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 (on a cash basis), or
- Non-prescribed (on an accrual basis).
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:
- The annuity must be purchased with non-registered
- The payments must not be guaranteed beyond the owner's
91st birthday (or the 91st birthday of the youngest annuitant for a
joint and survivor Life Annuity),
- The payments must be level (indexing is not allowed),
- The owner and the person entitled to the payments
(payee) must be the same and may not be a corporation,
- The payments must begin in the current or next calendar
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:
- A payment guarantee past their 91st birthday,
- Payments indexed to help combat inflation,
- The annuity to be owned by a corporation (not an
- An Accelerated Annuity / Nursing Care Income Plan,
in some cases.
"What if the money runs out?"
Arranging nursing home or long term care for an elderly family member
is no easy task. For many, managing the cost of nursing care is a serious
concern. If your parent or relative outlives his or her savings, how long
can your family continue to pay for the desired level of care - and at
what cost to your own lifestyle or retirement plans?
Manulife has created the Nursing Care Income Plan - it's a plan
designed to provide the certainty of guaranteed lifetime income based
on one up-front investment.
The plan features a guarantee that pays your family
member's monthly nursing home fees for as long as your family member lives.
It could save you and your family thousands of dollars and years of worry.
With help from Manulife we are featuring a few
new case studies about Annuities - that further explain the in's and out's
of this plan.
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, Fiscal Agents Money Management Newsletter
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