The pension income tax credit and pension income splitting using an insurance company GIA
Tax Managed Strategy 14
If you or your spouse1 are 65 or older, don’t have income from a registered retirement income fund (RRIF)2 or private pension plan, and aren’t otherwise taking advantage of the pension income tax credit, here’s what you need to know.
What is the pension income tax credit?
If you receive eligible pension income, you are entitled to deduct from your taxes payable a federal tax credit equal to 15% on the first $2,000 of pension income received. This means up to $300 in tax savings at the federal level, plus the provincial tax credits.
What types of income qualify?
The types of income that qualify for the pension income credit depend on your age. It’s important to note that government plans such as the Canada/Quebec Pension Plan and Old Age Security do not qualify at any age.
Types of income that qualify for the pension income credit depending on the pensioner’s age3
Income source |
Pensioner is under 65 the entire year4 | Pensioner is 65 or older during the year |
| Income received directly from a pension plan | ✔ |
✔ |
| Income received as a RRIF successor annuitant | ✔ | ✔ |
| Income from annuities purchased from RRSPs and DPSPs, non-registered annuities and ALDAs if received due to the death of a spouse | ✔ | ✔ |
| RRIF income | ✖ | ✔ |
| Annuities purchased from RRSPs and DPSPs | ✖ | ✔ |
| Non-registered annuities | ✖ | ✔ |
| ALDAs | ✖ | ✔ |
For those 65 and older, income from non-registered investments will generally not qualify for the pension income credit with the exception of annuity income. However, many people don’t realize that a Guaranteed Interest Account (GIA) from a life insurance company may report the interest accrued as annuity income5 and this also qualifies for the pension income credit and pension income splitting beginning in the year you turn 65.
Creating the income
The following chart shows the amount of nonregistered savings required at various interest rates to generate $2,000 of interest (reported as annuity income) from an insurance company GIA to claim the federal pension income tax credit.
Doubling up on the Pension Income Credit where both spouses are age 65 or older
If both you and your spouse are age 65 or older, you can invest double the amount of non-registered savings required in an insurance company GIA and make an election on your tax returns to each claim the $2,000 federal pension income tax credit and any applicable provincial pension income tax credit. Each of you will then be able to maximize the tax benefits of the $2,000 pension income amount and thereby double your tax credits. This is done by splitting the eligible pension income.
Transferring unused credits to a spouse
If you have eligible pension income but are unable to use the full credit because you have reduced your taxes to zero, you can transfer the unused portion to your spouse. The spouse receiving the transferred credit can claim it at any age and does not have to have eligible pension income to take advantage of the transferred credit.
Pension income splitting if you are 65 or older
Any annuity income reported by the GIA also qualifies for pension income splitting if you are 65 or older, regardless of your spouse’s age. Under the pension income splitting rules you can split up to 50% of eligible pension income. This has the potential to generate significant tax savings for a couple.
Case Study
Dan is 66 years old and married to Jane who is 65. He has $1 million invested in a bank or trust company Guaranteed Investment Certificate (GIC) that is up for renewal. He has just learned about the tax benefits of an insurance company GIA and wants to compare the two options. Dan’s marginal tax rate is 50% while Jane’s is 20%, and neither receives other income qualifying for the pension income tax credit. What are the potential tax benefits to Dan and Jane collectively?
| GIC | GIA | ||
| $1 million investment | Dan 50% tax rate | Dan 50% tax rate | Jane 20% tax rate |
Income: 4% GIC Income: 4% GIA ($40,000 split in half) |
$40,000 | $20,000 | $20,000 |
| Tax payable | $20,000 | $10,000 | $4,000 |
| After-tax income | $20,000 | $10,000 | $16,000 |
| Pension Income Credit | $387* | $387* | |
| Total family after-tax income | $20,000 | $26,774 | |
By investing in a GIA and taking advantage of the pension income splitting and the fact that both Dan and Jane can now take advantage of the pension income credit which wasn’t previously the case, they realize combined tax savings of $6,774 this year.
For more information on pension income splitting generally including using GIAs see: Opportunities for pension income splitting.
Tax deferral benefit offered by GIAs
Non-registered GIAs are taxed using accrual taxation and the income earned on the contract is reported in a taxpayer’s income on each anniversary day of the contract. Since individuals report their income on a calendar year basis, the amount reported on an anniversary day is included in the individual’s income for the calendar year in which the anniversary day falls. This provides for a 1-year tax deferral benefit in the first year of purchase6. The diagram below illustrates this.
As the image illustrates, if you hold the GIA to the policy anniversary date the income earned from January 2nd 2024 to January 1, 2025 is reported on a 2025 tax slip so there is no income to report on your 2024 tax return unlike some GICs. This provides the potential 1-year tax deferral benefit in the first year of purchase.
Caution! Late-year investing
If you are considering a deposit close to year end, consider postponing the purchase until the next year to provide a 1-year deferral of the tax reporting. If you do so it’s important to use a high interest savings account or similar investment and not the Daily Interest Account (DIA) as the DIA account also sets the anniversary date7.
Estate planning benefit offered by GIAs
Because a GIA is an insurance contract it allows for the naming of a beneficiary for non-registered investments unlike a GIC. This allows for the death benefit to be paid cost-effectively, quickly and directly to the beneficiaries avoiding the deceased’s estate and the delays and fees (e.g., executor, legal, accounting and probate fees where applicable) that come with settling an estate. These are just some examples of the value of naming a beneficiary. Also, as a result of being an insurance contract, GIAs offer the potential for creditor protection.
Ideal candidates
- Individuals age 65 or older
- Individuals who do not have other sources of eligible pension income
- Individuals with a spouse or common-law partner who could benefit from pension income splitting
Take action
- Determine the amount you need to invest to get $2,000 or $4,000 (if you have a spouse who is 65 or older during the year) of eligible pension income to claim the pension income credit
- Decide if the pension income splitting benefits of an insurance company GIA are of value and worthwhile
- Contact your advisor to purchase an insurance company GIA
Investment options from Manulife
Segregated fund contracts combine the growth potential offered by a broad range of investment funds with the unique wealth protection features of an insurance contract. Through Manulife segregated fund contracts, investors can help minimize their exposure to risk through income, death, and maturity guarantees; potential creditor protection features; and estate planning benefits — all from a single product or insurance contract.
Guaranteed interest accounts (GIAs) offer competitive rates plus investment options. Investors benefit from a guarantee on their principal investment, and from several different investment options that can diversify and add flexibility to their portfolio. GIAs can be an ideal solution for conservative investors who are looking to help grow their wealth but concerned about minimizing risk.
Manulife Annuities are a popular choice for those who want a guaranteed income stream. In exchange for a single lump sum deposit, Manulife makes guaranteed regular income payments to a client that contain both interest and a return of principal. Annuity payments can continue for a chosen period of time or for the lifetime(s) of one or two people.
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada). 2 For the purposes of this article, the same rules apply to the locked-in versions of RRIF and RRSPs (e.g., LIFs, LRIFs, RLIFs, PRIFs, LIRAs, and RLSPs). 3 This list is not exhaustive and there are other types of income that can qualify for the pension income credit. RRSP stands for registered retirements savings plan. DPSP stands for deferred profit sharing plan. ALDA stands for advanced life deferred annuity. 4 Quebec taxpayers under 65 for the entire year can’t split eligible pension income for provincial tax purposes as of January 1, 2014. 5 If the GIA is redeemed prior to maturity the interest accrued since the last reporting date is reported as other income which does not qualify for the pension income credit or pension income splitting. 6 If the GIA is redeemed prior to the first policy anniversary date then any interest accrued from the date of purchase to the redemption date is reported as other income in the calendar year of the redemption instead of on a policy year basis. 7 This information and strategy apply to Manulife GIAs, high interest savings accounts and DIAs and must be confirmed with other insurance companies.
Important disclosure
Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.
This communication is published by Manulife Investment Management. Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.
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MK2071E 04/24
