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Annuity Tax Issues

Taxation

 

pdf View Taxing Issues (6 page pdf)

 

 

Annuity Taxation

How are annuities taxed?

Registered vs Non-registered Taxation

Prescribed Taxation

Non-prescribed (accrual) Taxation

Level Taxation

Taxation During the Deferral Period

Withholding Tax

Mandatory Withholding Tax

Optional Withholding Tax

Taxation of Non-Residents

Income Splitting

Pension Income Tax Credit

Avoiding OAS Clawback

Potential Creditor Protection

Annuity Taxation

Portion of Annuity Payment Subject To Tax


Registered / Pension Funds

For annuities purchased with Registered or Pension funds, all income is 100 percent taxable.


Non-registered

For annuities purchased with non-registered funds, only the interest component of the payment is taxable.


Prescribed & Non-Prescribed Annuities


Non-prescribed annuities

Payments from a non-prescribed annuity are a blend of interest and capital. The interest element is taxed as it accrues; therefore the taxation will be higher in the early years of the annuity and decrease over the life of the contract as the capital is paid out.

 

Prescribed Annuities

Payments from a prescribed annuity are treated as a level blend of interest and capital and the interest element is taxed on a level basis spread out over the
life of the contract. An annuity must qualify for prescribed annuity taxation and the following is a partial list of conditions that must be met:

 

1. The annuity must be non-registered

 

2. The annuity may be a Single Life, Joint and Survivor Life or Term Certain Annuity


3. Guarantee of payments may not exceed the annuitant’s 91st birthday
Payments must commence no later than 31 December of the year after purchase


4. For Term Certain Annuities, the owner and payee must be the same person

 

5. For Life Annuities, the annuitant, owner and payee must be the same person

 

6. The purchaser/annuitant must be an individual (not a corporation) or a specified trust


7. Payments cannot be indexed

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