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The annuity tax rate varies according to the type of annuity the annuitant purchases. When the annuity is paid out, no source deductions are made, unless requested by the annuitant.
Registered annuity
When your clients purchase an annuity with registered funds, all payments received during the year are taxable for the annuitant.
Non-registered annuity
When an annuity is purchased with non-registered funds, there are two types of annuities available, each with different taxation rules: the prescribed annuity and the non-prescribed annuity. Only the interest portion is taxable over the years for both types of annuities.
- Prescribed annuity:
A prescribed annuity is taxed in the same way each year, meaning that the interest income is spread out evenly over the entire annuity payment period. An annual fixed amount is declared during the entire duration of the annuity. The tax to be paid is therefore reduced during the first annuity payment years.
To be considered prescribed, the annuity must meet the following criteria:
- The annuity must be issued by a recognized financial institution
- The annuitant must be the annuity holder
- The annuity must be irrevocable
- The annuity must be paid in equal instalments and at regular intervals at least once a year
- The annuity must be non-redeemable
- The annuity guarantee period must not extend past the annuitant’s 90th birthday
- The annuity must not be indexed
- Non-prescribed annuity:
Taxes on a non-prescribed annuity are paid on accrued income. The annuity is amortized over time, just like a mortgage, meaning that the interest amount is higher at the beginning and decreases over time. The annuitant is therefore considered to have received the interest first and the capital later.
The non-prescribed annuity is a good choice for your clients who want:
- a guarantee that extends past their 90th birthday
- an indexed annuity
- the annuitant holder to be a company
The non-registered annuity is eligible for the tax credit for pension income and for income splitting.
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