Annuity Taxation

Annuity Tax Rules and Information

How Are Annuities Taxed in Canada?

In Canada, both registered and non-registered annuities are subject to taxation, but they are taxed differently.

Income received from a registered annuity is 100% taxable to the policyholder in the year that it is received. On the other hand, only a portion of the income received from a non-registered annuity is taxable to the policyholder. The income received from a non-registered annuity can have prescribed or non-prescribed (accrual) tax treatment.

Portion of Annuity Payment Subject To Tax

• Registered / Pension Funds

For annuities that are purchased with Registered or Pension funds, the income from the annuity is 100% taxable in the year that it is received.

• Non-Registered Funds

For annuities that are purchased with Non-Registered funds, only the interest portion of the payment is taxable. In other words, only a portion of the payment is taxable in the year that it is received. Non-Registered annuities can either have prescribed or non-prescribed (accrual) taxation.

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. The interest element is taxed on a level basis spread out over the life of the contract.

An annuity must qualify for prescribed taxation when the following partial list of conditions are met:

• The annuity must be non-registered
• The annuity may be a Single Life, Joint and Survivor Life or Term Certain Annuity
• Guarantee of payments may not exceed the annuitant’s 91st birthday
• Payments must commence no later than December 31st of the year after the purchase of the annuity
• For Term Certain Annuities, the owner and payee must be the same person
• For Life Annuities, the annuitant, owner and payee must be the same person
• The purchaser/annuitant must be an individual (not a corporation) or a specified trust
• Payments cannot be indexed

More On 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 Tax Brochures

Annuity Brochure (Sun Life)

Annuity Tax Brochure (Standard Life)