🇨🇦 Canada · 5 min read · Published 2026-09-07 · Updated 2026-09-07

Written by Jordan Reeves · Editorial review: automated source and figure checks (how we check this)

Sources last verified: 2026-09-07

How Is Annuity Income Taxed in Canada?

Fully, if the annuity was bought with registered money. If it was bought with non-registered money, only the interest portion of each payment is taxable, and prescribed treatment spreads that interest evenly across every payment instead of front-loading it.

60-SECOND ANSWER

A registered annuity is fully taxable; a non-registered one taxes only the interest, spread evenly if the annuity is prescribed.

The answer:: Registered annuity payments are fully taxable. Non-registered payments are part return of capital and part taxable interest.
The trap:: Buying a non-prescribed annuity without noticing. The interest is front-loaded, so early payments carry far more tax.
The recommendation:: Ask whether the contract qualifies for prescribed treatment, because the level interest reporting materially reduces early taxable income.

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Where the AI summary above gets this wrong

"Annuity payments are taxed as regular income."

That's surface-true. Here's what it misses:

Only registered annuities are fully taxable — A non-registered annuity is part return of your own capital, and only the interest element is income.
Prescribed treatment levels the tax — The interest is spread evenly across all payments rather than concentrated in the early years when the balance is largest.
The difference matters for benefit tests — Lower reported income in the early years keeps more room under the OAS recovery threshold.

→ See what annuity income costs at your rate

01 Registered versus non-registered

An annuity purchased with RRSP or RRIF money is a registered annuity, and every payment is fully taxable as ordinary income, because none of the capital was ever taxed and none of the growth was either.

An annuity purchased with non-registered money is different. Part of each payment is your own capital coming back, which is not income, and only the interest element is taxable. The comparison against a guaranteed deposit is in GICs versus annuities.

Source: Interest and other investment income (line 12100)

02 What prescribed treatment does

Without prescribed treatment, interest is calculated on the declining balance, so early payments contain much more interest and much more tax than later ones. That front-loading is unhelpful for a retiree in their sixties, whose other income is often at its highest in the first years of retirement.

A prescribed annuity spreads the total interest evenly across every payment, producing a constant taxable amount for the life of the contract. Contracts must meet stated conditions to qualify, which is a question for the issuer before purchase rather than after.

WORKED EXAMPLE · Try the numbers

Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.

Amount ($)

Your marginal rate (%)

What you keep after tax

$6,700

At a 33% marginal rate, $10,000 costs $3,300 in tax and leaves $6,700.

Source: Interest and other investment income (line 12100)

03 Why the difference reaches beyond tax

Reported income drives the Old Age Security recovery tax, the age amount and the Guaranteed Income Supplement. Level interest reporting keeps early-year income lower, which can preserve benefits that front-loaded interest would reduce.

For a retiree close to the recovery threshold this is often worth more than the tax saving itself, and the threshold arithmetic is in the OAS clawback threshold.

Prescribed treatment also requires the contract to meet the conditions from the outset; it cannot be applied to an existing annuity afterwards. That makes it a question to settle before signing, alongside the guarantee period and any survivor provision, rather than something an issuer can adjust once the payments have started.

Source: Canadian income tax rates for individuals

Prescribed treatment is the sort of thing nobody asks about and everybody should. Two annuities with identical payments can produce very different taxable incomes in the first decade, and by the time that shows up on a return the contract is signed.