Boggs: New rules increase tax on annuity payments

Tax changes coming could be great incentive to buy now

While purchasing a life annuity with non-registered money has had the benefit of providing a lifetime guaranteed income unaffected by the market and interest rates, tax changes coming into effect next year could be a great incentive to buy now.

An annuity is a contract with a life insurance company. You deposit a lump sum of money at a locked-in interest rate and the company agrees to pay you a guaranteed income for a set period of time or for the rest of your life.

Annuities are most often used to generate a secure retirement income. They can be purchased with money from a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF) or a non-registered account. The minimum purchase amount for an annuity with Sun Life Financial is $5,000.

Income from a life annuity purchased with non-registered money may qualify for preferential tax treatment called prescribed taxation provided certain qualifications are met. The upcoming tax changes, however, will increase the taxable portion of each payment and reduce the after-tax income that you receive.

Here’s how prescribed taxation works.

After the life insurance company calculates the income for an eligible annuity purchased with non-registered money, it calculates the taxable portion of each income payment using a formula specified by the Income Tax Act (ITA).

The formula takes into account the premium used to purchase the annuity, the amount of each annuity payment and the number of payments you’re expected to receive depending on your life expectancy, which is determined by using tables specified by the ITA.

The taxable portion remains the same for every payment. Generally, the older you are when you buy the annuity the lower the taxable amount.

For some people there will be no tax payable.

After January 1, 2017, the formula is changing and will use update life expectancy tables. People are living longer these days. The current tables use life expectancy data from 1971 but the new tables reflect the significantly improved expectancies.

Under the new rules the annual taxable portion for a male purchasing a single life annuity at age 65 that provides an annual income of $5,906 will rise to $980 from $412. For a single male at age 70 providing an annual income of $6,808 the annual taxable portion will rise to $926 from $272. At age 80 with an annual income of $8,662 the annual taxable portion will rise to $532 from 0 under the existing rules.

Taxable amounts for females purchasing single life policies also will rise. Taxable amounts on a policy purchased at 65 providing annual income of $5,327 will increase to $902 from $496; to $842 from $279 at age 70 providing an annual income of $6,161; and to $291 from $0 at age 80 providing an annual income of $8,043.

Annuities purchased on or after Jan. 1 2017, will use the new life expectancy table to calculate the taxable portion of each payment but annuities purchased before will still use the old tables, even if payments won’t begin until after Jan. 1, 2017. This grandfathering provision is a good reason to purchase before Jan. 1, 2017.

“With high volatility in the markets and with people living longer, annuities provide a stable, guaranteed income and decrease the risk of you out-living your money, but the new tax changes can be quite material, so if you are considering an annuity now might be a good time,” says Brennan Kennedy, vice president of individual wealth products with Sun Life Financial Canada.

If you are considering investing in an annuity talk to a financial adviser to determine if it is right for you.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Justice Anne Molloy, from top left, John Rinaldi, Dr. Scott Woodside and accused Alek Minassian are shown during a murder trial conducted via Zoom videoconference in this courtroom sketch on December 11, 2020. THE CANADIAN PRESS/Alexandra Newbould
Verdict expected today in Toronto van attack trial

Alek Minassian admitted to planning and carrying out the attack on April 23, 2018

Meng Wanzhou, chief financial officer of Huawei, leaves her home in Vancouver to attend a court hearing, Monday, March 1, 2021. THE CANADIAN PRESS/Jonathan Hayward
Trump comments on trade negotiations with China take centre stage in Meng case

Meng was arrested at Vancouver’s airport more than two years ago

Red Deer dogs Bunsen and Beaker helped save a missing pet recently. The two dogs have more than 80,000 followers on Twitter. (Contributed photo)
WATCH: Red Deer science dogs help save lost pet

Red Deer science-communicating dogs Bunsen and Beaker helped rescue a missing pet… Continue reading

Commissioner Roger Goodell talks about the Walter Payton NFL Man of the Year award during the NFL Honors ceremony as part of Super Bowl 55 Friday, Feb. 5, 2021, in Tampa, Fla. (AP Photo/Charlie Riedel)
Annual NFL women’s forum enhancing career opportunities

When Sam Rapoport envisioned conducting virtually the NFL’s fifth annual Women’s Career… Continue reading

Seiko Hashimoto, president of the Tokyo 2020 Organizing Committee of the Olympic and Paralympic Games (Tokyo 2020), speaks during a news conference with Toshiro Muto, left, CEO of Tokyo 2020, after a council meeting in Tokyo on Wednesday, March 3, 2021. (Kimimasa Mayama/Pool Photo via AP)
Fans from abroad unlikely for postponed Tokyo Olympics

Olympics scheduled to open on July 23

FILE - Singer Jhene Aiko poses for a portrait on Dec. 7, 2020, in Los Angeles. Aiko will host the 63rd GRAMMY Awards on March 14. (Photo by Chris Pizzello/Invision/AP)
Jhene Aiko to host Grammy Award premiere ceremony

63rd annual Grammy ceremony set for March 14

Minister of Canadian Heritage Steven Guilbeault holds a press conference in Ottawa on November 3, 2020. The Heritage Department is committing $40 million to a “COVID-safe events fund” designed to encourage arts and cultural plans to move forward in the pandemic. THE CANADIAN PRESS/Sean Kilpatrick
Heritage minister unveils COVID-19 events fund for arts and cultural sector

Financial support tops out at $100,000 per eligible applicant

opinion
Opinion: Crisis in long-term care must include data-driven change

More than 19,000 people in Canada have died from COVID-19 – more… Continue reading

The Dawe family home in the Michener Hill subdivision in Red Deer. This house was designed and built by Robert G. Dawe, a local engineer, in 1911 and has remained in the family ever since. (Contributed photo)
Michael Dawe: 65 years of Red Deer history

As a major milestone birthday looms, I thought that it might be… Continue reading

Dallas Stars' Mark Pysyk (13) and Tampa Bay Lightning's Ondrej Palat (18) compete for control of a loose puck in the first period of an NHL hockey game in Dallas, Tuesday, March 2, 2021. (AP Photo/Tony Gutierrez)
Vasilevskiy 3rd straight shutout as Lightning top Stars 2-0

Vasilevskiy 3rd straight shutout as Lightning top Stars 2-0

Montreal Canadiens goaltender Carey Price (31) grabs a loose puck as Canadiens defenceman Ben Chiarot (8) and Ottawa Senators left wing Brady Tkachuk (7) battle for the rebound during first-period NHL hockey action Tuesday, March 2, 2021 in Montreal. THE CANADIAN PRESS/Ryan Remiorz
Hab down Sens 3-1 to snap 5-game winless streak; Ducharme earns 1st NHL coaching win

Hab down Sens 3-1 to snap 5-game winless streak; Ducharme earns 1st NHL coaching win

Most Read