The Pension Income Tax Credit Explained

The pension income tax credit (PITC) is a non-refundable tax credit that can be claimed on eligible pension income.

The tax credit allows seniors to save on taxes payable by giving them an annual tax credit on their first $2,000 of pension income. Depending on your marginal tax rate, $2,000 of your pension income becomes tax-free or you effectively pay a lower tax rate (federal and provincial) on the amount.

Pension income that’s eligible for the pension income tax credit is dependent on your age – whether you are 65 years (or older) or under 65 years of age.

Income Eligible for the Pension Income Tax Credit

Individuals aged 65 or older

  • Income from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF), and Locked-in Retirement Income Fund (LRIF)
  • Life annuity payments from a superannuation or pension plan
  • Income from certain foreign pensions
  • Annuity payments from a Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plan (DPSP)
  • Income from regular annuities
  • Income as a result of an election to split pension income.

Individuals under 65 years

  • Life annuity payments from a superannuation or pension plan
  • RRIF payments received as a result of the death of a spouse or common-law partner
  • Annuity payments received from an RRSP or DPSP as a result of the death of a spouse or common-law partner
  • Income from certain foreign pensions
  • Income as a result of an election to split pension income.

Income Not Eligible for the Pension Income tax Credit

Retirement income which does not qualify for the pension amount include:

Potential Tax Savings Using the Pension Income Tax Credit

The maximum tax savings available through the PITC will depend on your source of pension income, tax rate, and provincial pension income amounts.

For an individual in the lowest marginal tax bracket, no tax is payable on the first $2,000 of eligible pension income – equivalent to $300 in tax savings ($2,000 x 15%). Add in tax savings from the provincial pension amount (between 4% and 16%) and total tax savings are anywhere from $380 to $656 for 2017.

For an individual in a higher marginal tax bracket, some taxes will still be payable after deducting the savings from the tax credit. However, the overall tax burden is lower.

Also Read:

Tax Strategies Using the Pension Tax Credit

  1. Transfer your RRSP to an RRIF: At age 71, you’re required to convert your RRSP to an RRIF or purchase an annuity. If you’re 65 years old or older (less than 71) and do not have other eligible pension income, you can take advantage of the pension income tax credit by electing to transfer some of your RRSP assets to an RRIF. For example, if you’re 65 years old, consider transferring $12,000 to an RRIF and draw out $2,000 annually for the next 6 years tax-free (until you turn 71). If you don’t need the funds, you can deposit the $2,000 received into a TFSA where it continues to grow tax-free.
  2. Income Splitting: You can split eligible pension income with your spouse or common-law partner, thus enabling both of you to claim the tax credit. This makes sense if one spouse doesn’t have an income that is eligible for the pension tax credit. Form T1032 is required for pension income splitting.

Have a question about the pension income tax credit? Leave it in the comments.

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. His writing has been featured or quoted in the Toronto Star, The Globe and Mail, MSN Money, Financial Post, Winnipeg Free Press, CPA Canada, Credit Canada, Wealthsimple, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO and monitors his credit score for free using Borrowell.

7 thoughts on “The Pension Income Tax Credit Explained”

  1. Hi Enoch, I was starting a draft about converting RRSP to a RRIF; if I do ever write it I will put a link to your article. Lots of good info here. Cheers Steve

    Reply
  2. Is there an age limit if you’re under 65 to claim this credit? Some sites say you have to be 55 or older but the information on CRA implies no such thing that I can find. Tx

    Reply
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