Get the (pension) credit you deserve

Retirees in Canada benefit from a number of tax breaks, one of which is the pension income tax credit. Eligible taxpayers can claim up to $2,000 of qualifying income, which can include employer pensions, RRIF withdrawals and annuity income.

The federal credit is worth 15%, and the provinces have their own credits on smaller amounts. Ontario, for example, offers 5.05% on a maximum of $1,324. When you combine the two credits, it means an Ontario resident claiming the full $2,000 would receive a tax refund of $367. An Albertan would receive an even more generous $436.

Most financial planners and their clients probably don’t think much about the pension income amount before age 65, and with good reason. If you’re between 55 and 65 years of age, you can normally claim the credit only if the income is from a registered pension plan, or annuity income resulting from the death of a spouse. That rules out most Canadians who do not have a pension plan with their employer.

A creative solution

One of my blog readers—I’ll call him Peter—recently shared a creative strategy he’s considering in order to take advantage of the credit at age 55, even though neither he nor his spouse have employer pensions.

Peter is considering opening an account with the Saskatchewan Pension Plan. If you’re not familiar with the SPP, it’s open to all Canadians, not just residents of that prairie province. You can transfer up to $10,000 of existing RRSP assets into the plan every year, and you can make additional contributions of up to $2,500 annually. When you retire, your accumulated funds can be used to purchase an annuity that qualifies for the pension income tax credit.

The key point here is that you annuitize the money in an SPP account as early as age 55. Peter says both he and his wife are planning to transfer the annual maximum of $10,000 from their RRSPs until they have enough to purchase a small annuity that pays at least $2,000 a year by the time they’re 55. That will allow them to take advantage of the pension income tax credit a full 10 years before they’re eligible to convert their remaining RRSP assets to an RRIF.

Both Peter and his wife earn high incomes, so their RRSP contributions netted them the maximum tax refund. But Peter estimates that after the pension income tax credit, he’ll effectively pay just 16% on those $2,000 withdrawals after age 55, which he’ll roll into the couple’s Tax-Free Savings Accounts to shelter them from any further taxes.

This strategy is not without its downsides: SPP members have no control over how their money is invested, and they are not able to withdraw the funds in an emergency as they would be with an RRSP. But for investors in the right circumstances, it’s an opportunity to take full advantage of a significant tax credit.