Pension Income Credit

 Do you know how the Federal Pension Income Tax Credit is calculated? Did you know that 'pension income' is calculated differently depending on your age? Do you know what is excluded from 'pension income'? Are you aware of tax planning strategies using the pension income credit?

 This article will help you understand the pension income credit!

 How is the Pension Income Credit calculated?

The federal pension income credit is calculated using the following formula:

15% * the lesser of your 'pension income' or $2,000

This means that the maximum pension income credit is $300 (15% * $2,000). Any provincial taxes will increase the effect of this credit.

What Qualifies as 'Pension Income'?

The definition of 'pension income' differs depending on your age.

 If you were 65 or older in the year: Pension income includes:

• an annuity (not lump sum) payment out of or under a superannuation or pension fund or plan,
• an annuity payment out of a Registered Retirement Savings Plan ("RRSP") or a Deferred Profit Sharing Plan ("DPSP")
• a payment out of or under a Registered Retirement Income Fund ("RRIF")
• the interest element from a prescribed annuity
• accrual income included in respect of non-exempt life insurance policies and nonprescribed annuities.

 If you are younger than 65 for the entire year: Pension income includes:

• payments from superannuation or pension plans (provided they are life annuity and not                             lump sum payments) and
• annuity payments arising from the death of your spouse under a RRSP, RRIF, DPSP and                             other specified plans.

What is Excluded from 'Pension Income'?

 The following sources of income are always excluded from the definition of 'pension income':

• Old Age Security ("OAS") pension or supplement or of any similar payment from a province
• Canada Pension Plan ("CPP"), Quebec Pension Plan ("QPP") or Saskatchewan Pension                                 Plan ("SPP") payments
• payments received out of or under a salary deferral arrangement, a retirement                              compensation arrangement
• employee benefit plan or an employee trust
• death benefits

 Are there any tax planning strategies involving the pension income credit?

 To get the maximum pension credit your goal should be to have at least $2,000 of 'pension income' for both you and your spouse.

 If your spouse is younger than 71, you may be able to create 'pension income'. This can be achieved by creating a spousal RRSP and contributing your RRSP contributions to the spousal RRSP. When this income is withdrawn as an annuity payment, the 'pension income' created will be eligible for the pension income credit.

 Although there are restrictions that may apply, if your spouse has eligible 'pension income' but is not able to utilize the pension credit because their tax payable has been reduced to nil by using other tax credits, you should transfer the unused portion of their pension income credit to you.

 If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, you could consider purchasing a non-registered Guaranteed Income Annuity ("GIA") (very similar to a GIC) from a life insurance company. The deposit should be enough to produce $1,000 of interest income and this income will qualify for the pension income credit. Note that the reporting of the income is done on a "policy year" basis rather than "calender year" so it is important to calculate when to purchase these.

Note: The above article is for information purposes only and should not be construed as offering tax advice. Individuals should consult with their personal tax advisors before taking any action based upon the information in this article.

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.