Companion Advisor: Retirement
Annuities, like any other investment, are subject to tax. The taxation of annuities will depend on the type of funds used to purchase the annuity, and whether or not the annuity was purchased on a tax deferred "prescribed" basis. Below is a brief description of the different methods of annuity taxation.
Annuities purchased from RRSPs, Locked-in RRSPs, RRIFs,
LRIFs, LIFs, or pension funds are considered registered annuities. For
registered annuities, all annuity income paid out in a calendar year is
taxable to the owner in the year the payment is received.
Non-registered annuities are taxed in one of two ways:
Prescribed taxation may be available for annuities purchased with non-registered funds. Prescribed annuities are not subject to the accrual taxation rules where interest is taxed as earned (ie. with higher amounts in the early years and lower amounts in the later years). Instead, the total expected interest to be earned over the life of the entire contract is spread evenly over all payments.
Single Life Annuities, Joint and Survivor Life Annuities, and Term Certain Annuities can all be prescribed. Taxation of prescribed annuities is on a calendar year basis - the taxpayer receives a tax slip for the interest portion of all payments received in a calendar year.
Prescribed taxation is generally more favorable than non-prescribed taxation, because the tax is averaged over the lifetime of the annuity providing an element of tax deferral. An exception to this rule is for Accelerated Annuities (which are based on shortened life expectancy), because prescribed taxation is based on normal life expectancy. In these cases, non-prescribed taxation may be more beneficial.
To qualify for "level" prescribed taxation within non-registered contracts, the following is a partial list of conditions that must all be met:
Non-prescribed annuities are taxed using accrual taxation and the income earned on the contract must be reported in the taxpayer's income on each anniversary day of the policy. Taxation of non-prescribed annuities is on a policy year basis - the taxpayer receives a tax slip for the interest portion of all payments received in a policy year. Since individuals report their income on a calendar year basis, the amount reported on an anniversary day is included in the individual's income for the calendar year in which the anniversary day falls.
In general, clients should consider the tax advantages of prescribed annuities over non-prescribed annuities. However, there are situations where non-prescribed annuities are appropriate for a client. These situations include clients who want:
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