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You work hard for your money and likely want to make the most of it, especially when approaching your retirement years.

One of the ways you can maximize your income is through the Pension Income Tax Credit.  Even if you are still actively working, there are several ways you can take advantage of this tax credit.

 

What is the Pension Income Tax Credit?

The Pension Income Tax Credit enables anyone 55 and up to save on their taxes. Anyone who qualifies can apply for a tax credit on their first $2,000 pension income.  

To qualify for the Pension Income Tax Credit, you must be:

  • 55 or older (however, you must be 65 or older to have a broader range of qualifying sources of pension income)

  • Earning income that qualifies as pension income

The Pension Income Tax credit is non-refundable and you cannot carry it over.

 

What does the government consider eligible pension income?

If you are over 55 but below 65, then only the following sources of income count as pension income:

  • Annuity income you receive due to the death of your spouse—for example, from an RRSP, RRIF, or a DPSP

  • Income from superannuation, Canadian Pension Plan, and certain foreign pensions

  • Income received from splitting pension income

If you are 65 or over, then all of the following count as pension income:

  • Income from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) or Locked-in Retirement Fund

  • Income from a superannuation or pension fund

  • Annuity income from an RRSP or a Deferred Profit-Sharing Plan (DPSP)

  • Income received from splitting pension income

  • Interest from regular annuities

  • Income from foreign pensions

  • Interest from a non-registered GIC offered by a life insurance company

 

How can I take advantage of the tax credit?

Even if you are still actively working at 65, it makes sense to take advantage of the Pension Income Tax Credit.

Here are four ways you can take advantage of the tax credit if you are not part of a pension or superannuation plan.

  1. Open a RRIF. Put $12,000 into the RRIF from your RRSP. You can then take out $2000 each year tax-free.

  2. Transfer money from a Locked-in Retirement Account (LIRA) to a LIF. As with the RRIF, you can withdraw up to $2000 each year tax-free.

  3. Purchase a GIC through a life insurance company. To claim the full credit, you will have to invest enough capital to earn $2,000 in interest each year.  

  4. Transfer the credit to a spouse if you cannot use it.

 

The Takeaway

Even if you are still working at 65, it makes sense to take advantage of the Pension Tax Income Credit. There are various ways to bring extra income into your life tax-free! Your Financial Literacy Counsel advisor can provide more information about getting started.

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