If you’re celebrating your 65^th birthday this year, there is one gift you should be sure to open.  It’s the gift of a $1,000 pension income tax credit from the Canada Revenue Agency (CRA), and it’s available to eligible taxpayers who are at least 65 years old.

You can claim this 16 per cent credit on up to $1,000 of eligible pension income, which can include income from a Retirement Income Fund (RIF) - but not from a Retirement Saving Plan (RSP), annuity, company pension or from qualifying foreign pensions such as U.S. social security or a United Kingdom pension, as long as that pension is taxable in Canada. In addition to the federal 16 per cent tax credit, you may also receive a provincial tax credit on the first $1,000 of eligible pension income.  The amount of your provincial tax credit will depend on your province of residence but in Ontario, for example, it could increase your total pension income tax credit by another $1,000.

Income from the Canada Pension Plan/Quebec Pension Plan (CPP/QPP) or Old Age Security benefits does not qualify for the credit.  Neither do lump sum payments from a pension, death benefits, retiring allowances, any amounts received under a salary deferral arrangement or retirement compensation arrangement, or any other income that has been rolled over into a Registered Savings Plan (RSP).

The pension tax credit is restricted to those age 65 and over except when a person under that age receives pension income from a private work pension or if the income is from an RSP or RIF inherited from a deceased spouse.

Here are a few tips for getting the most out of your pension income credit:

·         Because money drawn from a RIF or annuity qualifies for this tax-saving treatment, and money drawn from an RSP does not, you should consider converting all or a portion of your RSP to a RIF or life annuity at age 65.  If you’re transferring money to a RIF, you’ll want to avoid the minimum withdrawal rules for a RIF that could force you to take out more than $1,000 each year and trigger tax consequences on the extra amount.  You can do this by transferring $1,000 annually from your RSP to your RIF and then drawing out the cash, which now qualifies for the pension tax credit.  (At age 69, government rules require you to wrap up your RSP and lose the plan’s tax-deferred benefits. You will be taxed on the total plan amount if you cash it in because it is income, but you can continue to enjoy some tax-deferral benefits by rolling the remainder of your RSP proceeds into a RIF.)

·         Both you and your spouse can claim the credit.  So your spouse can also use the RIF/annuity transfer strategy to access the full $1,000 credit on his/her tax return.

·         The pension tax credit can be transferred between spouses. If one spouse has too little income to use the full credit, it should be transferred to the spouse with the higher qualifying pension income.

The pension income credit is just one of the tax credits available to people age 65 and over.  By taking full advantage of these credits and other tax minimization strategies available to you in your retirement years, you can help ensure taxes don’t prematurely erode your savings and limit your lifestyle options.  A financial services professional can show you how to keep more of your pension and investment income and enjoy a fulfilling retirement.