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 a 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 do 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, overall tax burden is lower.

Tax Strategies Using the Pension Tax Credit

  1. Transfer your RRSP to a 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 is doesn’t have income that is eligible for the pension tax credit. Form T1032 is required for pension income splitting.

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