Prescribed Life Annuities

Annuity - 9dots99.comTax-efficient retirement income

Taxation is an important consideration when planning your retirement income, and using a prescribed life annuity is one of the best ways to generate tax-efficient income.



When a life annuity is purchased, the owner receives regular income payments which are comprised of capital and interest income. How the interest income is taxed depends on whether the owner elects “prescribed” or “non-prescribed” taxation when the policy is issued.

Non-prescribed taxation:

Under non-prescribed taxation the interest income is fully taxable at the owner’s marginal tax rate. The owner pays significantly more tax in the early years (when the interest portion of the annuity payment is largest), with the taxable portion reducing over time.


Prescribed taxation:

This tax option is unique to non-registered payout annuities. Policy owners enjoy preferred tax status and level taxation – two great benefits which can result in significant after-tax savings. These benefits are discussed below:

Preferred tax status:

The Canada Revenue Agency (CRA) assigns a preferred tax status to prescribed life annuities, which allows only a portion of the interest income to be taxed. This provides significant tax savings in comparison to other non-registered investment options.

Level taxable income:

Unlike other investments, a prescribed life annuity has a level taxation structure, which means the taxable amount is spread out evenly over the future life of the owner. As a result, the after-tax income is relatively consistent. This can help to ensure that essential expenses are covered, and help you to know the amount of discretionary income that is available each year.


Choosing “prescribed” or “non-prescribed” taxation will not affect the owner’s income payment, however it will have a significant impact on the owner’s after-tax income.

Who is eligible for a prescribed life annuity?

Most individuals are eligible for the prescribed taxation option, provided:

  • the source of funds is non-registered
  • the owner and the annuitant are the same
  • payments are not deferred beyond the end of the following calendar year
  • the guarantee period does not extend
  • Beyond age 90 the income payments are not indexed

Do you have questions about prescribed life annuities, feel free to get in touch.



About the Author