Don’t lose out on the pension income credit

Pension income typically includes annuity-type pension payments from a pension plan — regardless of your age; and, once you reach age 65, can also include RRIF or life income fund withdrawals. This does not, however, include RRSP withdrawals, as this was the subject of a recent Tax Court of Canada decision.

The case involved a taxpayer who withdrew funds from her RRSP in 2011 and went to court arguing that her RRSP withdrawals should qualify for the pension credit. The taxpayer testified that she began withdrawing funds from her RRSP in 2008, when her spouse died. In order to minimize withdrawal fees, she decided to withdraw funds only once a year, with the exception of 2011, in which she withdrew funds a second time in order to make an “unusual” tax payment.

The issue before the Court was whether her RRSP withdrawals were “annuity payments” as required by the definition of “pension income” in the Income Tax Act (ITA). Included in the definition of “annuity” under the ITA is “an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract … or otherwise.” The phrase “payable on a periodic basis” has been interpreted, based on prior jurisprudence, to be a payment obligation that recurs at intervals.

The taxpayer’s accountant submitted that the RRSP withdrawals should qualify for the pension credit starting in 2011, when his client turned 65, as the payments are indeed payable on a periodic basis “because they are payable on a recurring basis at [her] … direction.” He argued that there should be a “generous interpretation” of the term “annuity,” the definition in the ITA being “broad enough to apply where the RRSP administrator is obligated by the holder to make recurring payments.”

Although the judge was sympathetic, she concluded that the withdrawals the taxpayer made from her RRSP were simply not annuity payments and, therefore, not eligible for the pension credit because they are not obligated to be made on a recurring basis, especially as it was possible for the taxpayer to require that the entire RRSP value be paid out in one lump sum under the terms of her RRSP. Had Parliament intended that “periodic RRSP withdrawals made at the discretion of the holder qualify for the pension credit, it would have said so directly.”

The solution

A simple solution to this would be to consider converting part of your client’s RRSP to either a registered annuity or RRIF at age 65 to and to ensure he or she receives at least $2,000 a year of pension income to take advantage of this credit.