Taking advantage of the pension tax credit score

Having stated that, this tax credit score isn’t an enormous deal for most individuals, and in some circumstances, you’ll be higher off not changing an RRSP or LIRA to a RRIF or LIF to qualify for the credit score. 

In 2025, the utmost federal tax financial savings is $290 (for my calculations, learn on). There is a bit more in financial savings once you apply the provincial credit score, which varies by province. In Ontario, the extra tax saving is $89. Meaning the entire tax financial savings for everybody in Ontario is $379, assuming they’re paying at the least $379 in tax. When you can’t use the total credit score, you may switch what you may’t use to your partner.

Thoughts the brand new tax price

As a reader, Sylvain, you will have learn that the utmost federal tax financial savings is $300 and never the $290 acknowledged above. That was true in earlier years, however the lowest federal tax price was decreased this 12 months from 15% to 14%. The speed didn’t come into impact till the top of June, or midway via the 12 months. Subsequently, for 2025 the bottom federal tax price and pension tax credit score is 14.5%. Subsequent 12 months they’ll each be 14%. 

The opposite factor to bear in mind is that claiming the $2,000 pension tax credit score isn’t a solution to get $2,000 out of your RRIF/LIF tax-free, one thing I usually hear. Effectively, okay, it virtually is in case you are within the lowest tax bracket.  

Doing the mathematics across the pension tax credit score

Take into consideration the best way the tax credit score works. For the federal $2,000 tax credit score, a price of 14.5% is utilized and the tax financial savings is $2,000 x 14.5% = $290. A price of 5.05% is utilized to the $1,762 Ontario credit score for a tax financial savings of $1,762 x 5.05% = $89. The 2 mixed come to a tax financial savings of $379.

Now take into consideration what occurs once you draw $2,000 from a RRIF or LIF. In case you are within the lowest tax bracket in Ontario, with a marginal tax price of 19.55% (14.5% federal + 5.05% provincial), you’ll pay $2,000 x 19.55% = $391 in tax. Whenever you apply the pension tax credit score financial savings of $379, you find yourself paying solely $12 in tax on the $2,000 withdrawal. If the Ontario pension tax credit score was $2,000 fairly than $1,762 then it will have been a wash with no tax owing.

The story is completely different for an individual within the highest tax bracket with a marginal tax price of 53.53%. A $2,000 RRIF or LIF withdrawal will end in $1,070 in tax earlier than making use of the credit score, and $681 in tax after the pension tax financial savings of $379. An individual with an earnings of about $100,000 pays about $240 in tax after the credit score is utilized.   

This results in the subsequent query for the one that is simply drawing the $2,000 to get the pension tax credit score. Does it make sense to attract the cash and reinvest the lesser after-tax quantity, or would it not be higher to go away the total $2,000 within the RRIF or LIF to develop?  This turns into a planning query. What are your spending and gifting plans?

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What the pension tax credit score is nice for

Have I pelted you with sufficient math, Sylvain? You might be proper to consider methods to reduce the tax you owe and there are occasions when you may declare the pension tax credit score earlier than the 12 months you flip 65.  

Essentially the most acquainted approach you may declare the pension tax credit score earlier than age 65 is when you’re receiving earnings from life annuities from superannuation or employer pension plans. You too can declare the credit score in case you are beneath age 65 and are receiving pension funds as the results of the demise of a partner who was eligible for the pension tax credit score. In different phrases, in case your partner is over age 65 and drawing from a RRIF after which dies, you may declare the pension tax credit score on that continued earnings even in case you are not but 65.

One other benefit of the pension tax credit score comes with the flexibility to separate pension earnings. In case you have a defined-benefit pension plan you may break up your pension earnings along with your partner earlier than age 65. On this case each of you may declare the pension tax credit score, even in case you are each beneath 65. The identical is true with RRIF or LIF earnings after age 65, assuming you’re each 65 or older. As an alternative of claiming a $2,000 pension tax credit score, the 2 of you may every declare the $2,000 credit score. Two credit for one pension!

Thanks to your query, Sylvain. Some folks routinely convert RRSPs or LIRAs to RRIFs or LIFs to qualify for the pension tax credit score with out actually serious about it.  

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About Allan Norman, MSc, CFP, CIM

With over 30 years as a monetary planner, Allan is an affiliate portfolio supervisor at Aligned Capital Companions Inc., the place he helps Canadians preserve their existence, with out worry of operating out of cash.