What is Pension Income?
Pension income is the result of a retirement plan that will provide one with a monthly (or periodic) payment once a certain age is reached. This monthly income is meant to replace a portion of the previous income one was earning before retirement. The pension amount earned typically depends on three things; the amount you have contributed to the CPP (Canadas Pension Plan), the average income you earned throughout your work life and the age you take the pension. For example, a person with a low income throughout their career who decides to take an earlier pension at the age of 60 will have a low pension payment. On the other hand, a person who had higher work income and delayed their pension until the age of 65 will have a much higher pension payment.
How is pension taxed?
Pension income is taxable. Once retired, tax will have to be paid in one of three ways:
- Tax withheld at the source- if your main income is pension you may have enough tax withheld at the source to pay the tax you owe
- Paying your income tax by instalments- if you receive income through investments or other self-employment income you may have to pay your tax in instalments.
- Social benefits repayment- if your income exceeds a certain annual amount you may have to pay back some of your benefits.
How would one reduce pension tax?
In some cases, if all requirements are met a couple may be eligible for income splitting to reduce their overall taxable income. There are also many credits that an individual may be eligible for as well as charges and expenses that can be claimed for other investments. For more information, the following link to the CRA contains more detailed information on pension income taxes.
Interactive content (Author: Jaydeep Grewal, January 2020)
References and Resources::
- Article – “Changes to your taxes when you retire or turn 65 years old” (Author: Government of Canada)
- Article – “CPP Retirement Pension: Overview” (Author: Government of Canada)