How Are Pensions Taxed in Canada? A Comprehensive Breakdown

Understanding how pensions are taxed in Canada is essential for retirees looking to maximize income while minimizing tax burdens. Different types of pensions—government, employer-sponsored, or personal savings—are subject to varying tax rules that impact retirement planning.

Taxation depends on factors such as the type of pension, available deductions, and income-splitting strategies. Knowing these details helps retirees retain more of their money while complying with tax laws.

Government Pensions

Public pension programs provide taxable retirement income that must be reported on annual tax returns. The specific tax treatment varies by program.

Canada Pension Plan

The Canada Pension Plan (CPP) provides monthly payments to individuals who contributed during their working years. These benefits are fully taxable and depend on earnings history and the age benefits begin. In 2024, the maximum monthly CPP retirement pension is $1,364.60 for those starting at age 65.

Taxes are not automatically deducted from CPP benefits unless requested through Service Canada. Retirees can opt for tax withholding to avoid a large bill at year-end. Since CPP payments are subject to marginal tax rates, strategies like pension splitting or deductions can help reduce tax liability.

Old Age Security

Old Age Security (OAS) is available to Canadians aged 65 and older who meet residency requirements. Unlike CPP, OAS benefits depend on years lived in Canada after age 18 rather than earnings history. As of 2024, the maximum monthly OAS payment is $713.34 for those aged 65 to 74, with a slight increase for those 75 and older.

OAS payments are fully taxable. Higher-income retirees may face the OAS recovery tax, or “OAS clawback,” if their net income exceeds $90,997 in 2024. For every dollar above this threshold, 15% is deducted from OAS payments until eliminated at approximately $148,000. Retirees can reduce exposure to the clawback by deferring OAS, adjusting withdrawals from registered accounts, or splitting pension income with a spouse.

Other Public Plans

Beyond CPP and OAS, some retirees receive benefits from other government-administered pensions. The Guaranteed Income Supplement (GIS) provides non-taxable income support to low-income OAS recipients and does not need to be reported on a tax return.

The Quebec Pension Plan (QPP) operates similarly to CPP but applies to Quebec workers. QPP payments are fully taxable. Government employees may also receive taxable pensions from public sector plans like the Public Service Pension Plan, requiring tax planning to manage overall income.

Employer-Sponsored Plans

Many retirees receive income from employer-sponsored pensions, which are taxed upon withdrawal. The tax treatment depends on the plan type.

Defined Benefit Plans

A defined benefit (DB) pension plan provides a predetermined monthly income based on salary history and years of service. These pensions, funded by employer and sometimes employee contributions, grow tax-deferred until retirement.

When benefits are paid out, they are fully taxable. Since DB pensions provide steady income, retirees may find themselves in a higher tax bracket. Pensioners can request tax withholding to avoid a large year-end bill. Pension income splitting allows up to 50% of eligible pension income to be transferred to a lower-earning spouse, reducing overall tax liability.

Lump-sum payouts instead of monthly payments have significant tax implications. These withdrawals are subject to withholding tax and must be included as income in the year received, potentially increasing tax liability. Rolling a lump sum into a Locked-In Retirement Account (LIRA) or a Life Income Fund (LIF) can defer taxes and provide more control over withdrawals.

Defined Contribution Plans

A defined contribution (DC) pension plan differs from a DB plan in that retirement income is not predetermined. Instead, employer and employee contributions are invested, and the final pension amount depends on investment performance. Contributions grow tax-free, but withdrawals are fully taxable.

Upon retirement, DC plan funds are typically transferred to a Registered Retirement Income Fund (RRIF) or an annuity. RRIF withdrawals are subject to minimum annual requirements, which increase with age. At age 71, the minimum withdrawal rate is 5.28%, rising to 6.82% by age 80. These withdrawals are taxed at the individual’s marginal rate, requiring careful planning to avoid higher tax brackets.

Unlike DB plans, DC plans do not provide guaranteed income, so retirees must manage withdrawals to ensure funds last throughout retirement. Strategies such as withdrawing smaller amounts early or deferring CPP and OAS can help optimize tax efficiency.

Group RRSPs

A Group Registered Retirement Savings Plan (Group RRSP) allows employees to contribute a portion of their salary on a tax-deferred basis. Employer contributions are taxable to the employee in the year made.

Withdrawals are fully taxable and subject to withholding tax, which varies based on the amount withdrawn. In 2024, withdrawals up to $5,000 are taxed at 10% (5% in Quebec), while amounts over $15,000 are taxed at 30% (15% in Quebec). These withheld amounts count toward total tax liability, meaning additional tax may be owed depending on total income.

Unlike RRIFs, Group RRSPs have no mandatory withdrawal requirements, offering flexibility in managing withdrawals. However, large withdrawals in a single year can push income into a higher tax bracket. Converting a Group RRSP to a RRIF or annuity can help spread out income and reduce tax burdens over time.

Withholding Taxes

When pension income is withdrawn, a portion is withheld to cover potential tax liabilities. This is a prepayment toward the total amount owed at tax time.

For registered retirement savings converted into income, withholding tax applies only when withdrawals exceed the RRIF minimum. Excess withdrawals are subject to federal withholding rates: 10% on amounts up to $5,000, 20% for withdrawals between $5,001 and $15,000, and 30% for amounts exceeding $15,000.

Foreign pension income is often subject to withholding tax by the country of origin. Tax treaties may reduce or exempt withholding. U.S. pension income, for example, is typically subject to a 15% withholding tax under the Canada-U.S. Tax Treaty, but individuals can claim a foreign tax credit to offset this amount.

Pension Splitting

Sharing pension income between spouses can lower tax liability, particularly when one partner earns significantly more in retirement. By shifting up to 50% of eligible pension income to the lower-earning spouse, couples may reduce their combined tax burden.

Eligibility depends on the type of income. Payments from a Registered Pension Plan (RPP) qualify at any age, while RRIF withdrawals and annuities are eligible once the recipient turns 65. Pension splitting does not transfer actual funds; instead, it is an adjustment made on tax returns, requiring both spouses to consent by filing Form T1032 annually.

Credits and Deductions

Retirees can reduce taxes through various credits and deductions.

The Pension Income Amount provides a non-refundable tax credit for those receiving eligible pension income. Individuals aged 65 and older can claim up to $2,000 on qualifying income, such as payments from a Registered Pension Plan or annuities from a Registered Retirement Savings Plan (RRSP).

Medical expenses can also provide tax relief. The Medical Expense Tax Credit (METC) allows individuals to claim eligible expenses exceeding the lower of 3% of net income or $2,759 (for 2024). The Disability Tax Credit (DTC) offers further relief for those with severe and prolonged impairments.