The eligibility for the credit is based on your age, sources of income and tax payable
The article “Do I Qualify For The Pension Tax Credit?” was originally published on MoneySense on May 31, 2016.
Q: This is a question about the $2,000 pension income tax credit.
If I transfer RRSP funds into a RRIF before age 71, may I take advantage of the credit if I am a member of a DB pension plan although I am not drawing a pension as yet? In other words, is the PITC based on being a member of a DBPP or on the income you receive from it?
A: The pension income amount is a non-refundable tax credit that can be claimed on your tax return, Maria. It doesn’t apply specifically to defined benefit pension plan members, so it’s not your pension membership that makes you eligible. Eligibility is based on your age, sources of income and tax payable.
Defined benefit pension income is definitely eligible income for the credit, beginning at age 55. Foreign pensions qualify as well, but only to the extent that they are taxable in Canada. Some foreign source pension income is specifically tax-free in Canada due to tax treaties that may entitle you to claim a deduction of that income.
In your case, Maria, since you haven’t begun your defined benefit pension yet, you may qualify for the credit by drawing from your Registered Retirement Savings Plan (RRSP) account. However, you must convert your RRSP or a portion thereof to a Registered Retirement Income Fund (RRIF) for withdrawals after the age of 65 to qualify for the pension income amount.
Canada Pension Plan (CPP) and Old Age Security (OAS) pension benefits are specifically excluded from pension income amount eligibility.
Incidentally, eligible pension income that is elected split pension income from your spouse or common law partner will qualify you for the pension income amount. Likewise, your spouse or common law partner can claim the pension income amount on eligible pension income split from you to them. Pension income splitting was introduced in 2007 to allow you to move up to 50% of your eligible pension income to your spouse or common law partner’s tax return if you received pension income eligible for the pension income amount.
You need to have tax payable to benefit from the pension income amount, because it is a “non-refundable” tax credit. So if your income is very low and you have no tax payable, there is no benefit from the credit.
The pension income amount is $2,000 at the federal level and $1,000 to $2,000 at the provincial level, depending on your province of residence. That doesn’t mean that’s what the tax savings are, because only a percentage of the credit turns into actual tax reduction. The potential tax savings generally range from $370 to $442 depending on your province of residence.
In your case, Maria, you may want to consider creating eligible pension income for the pension income amount by converting a portion of your RRSP to a RRIF if you are over the age of 65. If you take withdrawals of $2,000 per year, you will qualify for the maximum pension income amount. If you withdraw $4,000 per year, you can transfer $2,000 to your spouse or common-law partner on your tax return, if applicable, to ensure you both can claim the maximum credit.
That said, you need to look at your current income and projected income in retirement. If you are in the top tax bracket in your province of residence, you may be paying as much as 54% tax. The percentage benefit of the pension income amount ranges from 19% to 26% depending on your province of residence. So your net tax on forcing a RRIF withdrawal could still be significant. This needs to be compared with your likely tax rate in retirement to make sure your forced income is not actually a counter intuitive strategy.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.