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Retirement Planning

Annuity Tax Guide

9 min readUpdated December 2024

Guaranteed Income for Life

Annuities provide guaranteed income, but tax treatment varies significantly depending on the type. Understanding the differences can save substantial taxes over your lifetime.

Types of Annuities

Life Annuity

  • Payments for your lifetime
  • No payments to estate (usually)
  • Higher payments, longevity risk transferred

Term Certain Annuity

  • Payments for fixed period
  • Remaining payments to estate if you die
  • Lower payments than life annuity

Joint and Survivor

  • Payments continue to surviving spouse
  • Usually at reduced rate (50-100%)
  • Lower initial payments

Guaranteed Period

  • Life annuity with minimum guarantee
  • E.g., Life with 10-year guarantee
  • Payments to estate if death before guarantee ends

Registered vs Non-Registered

Registered Annuities (from RRSP/RRIF)

  • 100% of payments are taxable
  • Same as RRIF withdrawals
  • Purchased with pre-tax money
  • Qualifies for pension income splitting (65+)

Non-Registered Annuities

  • Only interest portion taxable
  • Capital returned tax-free
  • Tax treatment depends on prescribed/non-prescribed

Prescribed vs Non-Prescribed Annuities

Prescribed Annuity

  • Level taxation each year
  • Taxable amount stays same throughout
  • Interest and capital spread evenly
  • Better for early years (defer tax)

Non-Prescribed Annuity (Accrual)

  • Interest taxed as earned
  • Higher tax in early years
  • Lower tax in later years
  • More tax overall often

Prescribed Advantage: For a 70-year-old, prescribed annuity might have 30% taxable vs 60% taxable in early years for non-prescribed. Significant tax deferral.

Tax Calculation Example

Non-Registered Prescribed Annuity

Purchase: $100,000, Annual payment: $8,000, Life expectancy: 20 years

  • Total payments expected: $160,000
  • Return of capital: $100,000
  • Total interest: $60,000
  • Taxable portion each year: $3,000 (60,000÷20)
  • Tax-free return of capital: $5,000/year

If Non-Prescribed (Accrual)

  • Early years: More interest, higher tax
  • Later years: Less interest, lower tax
  • Less beneficial tax deferral

Qualifying for Prescribed Treatment

Requirements

  • Individual annuitant (not corporation)
  • Non-commutable (can't cash out)
  • Level payments
  • Must be life annuity or term certain (only)
  • Payments at least annually

What Disqualifies

  • Variable payments
  • Able to cash out
  • Corporate-owned
  • Certain guarantees may affect it

RRSP Annuity vs RRIF

RRSP Annuity Pros

  • Guaranteed income for life
  • No investment decisions
  • Longevity protection
  • May get higher rate than expected returns

RRSP Annuity Cons

  • No flexibility
  • Can't access principal
  • No estate value (unless guarantee)
  • Locked in rate

RRIF Pros

  • Flexibility in withdrawals
  • Investment control
  • Estate value
  • Can vary income yearly

Hybrid Approach

  • Part annuity for guaranteed base
  • Part RRIF for flexibility
  • Balance security and control

Interest Rates Matter: Annuity rates are locked at purchase. Higher interest rate environment = better annuity rates. Consider timing.

Tax Reporting

Registered Annuity

  • Reported on T4A slip
  • Full amount on Line 11500
  • Qualifies for pension income amount

Non-Registered Annuity

  • T5 slip shows interest portion only
  • Interest on Line 12100
  • Capital returned is tax-free

Pension Income Splitting

Registered Annuity (from RRSP)

  • Can split at age 65+
  • Up to 50% to spouse
  • Form T1032 election

Non-Registered Annuity

  • Generally cannot split
  • Interest portion is investment income
  • No pension splitting available

Annuity Strategies

Laddering

  • Purchase annuities at different ages
  • Get better rates as you age
  • Diversify interest rate risk

Cover Basic Expenses

  • Annuity for essential costs
  • RRIF for discretionary spending
  • Peace of mind approach

Tax-Efficient Non-Registered

  • Prescribed annuity for tax deferral
  • Lower taxable income in early years
  • May preserve OAS/GIS

Special Situations

Annuity from Pension Plan

  • Different rules than purchased annuity
  • 100% taxable (defined benefit)
  • Eligible for pension income splitting (any age)

Foreign Annuities

  • May be taxed differently
  • Foreign tax credit available
  • Reporting requirements apply

Impaired Life Annuities

  • Higher rates if health issues
  • Shorter expected life = higher payments
  • Tax treatment same as standard

Death and Annuities

Life Only

  • Payments stop at death
  • Nothing to estate
  • No tax consequences

Guaranteed Period

  • Remaining payments to beneficiary
  • Continued taxable to recipient
  • Or lump sum payout (taxed as income)

Joint and Survivor

  • Payments continue to survivor
  • Survivor responsible for tax
  • No estate tax issue

Questions About Annuities?

Our AI tax assistant can help answer specific questions about annuity taxation.

Ask the Tax Assistant

Disclaimer: Annuity decisions are significant and irreversible. Consult with a financial advisor and insurance specialist before purchasing.