What is the tax rate on pension income in Canada?

Find out what the tax rate is on pension income in Canada and how it can be legally reduced
What is the tax rate on pension income in Canada?

While your mind is set for retirement after reaping the benefits of your years-long work, the law still imposes certain obligations from you – that would be taxes. It is better to know what the tax rate on pension income in Canada is. It would also be good to know the ways to reduce them within the bounds of the law.

What is the tax rate on pension income in Canada?

Your pension benefits are still considered “income”, where the appropriate tax rate on pension income in Canada will apply. These tax rates may vary for every pension income that you receive.

Canada Pension Plan (CPP)

Federal income taxes on your CPP benefits are not automatically deducted by the government. You can request an automatic deduction by applying online or submitting a paper application to the nearest Service Canada office.

If you opt not to file for an automatic deduction of your income tax from your CPP benefits, you will have to manually pay your income tax each quarter.

Tax rates on CPP income

The tax rates on the pension income from CPP are based on your overall taxable income. As of 2023, these are the federal income tax rates on your CPP income:

  • 15%: C$53,359 and below
  • 20.50%: C$53,360 to C$106,717
  • 26%: C$106,718 to C$165,430
  • 29%: C$165,431 to C$235,675
  • 33%: C$235,676 and above

Old Age Security (OAS)

Just like the CPP, your OAS pension benefits are also taxable and must be reported through your income tax return. It is not automatically deducted. You must apply for automatic deduction through the same channels as the CPP.

Recovery tax or Clawback

In addition, recovery tax – also called “clawback” – applies to your OAS benefits. This means that you would have to repay a part or all your OAS benefits if your net income exceeds the minimum income recovery threshold.

For income year 2023, the threshold amount is C$86,912.

The tax rate on the pension income for OAS recovery tax is at 15%. This will be computed on the difference between your income (which exceeded the threshold) and the threshold set for that year.

For example, if your income for the year 2023 is at C$100,000, and the threshold amount for 2023 is C$86,912, the 15% of the difference between these two amounts (which is C$13,088) would be C$1,963.20. It means that you would have to repay C$1,963.20 for the next period.

For an overview on pensions and how they work, read our short explainer on Canada’s pension legislation.

Tax on CPP and OAS for non-residents

If you’re receiving CPP and OAS benefits but you’re currently outside Canada, CPP and OAS benefits will be subject to non-resident tax. The non-resident tax rate on pension or benefits from the CPP and OAS is 25%. This could be lower if there’s a tax treaty between Canada and the country you’re in.

OAS recovery tax or OAS clawback will also apply even if you’re outside Canada and if the threshold applies to you. There’s an exception if the country you live in has a tax treaty with Canada.

Even if you’re living outside Canada, you must still file your income tax return for each taxation year, given that you’re receiving CPP and OAS benefits.

Private or supplemental pension benefits

Other pension benefits from private or supplemental pension plans are also taxed. Administrators of these pension plans may deduct federal and provincial income taxes whenever applicable.

Can taxes on pension income in Canada be reduced?

There are many legal ways to reduce the tax rate on your pension income in Canada. An overview of these ways is discussed below. For a more detailed explanation, reach out to a pensions & employee benefits lawyer in your area.

If you’re in Toronto, for example, contact a Lexpert-Ranked lawyer for pensions & employee benefits in Ontario. Your lawyer will assess your case and tell you which option is best for you.

RRSP contributions

Establishing an RRSP will benefit you in two ways. First, it will help you save money for the future.  Second, RRSP contributions can be used to reduce the taxes you owe.

The deductible tax rate of your RRSP contributions on your income tax and benefit return may range from 20% to 50%. This tax rate depends on your marginal tax rate and your provincial tax rates.

When you file your tax return, the RRSP contributions you state in the return can be used to reduce your taxable income. This will then reduce the total taxes that you would have to pay.

The RRSP contributions which you can use to deduct from your income tax and benefit return are:

  • your own contributions to your RRSP;
  • your contributions to your spouse’s or common-law partner’s RRSP
  • your unused RRSP contributions from the previous year

However, know that receiving payments from your RRSP is a different matter. You will have to pay tax to receive such payments. These tax rates for RRSP payments are:

  • 10% (5% in Quebec): withdrawals of up to C$5,000
  • 20% (10% in Quebec): withdrawals of more than C$5,000 up to C$15,000
  • 30% (15% in Quebec): withdrawals of more than $15,000

Check with a taxation lawyer or a pensions & employee benefits lawyer when reducing taxes through the RRSP contributions. Other tax schemes may fall into aggressive tax planning or tax evasion, which is prohibited by the CRA and punishable under the law.

Tax credits

There are two tax credits that may be available to you which may reduce your tax rate based on your income tax:

  • Non-refundable tax credits or personal amount: 15% of the federal personal amount
  • Refundable tax credits: GST/HST credit and Working Income Tax Credit

You may also want to look up the provincial and territorial deductions and tax credits that might apply to you.

Tax credits from foreign pension

If you’re receiving pension benefits from another country, you may claim foreign tax credits when you file your income tax return. This can prevent any double taxation on your pension benefits, since the pension you receive from outside Canada may already be taxed by that country.

Pension income splitting

Another way of reducing your tax rate on pension income in Canada is by personal income splitting. Here, you and your spouse or common-law partner may elect to split your eligible pension benefits or superannuation income by making a joint election.

Both you and your spouse must complete the necessary form, which must be included when you both file your tax returns.

Want to learn more on getting the best tax rates on pension income the legal way? Consult with a Lexpert-Ranked pensions & employee benefits lawyer in Canada.