Make the most of the pension tax credit – MoneySense

That said, this tax credit isn’t a big deal for most people, and in some cases it’s better not to convert an RRSP or LIRA to a RRIF or LIF to qualify for the credit.

In 2025, the maximum federal tax savings will be $290 (for my calculations, read on). You can save a little more if you apply the provincial discount, which varies per province. In Ontario, the additional tax savings is $89. That means the total tax savings for everyone in Ontario is $379, assuming they pay at least $379 in taxes. If you can’t use the full credit, you can transfer what you can’t use to your spouse.

Please note the new tax rate

As a reader, Sylvain, you may have read that the maximum federal tax savings is $300 and not the $290 mentioned above. This was also the case in previous years, but the lowest federal tax rate was reduced this year from 15% to 14%. The tariff didn’t go into effect until late June, or mid-year. Therefore, the lowest federal tax rate and pension credit for 2025 is 14.5%. Next year they will both be 14%.

The other thing to keep in mind is that claiming the $2,000 retirement tax credit is not a way to take $2,000 out of your RRIF/LIF tax-free, which is something I hear often. Well, that’s almost true if you’re in the lowest tax bracket.

Let’s do some calculations regarding the pension tax credit

Think about the way the tax credit works. For the $2,000 federal tax credit, a rate of 14.5% applies and the tax savings is $2,000 x 14.5% = $290. A 5.05% rate is applied to the $1,762 Ontario credit for a tax savings of $1,762 x 5.05% = $89. The two together add up to a tax savings of $379.

Now think about what happens if you take $2,000 out of a RRIF or LIF. If you are in the lowest tax bracket in Ontario, with a marginal tax rate of 19.55% (14.5% federal + 5.05% provincial), you will pay $2,000 x 19.55% = $391 in tax. When you apply the $379 retirement tax credit, you end up paying only $12 in tax on the $2,000 withdrawal. If Ontario’s pension tax credit was $2,000 instead of $1,762, it would have been a flop with no tax due.

The story is different for someone in the highest tax bracket with a marginal tax rate of 53.53%. A $2,000 RRIF or LIF withdrawal results in $1,070 in taxes before the credit is applied, and $681 in taxes after the $379 retirement tax savings. Someone with an income of about $100,000 will pay about $240 in taxes after the credit is applied.

This leads to the next question for the person who only withdraws $2,000 to get the retirement tax credit. Does it make sense to withdraw the money and reinvest the lower after-tax amount, or would it be better to grow the entire $2,000 in the RRIF or LIF? This becomes a planning question. What are your spending and gift plans?

What the pension tax credit is good for

Have I bombarded you with enough math, Sylvain? You are right to think about ways to keep the tax you owe as low as possible. There are times when you can claim the pension tax credit before the age of 65.

The most common way in which you can claim the pension tax credit before the age of 65 is if you receive income from annuities from annuity or employer pension schemes. You can also claim the credit if you are under 65 and receive a pension benefit as a result of the death of a spouse who was eligible for the pension tax credit. In other words, if your spouse is over 65 and relies on a RRIF and then dies, you can claim the pension tax credit on that continued income, even if you are not yet 65.

Another advantage of the pension tax credit is the option to split the pension income. If you have a defined benefit plan, you can share your retirement income with your spouse before age 65. In this case, you can both claim the pension tax credit, even if you are both younger than 65. The same applies to RRIF or LIF income after age 65, assuming you are both 65 or older. Instead of claiming a $2,000 retirement tax credit, you can both claim the $2,000 credit. Two credits for one pension!

Thank you for your question, Sylvain. Some people automatically convert RRSPs or LIRAs to RRIFs or LIFs to qualify for the pension tax credit, without really thinking about it.

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