| Financial and Legal Aspects of Annuities |
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Registered Annuity
An annuity is "registered" when it is purchased with registered savings funds accumulated in a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), locked-in retirement account (LIRA), locked-in RRSP, life income fund (LIF), registered pension plan (RPP) or deferred profit sharing plan (DPSP).
All payments received are taxable.
Non-Registered Annuity
An annuity is "non-registered" when it is purchased with funds from non-registered savings, such as capital derived from the sale of property or other assets.
- Annuities:
Payments made under a non-registered annuity consist of invested principal and earned interest. Only the interest portion of a non-registered annuity is taxable each year.
For individuals age 65 and over, the interest portion of a non-registered annuity (not taken from an RRSP) is eligible for spousal income splitting.
- Non-prescribed annuities:
The taxable interest portion of a non-prescribed annuity decreases annually, in much the same way as the interest portion of a mortgage does. This means that the taxes to be paid are higher during the first few years, gradually decreasing to zero over time. See the Table comparing tax payable.
E.g.: Assuming an annual annuity of $6,000, the interest portion for the first year will be $3,100, dropping to $2,989 for the second year, $2,455 for the third year, and so on.
|
Age |
Year |
Net annuity |
Total gross annuity |
Interest portion |
|
68 |
2010 |
$ 5 194 |
$ 6 000 |
$ 3 099 |
|
69 |
2011 |
$ 5 223 |
$ 6 000 |
$ 2 989 |
|
74 |
2016 |
$ 5 362 |
$ 6 000 |
$ 2 455 |
|
84 |
2026 |
$ 5 594 |
$ 6 000 |
$ 1 562 |
|
94 |
2036 |
$ 5 765 |
$ 6 000 |
$ 906 |
|
104 |
2046 |
$ 5 895 |
$ 6 000 |
$ 403 |
|
114 |
2056 |
$ 6 000 |
$ 6 000 |
$ 0 |
Prescribed annuity:
Payments made under a non-registered and prescribed annuity also consist of invested principal and earned interest. However, under a prescribed annuity contract, the tax payable is spread out evenly over the entire duration of the contract, since the "interest" portion, i.e., the taxable portion, is level for the duration of the contract, offering tax savings. For an example of tax savings, see the Table comparing tax payable.
Let's return to the previous example of an annual annuity of $6,000, making it a prescribed annuity this time. This means that the interest portion will remain steady at $1,586 until the end of the contract, meaning that the tax payable on the interest will be lower (See table, below).
|
Age |
Year |
Net annuity |
Total gross annuity |
Interest portion |
|
68 |
2010 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
69 |
2011 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
74 |
2016 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
84 |
2026 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
94 |
2036 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
104 |
2046 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
|
114 |
2056 |
$ 5 588 |
$ 6 000 |
$ 1 586 |
However, some restrictions apply to prescribed annuities:
- The annuity must not be indexed or redeemable.
- It must not be an immediate annuity.
- The policyholder (an individual) and the annuitant must be one and the same person. The only options offered for a prescribed annuity are reversibility and guaranteed payment term. The following conditions apply:
Reversibility may apply to the annuitant's spouse, brother or a sister;
- The guaranteed payment term may not extend beyond the annuitant's 91st birthday. If the annuity purchased is a joint and survivor annuity, the guaranteed payment term ceases once the younger of either the annuitant or the surviving spouse turns age 91.
Comparison of the Tax Payable on a Prescribed Annuity and a Non-Prescribed Annuity
Table comparing tax payable
 1 page - 29 kb
Seizable Annuities
- The principal under an annuity contract is exempt from seizure when the planholder designates:
- a revocable or irrevocable beneficiary, provided that it is his or her spouse or partner under a civil union (in Quebec), his or her descendants or ascendants;
- an irrevocable beneficiary, if it is any other person, including his or her common law partner.
- The principal under an annuity contract comprised of sums from an RPP, DPSP, LIF, LIRA or locked-in RRSP is exempt from seizure, regardless of the beneficiary designation.*
* Except concerning annuities with funds from a pension plan administered by CARRA
- Annuity payments can be seized, unless the sums are from an RPP. All other annuity payments, regardless of the origin of the funds or beneficiary designation can necessarily be seized once they have been paid out.
Pension Income Tax Credit
The pension income tax credit is granted on the first $2,000 ($1,500 in Quebec) of all eligible pension income. The credit is 15% at the federal level and 20% for Quebec.
Income from a prescribed annuity contract and the income accrued under a non-prescribed annuity contract give entitlement to the pension income tax credit
- At the federal level, the credit can be used when the annuitant turns age 65. However, if the income is rolled over to a person following the death of his/her spouse, he/she is eligible for this credit even if the beneficiary spouse is not yet age 65. The amounts from a registered pension plan are eligible for this credit regardless of the annuitant’s age.
- In Quebec, there is no minimum age for this tax credit, but it may be reduced or even eliminated based on family income.
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Note: This text is intended for information purposes only. In no event should it be considered as professional tax or legal advice.
Updated: October 2007
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