Have you been thinking about how you'll spend your days in retirement? There's lots to do in those golden years. Just be careful where you hang out. I recall the story a few years back of a 62-year-old man who was kicked out of the Spring Haven Retirement Community (in Winter Haven, Fla.) because he punched an 86-year-old resident and bit another in a fight at the community salad bar.
It turns out the offender had the tendency to forage through the lettuce, looking for his favourite type, which frustrated the other tenants. The man didn't take kindly to their comments, and he gave them what-for. The 80-year-old mother of the offender, who also lived at the home and was slightly injured trying to help her son in the incident, conceded that "it did look as though he was playing with the food."
I think it's safer just avoiding bars of all types in retirement – salad or not. You'd be better served spending time reading quietly at home, learning about how to beat the taxman. And you might as well start with the pension credit. So, let's talk about it today.
THE CREDIT
While the pension income amount isn't going to make you wealthy, these are dollars that are better in your pocket than the taxman's. You can claim a federal non-refundable tax credit on up to $2,000 of eligible pension income. The actual tax savings federally amount to 15 per cent on up to $2,000 of this pension income, or $300. Provincial tax savings are on top, which can bring the total savings between about $350 and $700 depending on your province of residence.
There's good news if you're married and receive eligible pension income. You're able to transfer up to 50 per cent of your pension income to your spouse's tax return to be taxed in his or her hands. This pension income splitting is so valuable because it can provide both you and your spouse with access to the pension income tax credit where you might not have both been eligible otherwise.
THE STORY
A recent Tax Court of Canada decision, Taylor v. The Queen (2014 TCC 102), highlights the importance of understanding what type of income qualifies for this credit. In this case, Mrs. Taylor was denied the pension credit for her registered retirement savings plan (RRSP) withdrawals. Mrs. Taylor's husband passed away in 2008 at which time she began making regular withdrawals from her RRSP. Her RRSP gave her complete discretion with respect to the timing of her withdrawals. She argued that she qualified for the pension credit once she turned age 65.
Her appeal was dismissed. The court was sympathetic but explained that the payments had to be annuity payments, which are ordinarily defined to be payments that are made on a periodic basis. Since Mrs. Taylor had discretion as to the timing of her RRSP withdrawals, these were not considered to be annuity payments. Since the purpose of the pension credit is to provide tax relief to pensioners, she argued for a generous interpretation of an "annuity." She lost the case.
THE RULES
This raises the question: What type of income will qualify for the pension credit? Your age will help to determine this. If you're 65 or over, there's a longer list of qualifying income types than for those under 65.
Specifically, if you're 65 or over you can claim the credit if you received any of the following types of income: Life annuity payments from a superannuation or pension plan – including income from life income funds (LIFs), and locked-in retirement income funds (LRIFs), registered retirement income fund (RRIF) payments, annuity payments from an insured RRSP or from a deferred profit sharing plan (DPSP), payments from a pooled registered pension plan (PRPP), regular annuities and income averaging annuity contracts, annuity payments from the Saskatchewan Pension Plan (SPP), and certain foreign pension payments.
If you're under 65, you can claim the credit if you have one of the following types of income: Annuity payments from a superannuation or pension plan, payments from a RRIF or annuity payments from an RRSP or DPSP which have been received as a result of the death of a spouse or common-law partner, and annuity payments from the SPP.
Income that won't qualify includes: Old Age Security benefits, Canada and Quebec Pension Plan benefits, death benefits, retirement compensation arrangement payments, benefits from salary deferral arrangements, and non-annuity RRSP withdrawals.
Here's an idea for you: Consider using some of your RRSP assets to create a RRIF to draw out $2,000 annually to take advantage of the pension credit.
Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.
Tim Cestnick