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3 top retirement tax credits

3 top retirement tax credits

Posted on: April 03, 2013
Author: Staff

Save thousands with federal and provincial tax credits.

For many of us, retirement requires some major adjustments, and learning how to live with a smaller income is at the top of the list. By taking full advantage of tax credits, you can stretch your savings and enjoy a rewarding retirement.

Tax credits vs. tax deductions

To understand tax credits, it's important to first understand tax deductions. Tax deductions are subtracted from your total income before you submit your tax return, resulting in a lower net income and fewer taxes. Once you are retired, not many deductions apply to you, so the majority of retirees will have the same total income as net income.

Tax credits, on the other hand, are used to reduce the tax that you have to pay after you've established your net income. Nobody wants to pay more tax than they have to, especially when income is limited, so retirees should make sure that they take advantage of any available tax credits.

Here are three popular retirement tax credits and how they can benefit you:

  1. Age Amount Tax Credit1

    1. Available to Canadians age 65 and up.
    2. If your net income is less than $34,562, your credit is worth $1028.10 annually.
    3. For every dollar over $34,562, the credit is reduced by 15%.
    4. The credit is fully phased out when net income reaches $80.256.
  2. Medical Expense Tax Credit1

    1. Helps cover medical expenses paid by the taxpayer, the taxpayer's spouse, or their common-law partner.
    2. Claimable medical expenses are those used to treat the taxpayer, their spouse, their common-law partner, or a dependent child under age 18. The expenses can be incurred in Canada or another country.
    3. You can only claim expenses that are more than $2,152 or 3% of your net income, whichever amount is smaller.
    4. For medical expenses reimbursed by an insurance plan, you can only claim the portion that wasn't reimbursed.
    5. It's non-refundable, meaning it can reduce your taxes to zero but cannot generate a payment beyond that point.
    6. The amount of the tax credit is calculated using the lowest tax rate.
  3. Pension Income Tax Credit1

    1. Available to Canadians who are receiving eligible pension income. (See definitions below.)
    2. Federal tax credit applies to the first $2,000 of eligible pension income.
    3. In addition, the Alberta tax credit applies to the first $1,355 of eligible pension income.
    4. You can split your eligible pension income with your spouse. If your spouse had no previous pension income, this will generate two tax credits and double your savings.

Federal and provincial tax credits, by the numbers1:

Federal Savings Alberta Savings  
Qualifying Pension Amount Applicable tax rate Federal Savings Qualifying Pension Amount Applicable tax rate Alberta Savings Combined Savings Combined savings if pension income is split between both spouses
$2000 15% $300 $1355 10% $135 $435 $870

Eligible pension income includes:

  1. Income from a registered pension plan (RPP), regardless of the recipient's age. (E.g. a pension from a employer-sponsored defined benefit plan or defined contribution plan)
  2. Income from a registered annuity, a Registered Retirement Income Fund (RRIF), a Locked-In RRIF (LIF), or a deferred profit sharing plan (DPSP) annuity, if the recipient is 65 years of age or older.

Ineligible pension income includes:

  1. Old Age Security (OAS)
  2. Guaranteed Income Supplement (GIS)
  3. Canada Pension Plan/Quebec Pension Plan
  4. Registered annuities, RRIFs, LIFs, and DPSP annuities if recipient is under age 65
  5. RRSP withdrawals
  6. Income from Retirement Compensation Arrangements (RCAs)

The bottom line

Although the paperwork may seem daunting, these three tax credits can save you thousands of dollars at tax time throughout your retirement. An ATB Investor Services advisor can help you take full advantage of these opportunities.

Other articles you may be interested in:

Income splitting: Simple ways to maximize your retirement income
Government benefit basics
Old Age Security: How to get it and keep it
1 All numbers are for 2013 tax year