Pension income credit can vary
If you receive pension income, you’re likely aware of a $2,000 federal pension income credit that, when combined with its corresponding provincial/territorial credit, can be worth anywhere from $350 (B.C.) to nearly $700 (Quebec), depending on your province or territory of residence.
Pension i ncome typically includes annuity-type pension payments from a pension plan and, once you reach age 65, can also include RRIF or life income fund (LIF) withdrawals. It does not include RRSP withdrawals. This last point was the subject of a recent Tax Court of Canada decision.
The case involved a taxpayer who withdrew funds from her RRSP in 2011 and argued in court that her withdrawals should qualify for the pension credit. The taxpayer testified she began withdrawing funds from her RRSP in 2008, when her spouse died. In order to minimize withdrawal fees, she decided to withdraw funds only once a year, with the exception of 2011, when she withdrew funds a second time in order to make an “unusual” tax payment.
The issue before the court was whether her withdrawals were “annuity payments” as required by the definition of “pension income” in the Income Tax Act. Included in the Act’s definition of “annuity ”is“an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract... or otherwise.”
The taxpayer’s accountant argued that the withdrawals should qualify for the pension credit starting in 2011, when his client turned 65, since the payments are payable on a periodic basis “because they are payable on a recurring basis at (her) … direction.” He argued that there should be a “generous interpretation” of the term “annuity,” the definition in the Act being “broad enough to apply where the RRSP administrator is obligated by the holder to make recurring payments.”
The judge concluded that the withdrawals made by the taxpayer from her RRSP were not annuity payments and therefore not eligible for the pension credit because they are not obligated to be made on a recurring basis, especially since, under the terms of her RRSP, it was possible for the taxpayer to require that the entire RRSP value be paid out in one lump sum. Had Parliament intended that “periodic RRSP withdrawals made at the discretion of the holder qualify for the pension credit, it would have said so directly.”
A simple solution would be to consider converting part of your RRSP to either a registered annuity or RRIF at age 65 to ensure you receive at least $2,000 a year of pension income to take advantage of this credit.