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How the Age and Pension Amount Tax Credit Works





As I mentioned in the Old Age Security (OAS) clawback article, a reader requested an explanation of the various seniors benefits in Canada.  While I’ve explained some income sources (oas and gis), lets get into a couple popular tax credits.

Age Amount Tax Credit

This tax credit, as the name suggest, is for seniors age 65 and older within an income threshold.  Like Old Age Security and Guaranteed Income Supplement, the Age Amount Tax Credit is reduced as income increases past the pre-determined limit.

More specifically,

  • In 2010, a non-refundable tax credit of $6,446 (worth about $967 federally)  is offered to seniors who make $32,506 or less.
  • The Age Amount Tax Credit is reduced by 15% for every dollar above $32,506 until it is completely eliminated when income reaches $75,480.
  • This tax credit is also matched by a provincial portion which varies.  For a complete table of this tax credit calculated by province, standard life has a useful table to reference.

For example, a 65 year old senior in Ontario making $32,000 per year, can reduce his/her tax owing by $1,187 (provincial and federal combined). Or what if the a senior makes $50,000 income for the year?  The age amount tax credit (federal) would be clawed back by ($50,000 – $32,506=$17,494 * 15%)  $2624.10.  This results in the tax credit of $6446-2624.10 = $3822 (worth about $573.30 federally).

Another thing to note is that the dividend gross up (45%) from stocks held in a non-registered account is counted as income when determining the age amount (similar to the OAS clawback).  Here is a comprehensive article on how clawbacks work in the big picture.

Pension Income Amount Tax Credit

This tax credit is a bit more simple than the age amount.  The pension amount tax credit offers up to a $2,000 non-refundable tax credit (worth about $300)  to seniors who collect private pension (RRIF counts) or annuity payments.  Qualifying pensions do not include Canada Pension Plan (CPP), Old Age Security (OAS), or Guaranteed Income Supplement (GIS).

For example, if a retiree is collecting benefits of $1,500 per year from a defined benefit pension, then he/she can claim $1500 under the pension income amount tax credit and be awarded a $225 (1500 * 15%) reduction in taxes owing.  If he/she somehow increases his pension income (RRIF withdrawals etc) to greater than $2,000 per year, then he/she can claim the full amount.

Pension Splitting

One advantage of getting a private pension is the ability to split the pension with your spouse.  Not only will that help reduce tax, the spouse would be eligible for the pension tax credit (according to George Vandebeek, tax partner at BDO Canada).

Final Thoughts

A short article of a couple of the more common tax credits available to seniors.  There may be more articles about retirement and retirement planning coming up as I have family members entering the retirement scene.  Are there any other tax credits for seniors that I should be looking into?





17 Comments, Comment or Ping

  1. 1. Andrew F

    Do you know where I can find that table of effective marginal tax rates for seniors by province? I thought I saw it on taxtips.ca but I can’t find it again. It’s pretty useful, because the tax picture changes drastically with all these clawbacks and credits.

  2. Andrew, we have an article here with a table indicating the effective rates when accounting for seniors clawbacks.

  3. 3. BOB

    Pension Income Amount Tax Credit..

    it’s nt limited to Seniors..that’s a misconception…

  4. 4. steve

    Thanks for a quick concise explanation. Retirement and Tax issues can become all muddled up quickly. Appreciate the clarity and gives me some ideas.

  5. 5. Capndan

    I didn’t have any pension income when I retired that qualified for the Pension Income deduction, so I took some money (about $15,000) from my RRSP and converted it to a RIF. I take out $2,000 per year from the RIF and offset the tax with the Pension Income deduction.

    It is a way to get some of your money out of the RRSP tax free, before you have to convert all of your RRSP to a RIF at age 71 and have to pull out the schedule percentages each year.

    As I didn’t need the money for living expences, I am now contributing it to my TFSA and it earns income tax free. Prior to the TFSA I used a Canadian dollar account to invest it.

  6. A couple folks close to me in my family tree (naturally so) are going to be entering into retirement soon. A couple of them have a rather big reliance on these pension plans.

    It’s pretty tricky to find information about it in layman’s terms. But this does add a few pieces to this particular jigsaw puzzle.

  7. 7. Robert L.

    The reply by capndan May 4/2010 regarding setting up a RIF to pay out an annual amount equal to the pension income deduction is a strategy I was planning to do since I will be turning 60 in January. The main issue to me is the low interest rate environment affecting the amount that would have to be dedicated to the RIF and not be available for greater gains (one hopes) in the general investment arena. What is the lowest cost avenue to accomplish the objective?

  8. 8. Robert L.

    What is the minimum age to qualify for the pension income deduction? I will be 60 soon and plan to set up a RRIF or LRIF to pay $2K annually for me then claim the deduction. I also wish to use my RRSP or LRSP funds to set up a spousal RRIF for $2K annually (she is 57). Is this do-able?

  9. 9. Robert L.

    Further to earlier posts, apparently you may not contribute to a tax-deferred pension plan if you hold a RIF. If so, the idea to set up a RIF just to obtain an amount equal to the pension income deduction is only sensible for someone sure that they are not going to be employed again by an employer offering a company pension plan! Anybody know what options exist if such a situation were to occur? Can the RIF be ended and funds transferred back into the RRSP from whence the original funds came and the person become capable of participating in the company pension plan??????

  10. 10. math person

    This article and the one referred to in comment 2 are both misleading. The age amount is NOT a non-refundable tax credit of 6,446, it is an amount of 6,446 that leads to a non-refundable tax credit of $967 (.15 *6446).

    With income over the threshhold, the AGE AMOUNT is reduced by .15 for each $1 of “excess income” and the TAX CREDIT is reduced by .0225 (=.15*.15) for each dollar of “excess income”. The “surtax” on income due to loss of the age credit is around 3% when provincial taxes are considered, NOT the 15% Million Dollar Journey claims it is.

  11. 11. Kam

    My bank told me that the $ 2000 pension can only be claimed from aged 65 to 70 when withdraw money from RIF. Once you turn 71 and up the pension credit will be eliminated . Is it true?

  12. 12. Ed Rempel

    Hi Bob,

    For the most part, the pension credit is for seniors only. Before age 65, you can only claim it if you have actual pension income, but income from your RRIF and LIF only counts after age 65.

    Ed

  13. 13. Ed Rempel

    Hi Capndan,

    Good strategy. That makes a lot of sense.

    Ed

  14. 14. Ed Rempel

    Hi Robert,

    Converting your RRSP to a RRIF and taking out $2,000/year to use your pension credit, as Capndan did, makes sense, but you have to wait until age 65.

    You can invest your RRIF in exactly the same investments you have in your RRSP. The investment rules are the same. This may or may not make sense, depending on your risk comfort and your income needs. RRIF stands for “registered retirement income fund”, but that does not necessarily mean you have to restrict yourself to income investments, such as low rate GICs.

    Ed

  15. 15. Ed Rempel

    Hi Robert,

    Who told you that you can’t contribute to a tax-deferred pension if you hold a RRIF? I’m not aware of any such restriction. You may or may not benefit from the pension credit because or your RRIF withdrawals while you are in a pension, but I’m sure you can contribute.

    This would rarely come up, since you have to be age 65 or over to claim the pension credit for your RRIF withdrawals, and few people are contributing to a pension after age 65.

    You can transfer investments from your RRIF back to an RRSP though. It’s a transfer, the same as transfers between RRSPs.

    If you setup a RRIF to claim the pension and then start receiving pension income so the RRIF does not help you, then you can just transfer it back to an RRSP.

    Ed

  16. 16. Ed Rempel

    Hi Math Person,

    I assume you are referring to the income tax clawbacks table? There is a link below it to a revised table that fixes that error.

    Ed

  17. 17. Ed Rempel

    Hi Kam,

    No. Your bank person is wrong.

    The joke in the industry is that the 3 most unreliable sources of tax information are your buddies, a bank advisor and the CRA help line. :)

    You still get the pension credit after age 71. At that point, withdrawing from your RRIF is no longer optional, since you have to convert all yoru RRSPs to RRIFs by the end of the year in which you turn 71. However, RRIF income still qualifies for the pension credit.

    Ed

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