Tax Free Income from a Non-Registered GICStuart Kirk, CIM®, Wealth Advisor
Recently a client asked how to get tax free income from a non-registered GIC, as their TFSA was maxed out. I mentioned that they could use the pension income credit. Here is how it works: if you or your spouse are 65 or older and do not have income from a RRIF or private pension plan, there is another alternative to take advantage of the Pension Income Tax Credit.
What is the Pension Income Tax Credit?
If you receive eligible pension income, you are entitled to deduct from your taxes payable, a federal tax credit equal to 15 per cent on the first $2,000 of pension income received. This means up to $300 in tax savings at the federal level, plus the provincial tax credits.
What Types of Income Qualify?
Under age 65, only income received directly from a pension plan or other registered income received because of the death of your spouse qualifies for the pension income tax credit. Income from other registered plans such as RRIFs and RRSP annuities are only eligible for the credit if you are age 65 or older. Government plans such as Canada Pension Plan and Old Age Security do not qualify.
Generally, income from non-registered investments will also not qualify for the pension income credit. One exception is the income received from a Guaranteed Interest Contract (GIC) provided by an insurance company. A GIC from a life insurance company reports the interest accrued as annuity income which qualifies for the pension income tax credit beginning at age 65.
Income Splitting Where Both Spouses are Age 65 or Older
If both you and your spouse (or common law partner) are age 65 or older, you can invest double the amount of non-registered savings required in an insurance company GIC and make an election on your tax returns to each claim $2,000. Each of you will then be able to maximize the tax benefits of the $2,000 pension income amount and thereby double your tax credits.
Transferring Unused Credits to a Spouse
If you are at least age 65 and have eligible income but are unable to use the full credit because you have reduced your taxes to zero, you can transfer the unused portion to your spouse (or common law partner). Only you as the original recipient of the eligible income must be age 65 or older. The spouse receiving the transferred credit can claim it at any age and does not have to have eligible income to take advantage of the transferred credit.
- You are age 65 or older
- You do not have other sources of eligible pension income
- You have a spouse or common law partner
- Determine the amount you need to invest to get $2,000 or $4,000 (if you have a spouse) of eligible pension income
- Contact your advisor to purchase an insurance company GIC
Always remember to consult your advisor before taking any action.