# taxation of pension income



## digitalatlas (Jun 6, 2015)

Hi everyone,

How is pension income taxed? Is it taxed at the full marginal rate? Is it the same whether it's CPP or work pension? And is this the same as RRSP/RRIF, since that (as I understand) is taxed at the full marginal rate.

If pension income is taxed at full marginal, I would think that it's better to end up in retirement with lots of other sources of more tax favourable income (dividends, cap gains?), right? It would be as much as working income (save for pension credit if income is low enough).

Thanks


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## AltaRed (Jun 8, 2009)

Right on all counts BUT if one is lucky enough to have a well funded COLA'd DB pension, there isn't anyone who is going to argue with full taxation rates on that. Tax deferment for decades via a DB plan, or DC plan, or an RRSP is still a powerful tool despite 'full rate' taxation. Remember that you are getting a 'full rate' tax credit on money committed to such vehicles as well.


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## like_to_retire (Oct 9, 2016)

digitalatlas said:


> Hi everyone,
> 
> How is pension income taxed? Is it taxed at the full marginal rate? Is it the same whether it's CPP or work pension? And is this the same as RRSP/RRIF, since that (as I understand) is taxed at the full marginal rate.
> 
> ...


Pension income is taxed basically the same as any other income, other than there is a pension income credit available to you.

Nothing is really taxed at the full marginal rate. All income is grouped together along with all the credits and deductions and results in an average rate that you pay to the government.

ltr


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## kcowan (Jul 1, 2010)

Yup. Except for OAS clawbacks, for everything else, one dollar is as good as another. And for dividends and cap gains, OAS clawback also applies.


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## digitalatlas (Jun 6, 2015)

kcowan said:


> Yup. Except for OAS clawbacks, for everything else, one dollar is as good as another. And for dividends and cap gains, OAS clawback also applies.


Interesting, so you're saying that while dividends may only be taxed at 50%, the full 100% of it would affect OAS clawbacks?

Thanks to everyone for your replies.


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## AltaRed (Jun 8, 2009)

digitalatlas said:


> Interesting, so you're saying that while dividends may only be taxed at 50%, the full 100% of it would affect OAS clawbacks?
> 
> Thanks to everyone for your replies.


It is the grossed up number that is used in the OAS clawback calculation. Seems absurd but it isn't. What the gross up does is bring the dividend back to a pseudo/synthetic pre-tax basis (before tax corporate basis) which then is the basis for applying the personal income rates of you and I.


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## digitalatlas (Jun 6, 2015)

Thanks! OK, something to be aware of. Though probably still better off overall with tax-favourable dividends/cap gains in a non-reg account, despite OAS clawback...most of the time (would need to calculate to be sure), right?


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## AltaRed (Jun 8, 2009)

IMO, for the most part, yes. Anyone who gets into OAS clawback range is not in need of social support anyway (which is what OAS is). 

To be clear though.... only 50% of cap gains is taxable, so it is the 50% number that goes on Line 127 and is factored into the income number used to calculate OAS clawback. So from an OAS perspective, it is much better to have cap gains income than any other kind of income when it comes to OAS clawback calculations.


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## digitalatlas (Jun 6, 2015)

Thanks for your explanation! Makes perfect sense.


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## Eclectic12 (Oct 20, 2010)

digitalatlas said:


> Interesting, so you're saying that while dividends may only be taxed at 50%, the full 100% of it would affect OAS clawbacks?


Where does the "dividends may only be taxed at 50%" come from?

My understanding is that if the dividends are from a non-Canadian company - the dividends are taxed by Canada at the same rate as income.
Canadian companies, especially those paying eligible dividends will have the gross-up/dividend tax credit to result in a lower tax rate being paid.

Either way, using Ontario as an example - to pay "50%" on foreign dividends means other income of over $202K. For eligible dividends, other income over $220K will mean the tax rate on the eligible dividends is 39.34% (i.e. less than 50%). http://www.taxtips.ca/taxrates/on.htm

From what I recall, the OAS clawback starts around $72K with OAS wiped out at something like $122K so if dividend tax rates are at this high a level, it seems far too late to worry about it (but potentially a good problem to have! :wink.




AltaRed said:


> ... To be clear though.... only 50% of cap gains is taxable, so it is the 50% number that goes on Line 127 and is factored into the income number used to calculate OAS clawback. So from an OAS perspective, it is much better to have cap gains income than any other kind of income when it comes to OAS clawback calculations.


To add a bit more detail ...

$1 Capital Gains (CG) gets reported as $0.50 taxable CG ... slowing down how quickly one gets into the income level that results in OAS threshold.
$1 interest/employment income/foreign dividends i= $1 ... it is at par so the impact should be easy to figure out.
$1 eligible dividends = $1.38 or so that is included in the income that is tested by the OAS threshold. The dividend tax credit will reduce the taxes but the income test has already happened before that.

Interestingly ... where one makes a big CG sale and is using a carried forward capital loss (CL) from previous years to reduce or eliminate the CG, the same thing happens. 

The OAS income test is applied to net income before adjustments on line 234 while the carried forward CL is deducted after this, on line 253. It seems that where one has a large CG where the OAS clawback is of concern, having a CL in the same tax year is advisable.
http://www.taxtips.ca/seniors/oas-clawback.htm


Cheers


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## kcowan (Jul 1, 2010)

This year the OAS Clawback starts just under 75k.


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## AltaRed (Jun 8, 2009)

kcowan said:


> This year the OAS Clawback starts just under 75k.


And is fully clawed back at $121,070 Line 234 net income. Dividend and cap gains income in particular is still much better than a 15% OAS clawback rate. No one should be worried about it....really.


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## tdiddy (Jan 7, 2015)

AltaRed said:


> And is fully clawed back at $121,070 Line 234 net income. Dividend and cap gains income in particular is still much better than a 15% OAS clawback rate. No one should be worried about it....really.


But if you have the choice and will be in the 75K-125K range during retirement then selling capital gains is more efficient wrt OAS clawback than dividend income because of gross up no?


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## AltaRed (Jun 8, 2009)

Certainly!


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## like_to_retire (Oct 9, 2016)

tdiddy said:


> But if you have the choice and will be in the 75K-125K range during retirement then selling capital gains is more efficient wrt OAS clawback than dividend income because of gross up no?


And the same for the Age Tax Credit until about $85K.

ltr


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## tdiddy (Jan 7, 2015)

like_to_retire said:


> And the same for the Age Tax Credit until about $85K.
> 
> ltr


I guess the other question is will this tax credit and OAS survive politically/economically until us in our 20/30s are 65/67+ 

so much talk of tax fairness these days, not sure how reasonable it is for someone taking 80K capital gains and 40K RRSP getting nearly full OAS


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## kcowan (Jul 1, 2010)

like_to_retire said:


> And the same for the Age Tax Credit until about $85K.
> ltr





tdiddy said:


> But if you have the choice and will be in the 75K-125K range during retirement then selling capital gains is more efficient wrt OAS clawback than dividend income because of gross up no?
> 
> ...so much talk of tax fairness these days, not sure how reasonable it is for someone taking 80K capital gains and 40K RRSP getting nearly full OAS


So there is one other strategy and that is to blow through all deductions and that is a massive capital gain that gets you above $125k and get it over with. Then go back to living off dividends and interest.


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## like_to_retire (Oct 9, 2016)

kcowan said:


> So there is one other strategy and that is to blow through all deductions and that is a massive capital gain that gets you above $125k and get it over with. Then go back to living off dividends and interest.


But that's the problem. There's lots of people in that 75K-125K range, and when they play around with a tax program and see the marginal rate on an extra $100 of interest income for the guy making $125K is less than they're paying on their tax form for an extra $100, it gets discouraging.

I think the entire tax system needs an overhaul.

ltr


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