Q: Do payments from an annuity (bought with after-tax money) trigger a clawback of the Guaranteed Income Supplement?
A: Money all looks the same when it arrives in your bank account. But when it comes to annuities, it’s not all the same in the eyes of the CRA. Part of the money is simply a return of your capital, explains Beth Hamilton-Keen, Director of Private Client Portfolio Management at Mawer Investment Management. “The annuity provider is giving you some of your money back. That portion was taxed when you earned it, and therefore it isn’t taxed again. But the other part is income you have earned on the investments and that part is taxable.” Had you bought the annuity in your RRSP, the entire payment would be taxable because it wasn’t taxed in the first place.
If the annuity income is high enough, it can indeed trigger a clawback of the Guaranteed Income Supplement, which is reserved for seniors with very low income. The annuity provider will give you a slip to include with your taxes so both you and the government can see the amount of each part. Before tax time, it’s worth booking an appointment with an accountant to figure out how to minimize both the clawback and the overall amount of tax you pay.