Prescribed annuities issued after 2016: Impact of the legislation

Investment insight

Changes made to the taxation of prescribed annuity contracts (PACs)¹ impacts the proportion of the annuity payment that will be taxable income.

Under legislation introduced by the federal government, PACs issued after 2016 will have to use an updated mortality table to calculate the return of capital portion of each annuity payment. The prescribed table for those annuities will be the Annuity 2000 Basic Mortality Table of the Society of Actuaries (Annuity 2000 Table) instead of the 1971 Individual Annuity Mortality (IAM) Table. This change will increase the life expectancy of the annuitant, which will decrease the return of capital portion and potentially increase the taxable portion of the annual annuity payments from a PAC.

The legislation provides that the 1971 IAM Table will apply to annuities that were issued up to the end of 2016 and:

  • are prescribed annuities


  • would have been prescribed annuities, except that annuity payments haven’t commenced, and for which the annuity rates are fixed and determined before 2017 and can’t be terminated except by the death of the measuring life.

This allowed for grandfathering of existing prescribed annuities and deferred annuities that became prescribed annuities provided the annuity rates were set prior to 2017.

How the numbers stack up

For a life annuity with a three-year guarantee, the differences in life expectancy between the 1971 IAM Table and the Annuity 2000 Table for a few select ages are as follows:

Effective life expectancy (years)


1971 IAM

Annuity 2000

Male 65



Male 70



Male 75



Female 65


Female 70 16.1 18.1
Female 75 12.5 14.3
*For illustration purposes only.

In these examples, the updated mortality table extends life expectancy by approximately two years. The portion of the annual annuity payments considered to be tax-free return of capital is based on the total expected number of annuity payments. Increased life expectancy increases the expected number of payments, which means the total return of capital (effectively, the annuity premium) is spread out over more payments. As a result, a smaller portion of each payment will be considered return of capital and the taxable portion of each annuity payment may increase.

For example, if someone paid $100,000 for a PAC life annuity and the life expectancy using the 1971 IAM Table is 20 years, then the first $5,000 of annual annuity payments ($100,000 / 20 years) would be considered tax-free return of capital. Any annuity payments received above that amount each year would be taxable. However, if the life expectancy with the Annuity 2000 Table is 22 years, then only the first $4,545 of annual annuity payments ($100,000 / 22 years) would be considered tax-free return of capital. Any annuity payments received above that amount each year would be taxable. The net result is the annual amount of tax-free income that an annuitant can receive each year is lower with the Annuity 2000 Table.

The following chart helps illustrate the impact on the taxable portion of an annuity* for the same ages.

  Annual income Taxable portion  



1971 IAM Annuity 2000

Male 65


$5 $867

Male 70


$0 $293

Male 75


$0 $0

Female 65


$546 $1,019
Female 70 $6,228 $17 $701
Female 75 $7,241 $0 $231
*Based on a $100,000 premium, single life, non-registered PAC, three-year period at March 9, 2016. For illustration purposes only.

As you can see, the changes can increase the taxable portion of the annuity payments and, therefore, decrease the net cash flow after tax.

It’s important to note that the changes don’t affect PACs that are term certain annuities, nor does it affect non-prescribed annuities. In addition, the changes don’t impact the gross annual payments.

Prior to 2016, all testamentary trusts could potentially buy a prescribed annuity. After 2015, only testamentary spouse or common-law partner trusts or testamentary trusts that are qualified disability trusts (QDT) for the year in which the annuity is issued can qualify, provided they meet the other conditions of a PAC. A QDT is a testamentary trust, resident in Canada, that jointly elects, with one or more beneficiaries eligible for the disability tax credit, to be a QDT and that beneficiaries haven’t made that election with any other trust.

Annuities aren’t for everyone. However, in the right situation, they can be very useful and provide a tax-efficient source of income. Reducing the amount of income a client reports on a tax return can not only save taxes but can help preserve income-tested benefits like Old Age Security (OAS). Furthermore, for those 65 or older, taxable income from a non-registered annuity (prescribed or non-prescribed) will qualify for the pension income tax credit and pension income splitting.

In this article, prescribed annuity contracts (PACs) refer to annuities purchased with non-registered funds that qualify for prescribed tax treatment.

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Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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