Annuity Tax Rules and Information
How are annuities taxed in Canada?
Income from a registered annuity is fully taxable to the policyholder in the year it’s received. Income 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 purchased with Registered or Pension funds, all income is 100 percent taxable.
For annuities purchased with non-registered funds, only the interest component of the payment is taxable.
Prescribed & Non-Prescribed Annuities
- Non-prescribed annuities
- Prescribed Annuities
- 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 31 December of the year after purchase
- 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
- 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
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.
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 taxation when the following partial list of conditions are met: