If you have clients who are 65 years old or older, remember to make sure they are generating at least $2,000 of eligible pension income annually, even in cases in which they don’t require the extra income, in order to take full advantage of the pension income tax credit.

Many Canadians are unaware of this non-refundable tax credit. Thus, the opportunity to achieve some effective tax planning results in retirement slips away.

“You certainly have an interest in generating any qualifying pension income in any year you possibly can,” says Aurèle Courcelles, director of tax and estate planning with Winnipeg-based Investors Group Inc. “If you don’t use the credit, it can’t be carried forward. Use it or lose it.”

The pension income credit is a 15% federal credit on up to $2,000 of eligible pension income per year for individuals aged 65 or older. Income that is considered eligible qualified pension income includes payments from: retirement pension plans; registered retirement income funds (RRIFs), including life income funds and locked-in retirement income funds; lifetime annuities from registered plans; and the interest component of payments from non-registered annuities. Ineligible pension income amounts include RRSP with drawals and government pension benefits such as Canada Pension Plan, old-age security and the guaranteed income supplement.

A provincial pension income tax credit also is available and varies by province. For example, for the 2014 tax year, British Columbia provides a 5.06% tax credit on up to $1,000 of eligible pension income, while Alberta offers a 10% tax credit on up to $1,370 of eligible pension income.

Clients younger than age 65 may qualify for the pension income credit if they receive registered pension-plan income or eligible pension income as the result of the death of a spouse.

A tax-planning opportunity is available in situations in which a taxpayer between the age of 65 and 71 is not taking full advantage of the pension tax credit. In these cases, your clients should consider taking a portion of their RRSP and converting it into a RRIF. Clients then can withdraw $2,000 per year from the RRIF, generating eligible pension income in order to take advantage of the credit. When a client reaches age 71, RRSPs have to be converted into RRIFs anyway and, presumably, he or she would be generating pension income annually.

While the additional $2,000 in pension income must be added to income for the year and, therefore, is taxable, the pension income credit will either largely eliminate or significantly reduce the amount of taxes payable on the amount.

“For those individuals who are in the lowest bracket, they’re not going to be paying much, if any, tax [on the additional income],” says John Waters, vice president and head of tax and estate planning with BMO Nesbitt Burns Inc. in Toronto. “Even for those in the top bracket, there will be only some incremental increase in taxes. Regardless, it’ll be better than paying tax on the amount at the top rate later on.”

Married or common-law couples, if both spouses are over age 65, can “double up” on the pension income credit through pension-income splitting. At least $4,000 of eligible pension income would have to be generated between the spouses to take full advantage of both spouses’ available pension income credit amounts.

A couple with one spouse over the age of 65 and the other younger than 65 can double their pension income credit if the pension income that is being transferred to the younger spouse is registered pension plan income. Other forms of pension income do not count as qualifying pension income for the younger spouse.

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