Annuity taxation varies according to the type of annuity the annuitant purchases. When the annuity is paid out, no tax withholdings are made*, unless requested by the annuitant.
When your clients purchase an annuity with registered funds, all payments received during the year are taxable for the annuitant.
When an annuity is purchased with non-registered funds, there are two types of tax treatments: the prescribed annuity and the non-prescribed annuity.
A prescribed annuity is taxed each year, meaning that the interest income is spread out evenly over the entire annuity payment period. A fixed taxable amount is declared annually for the duration of the annuity.
To be considered prescribed, the annuity must meet the following criteria (non exhaustive list):
- The annuity must be issued by a recognized financial institution
- The annuitant must be the annuity holder
- The annuity owner must not be a company
- 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 91th birthday
- The annuity must not be indexed
- The annuity must not be differed
Accrued income on a non-prescribed annuity is taxable each year. The annuity is amortized over time, just like a mortgage, meaning that the interest amount is higher at the beginning and decreases every year. 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 91th birthday
- an indexed annuity
- the annuitant holder to be a company
The taxable income realized on a non-registered annuity is eligible for the tax credit for pension income and for income splitting if the annuity owner turned 65 before the end of the year.
*Except if the funds are from a registered pension plan (RPP).