If you are among the citizens who are unsure whether pensions are taxed, then the answer is simple: yes, the pensions are taxed. The retired seniors in Canada rely on two of the major financial programs as a source of income in their retirement age. The Canada Revenue Agency (CRA) provides the retirement benefits to the eligible citizens under Canada Pension Plan (CPP) and Old Age Security (OAS). While millions of Canadian citizens are eligible to receive CPP and OAS pension, majority of the beneficiaries do no know about the taxation of these retirement income. Through this post, you will be able to gain important attributes on taxes on pension in Canada and the taxes when you retire or turn 65. Read the full post to obtain knowledge on how to reduce the taxes you owe, so that you cannot miss any updates.
Pension Plans Subject to Tax in Canada?
The eligible citizens who have contributed during their employment years as an employee, employer or a self-employed citizen are allowed to receive benefits from CPP/QPP and OAS. As per the CIBC (Canada Imperial Bank of Commerce) retirement poll, 85% respondents in CIBC are expected to claim the CPP/QPP payment in their retirement age. Still, over half of the respondents either do not know that CPP payments are taxed or think that these pensions are tax-free. In addition to retirement benefits, you can also receive disability benefits if you have any disability or blindness. However, these payments will stop when you turn 65 and start receiving retirement benefits. In addition to it, in case of your spouse’s or head of household demise, you can also claim survivor benefits.
Apart from CPP, you will automatically be entitled to OAS benefits which is also taxable after turning 65 if you meet the eligibility requirements. As of 2023, once your taxable income exceeds the limit of $86,912, a 15% deduction will be imposed to your OAS payment. Apart from OAS and CPP, certain private retirement savings are also taxable that includes Registered Retirement Savings Plan (RRSPs), Registered Retirement Income Funds (RRIF) and Annuities. The citizens who are entitles to US social security benefits under foreign pensions are also taxable. The CRA also runs certain financial support programs other than CPP and OAS such as Guaranteed Income Supplement (GIS) which is not taxable. Before applying for any pension plan, it is advised to gain insights on taxation of retirement income.
Tax on Pension Amount 2024 Overview
| Post title | Tax on Pension: Is there a Tax on Pension in Canada |
| Country | Canada |
| Department | Canada Revenue Agency |
| Category | Taxation |
| Applied for | Citizens who are receiving pensions |
| Year | 2024 |
| Official website | canada.ca |
Taxation on Pension in Canada
In Canada, the pension income is taxed based on the same tax system as applied other source of income that you have. For instance, the pension income that you are entitled to claim from CPP or OAS will be added to your other income for the year and will be taxed as per the marginal tax rate. The term marginal tax rate is defined as the percentage of tax that will be imposed to every dollar that you earn above the taxable income. To understand the taxes on your pension, you must be aware of the federal marginal tax rate which are mentioned in the following table:
| Taxable income | Federal income tax rate |
| Below $53,359 | 15.0% |
| Above $53,359 and below $106,717 | 20.5% |
| Above $53,359 and below $165,430 | 26.0% |
| Above $165,430 and below $236,675 | 29.0% |
| Above $235,675 | 33.0% |
The abovementioned details are the federal income tax rate. In addition to it, you will also have to pay provincial or territory tax rate which may differ based on where you are living. For instance, if your total income which also consists your CPP pension falls under the first tax rate and bracket which is $53,359 and your provincial tax rate is 5.0%, then your CPP payment is entitled to be taxed at a combined rate of 15.0% + 5.0% = 20.0%.
How to Pay Income Taxes and Deductions?
You can handle you CPP payments and taxes by following the below mentioned points:
- Tax Withholding: Generally, the CRA will not automatically withhold your tax but you can request for tax withholding form your CPP or OAS by filling out the Form ISP3520 and submit it to your Service Canada Office.
- Paying tax in instalment: If you do not withhold your taxes, then you will have to pay your income taxes in instalments on quarterly basis. It is required if the total taxes that you owe are more than $3,000 or $1,800 if you are living in Quebec for 2024.
- Filing your tax return: The Service Canada will provide you a T4A(P) slip which allows a citizen to check the amount and type of benefits they have received along with the amount of income tax deducted. You can use deductions and credits to reduce your taxable income.
How to Minimize the Tax that You Owe?
There are a number of ways that can be beneficial for you to reduce the taxes that you owe. For instance:
- Pension Splitting: You and your spouse or common-law partner are able to split the pension income. However, as per the CIBC retirement poll, only 44% of the beneficiaries know that any pension income can be split up to 50%.
- Pension sharing: You are allowed to share your CPP/QPP pension with your spouse if you are the only one who received CPP/QPP income.
- Provincial/Territory Deductions and Credits: You are able to claim deductions and credits that are specified in the provinces or territories in which you are living. For more information, you can also visit the official website of the Canada Revenue Agency.
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