The Tax Blog for Smart Canadians

What is pension income?

Pension income encompasses several types of payments received during retirement. The Canada Revenue Agency (CRA) defines pension income broadly, but not all retirement payments qualify for special tax treatment or credits. Key sources include:

• Old Age Security (OAS): The government-provided pension for Canadians aged 65 and older.
• Canada Pension Plan (CPP) / Quebec Pension Plan (QPP): Earnings-based public pensions available to most Canadian workers.
• Private Pension Plans (RPP): Employer-sponsored pensions, including defined benefit and defined contribution plans.
• Registered Retirement Income Funds (RRIFs): Withdrawals from RRIFs, which are converted from RRSPs at retirement.
• Annuities: Income from purchased annuities, often used to provide steady retirement income.
• Foreign Pensions: Pensions from other countries, which may be taxable in Canada.

Eligibility for pension income treatment often depends on age (usually 65 and older) and the type of pension. For example, RRIF withdrawals and annuity payments may qualify for pension income splitting if you are at least 65, while CPP/QPP and OAS do not.

How pension income is taxed

Pension income is taxed as regular income and subject to marginal tax rates. Withholding tax is often applied at source, especially for RRIF withdrawals and private pensions. OAS and CPP/QPP typically do not have tax withheld unless requested. OAS is subject to a "clawback" if net income exceeds a threshold, resulting in partial repayment of benefits.

Tax measures related to pension income

As mentioned in the introduction, the federal government has enacted several measures related to pension income.

On the income side:

• Guaranteed Income Supplement (GIS): Monthly, tax-free payment you can get if you are 65 or older. GIS eligibility is based on income, and the supplement is available to Old Age Security (OAS) pensioners with low income) for the GIS in your first year of eligibility. Although not a tax measure, the payments are tax-free and eligibility is based on the income declared on the tax return.

On the credits side:

• Pension Income Amount: Claim up to $2,000 for eligible pension income on line 31400. Only certain types of pension income qualify (not OAS or CPP/QPP).
• Age Amount: Canadians aged 65 and older can claim the age amount on line 30100, subject to income limits. Although not directly linked to pension income, most pensioners will meet the criteria for this credit.

On the deduction side:

• Pension income splitting: Eligible taxpayers can allocate up to 50% of certain pension income to a spouse or common-law partner, potentially lowering the overall tax bill. The tax bill gets lowered by taxing the pension income that is split in the hands of the spouse who’s paying a lower tax rate. You must be at least 65 for most pension income (NOT employer pension like RPPs), and the income must come from qualifying sources (RRIFs, private pensions, annuities). CPP/QPP and OAS cannot be split.
• CPP/QPP pension sharing: You can request to split the payments of the CPP/QPP with your spouse from Service Canada (Retraite Québec for Quebec).  Although not a tax measure, it still represents an available method to split payments to a lower taxed spouse at source.
• Tax treaty exemptions for foreign pensions: Certain foreign pensions are partially or entirely exempted from Canadian taxation based on the tax treaty with the foreign country.

In conclusion, pension income is at the heart of retiree taxation, but it also comes with numerous opportunities for tax optimization. Understanding the rules well can make a real difference in the tax owed - and in the disposable income available during retirement.

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