of Tax, Retirement & Estate Planning Services.
John is the Head of the Tax, Retirement & Estate Planning Services, Wealth team at Manulife. He and his team provide case-level support on tax, retirement, and estate planning matters to advisors across the country.
Creating the income
The following chart shows the amount of non-registered savings required at various interest rates to generate $2,000 of interest (reported as annuity income) from an insurance company GIA to claim the pension income tax credit.
Annual interest rate (%)
Non-registered savings required ($)
For illustration purposes only
Income splitting where both spouses are age 65 or older*
If both you and your spouse are age 65 or older, you can invest double the amount of non-registered savings required in an insurance company GIA and make an election on your tax returns to each claim $2,000. Each of you will then be able to maximize the tax benefits of the $2,000 pension income amount and thereby double your tax credits.
Transferring unused credits to a spouse
If you are at least age 65 and have eligible pension income but are unable to use the full credit because you have reduced your taxes to zero, you can transfer the unused portion to your spouse. Only you as the original recipient of the eligible pension income must be age 65 or older. The spouse receiving the transferred credit can claim it at any age and does not have to have eligible pension income to take advantage of the transferred credit.
- Individuals age 65 or older
- Individuals who do not have other sources of eligible pension income
- Individuals with a spouse or common-law partner
- Determine the amount you need to invest to get $2,000 or $4,000 (if you have a spouse) of eligible pension income
- Contact your advisor to purchase an insurance company GIA
If you have clients who could benefit from this information, send them a copy of our easy-to-read piece which is available on manulifeim.ca.
*See Tax Managed Strategy #15 for more on pension income splitting
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada).
2 Quebec taxpayers under 65 can’t split pension income for provincial tax purposes as of January 1, 2014.
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Manulife Investments is a division of The Manufacturers Life Insurance Company. The Manufacturers Life Insurance Company is the issuer of Manulife segregated fund contracts and the Manulife Investments Guaranteed Interest Contract (GIC), and is the guarantor of any guarantee provisions therein. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife, Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.