If you are receiving pension income, you may be entitled to a tax credit on the first $2,000. The specifics of which types of pension income are eligible for this credit vary depending on your age.

Are you 65 years of age or older?

If you are 65 or older on December 31, 2023, the types of income that qualify for this credit in 2023 are:

• Annuity (not lump sum) payments from a superannuation pension fund – this includes foreign pensions and US Social Security to the extent that the income does not qualify for a separate deduction under a tax treaty
• Payments from RRSPs that have been converted to an annuity   
• RRIF payments
• Payments received on a periodic basis from a money purchase pension plan
• Payments from a Pooled Registered Pension Plan (PRPP)
• Deferred Profit-Sharing Plan (DPSP) payments
• Various other annuity payments

Note that payments received under the Canada Pension Plan are specifically excluded. You won’t be able to claim the tax credit on CPP income.

Are you under the age of 65?

The rules for claiming this credit for those under age 65 are a lot narrower. Eligible income includes:

• Annuity (not lump sum) payments from a superannuation pension fund – including from foreign sources
• The other types of income described above for those 65 or older, but only if you received these payments as a consequence of the death of your spouse or common-law partner

What do I need to do?

When we prepare your tax return, your McCay Duff advisor will automatically claim the credit if you are eligible. We may ask you a few clarifying questions if it’s not obvious what type of income you are receiving.

Tax planning opportunity

If you are 65 or older and your retirement plan includes withdrawing from your RRSP early, you may want to consider converting a portion of your RRSP to an RRIF before you start withdrawing. RRIF withdrawals are eligible for the pension credit, but RRSP withdrawals are not. So, if you pull money out of your RRIF instead of your RRSP, you could reduce your taxes by up to about $380 as a single taxpayer in Ontario in 2023. If you have a spouse who is also 65 or older, there is the potential to double your savings by splitting the income for tax purposes.

The tax savings alone are likely not justification for early conversion of your RRSP to an RRIF before you are required to convert at age 71. There are many factors that go into deciding when to pull money out of your RRSP or RRIF. These include your current income and cash needs, future income, other sources of funds available, when you plan to start collecting Canada Pension Plan and/or Old Age Security, and other questions specific to your own situation.

Therefore, if you’re thinking about implementing this strategy, please contact your McCay Duff advisor. We can run the numbers for you to help you maximize not just your pension income tax credit, but your overall retirement income.

McCay Duff LLP in Ottawa provides comprehensive tax solutions and support

At McCay Duff LLP, our trusted team of Chartered Professional Accountants provides high-quality tax and business advisory services to Ottawa and surrounding area businesses. We assist corporations to achieve maximum profitability, minimize tax obligations and stay compliant with tax laws through expert tax planning, preparation, and advice. If you need assistance maximizing your pension income tax credit, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.