Annuities in Canada

An annuity is the oldest retirement product there is and the one Canadians understand least. Part of the reason is that it does the opposite of everything else on the shelf. A portfolio keeps your capital and gives you a variable income. An annuity gives up your capital and fixes your income for as long as you live. You cannot change your mind afterwards, which is why people hesitate, and you cannot outlive the payment, which is why they keep coming back to it. Annuities are listed on this site as a product and until now there has been nothing here to read about them. What follows sets out what you are actually signing, the difference between a single life and a joint contract, what a guarantee period buys, what a term certain contract is, how the tax changes depending on where the money came from, what prescribed taxation does to the taxable portion, and how the whole thing compares with simply drawing down a portfolio.

What an annuity is, contractually

You pay a life insurer a sum of money. In exchange the insurer contracts to pay you a stated amount at stated intervals, either for a stated period or for the rest of your life. That is the whole product. It is a contract, not an investment account. Once it starts there is no balance to look up, no unit value, no statement of holdings and nothing to rebalance.

The insurer takes on the risk that you live longer than expected, which is the risk no portfolio can remove. The payment is set at issue from your age, the type of contract, the options you choose, and interest rates on the day the contract is bought. Once set it does not move, unless you bought indexing, which is dealt with below.

For tax purposes an annuity contract issued by a life insurer sits inside the Income Tax Act rules for life insurance policies, which is why subsection 12.2(1) names a life insurance policy and a prescribed annuity contract in the same sentence. That is why the tax treatment described later looks nothing like the treatment of a mutual fund.

Single life against joint and last survivor

A single life annuity is measured on one life. Payments run for as long as that person lives and stop at their death, subject to whatever guarantee period the contract carries. For a person with no dependants it is the straightforward choice and it produces the highest payment for the money.

A joint and last survivor annuity is measured on two lives, usually a couple. Payments continue until the second of the two deaths. Because the insurer expects to pay for longer, the starting payment is lower than a single life contract bought with the same money at the same ages. Many contracts allow the payment to step down to a stated fraction after the first death, and choosing that reduction raises the payment while both are alive.

The choice is a household choice rather than an individual one, and it should be made against what the survivor will actually have. Where one spouse already has an employer pension that continues to a survivor, a joint contract may be duplicating protection already paid for. Where neither has one, the joint contract is often the point of the exercise.

What a guarantee period buys

A guarantee period, sometimes called a certain period, means the insurer will make payments for at least that number of years whether the annuitant lives through them or not. It exists to answer the objection everyone raises first, which is the fear of handing over a lifetime of savings and dying in the second month.

If death occurs inside the guarantee period the remaining payments continue to the named beneficiary, or their value is paid as a lump sum, depending on how the contract is written. If death occurs after the period ends, nothing further is paid on a single life contract. That is the trade the product is built on.

The guarantee is not free. The longer the guaranteed period, the lower the starting payment, because the insurer has surrendered part of the mortality pooling that makes a life annuity pay more than a bond ladder. Where registered money is used, the length of the guarantee is also constrained by the rules on what a registered plan is permitted to buy.

The term certain annuity

A term certain annuity has no life contingency at all. It pays a fixed amount for a fixed number of years and then it stops, whether the annuitant is alive or not. If the annuitant dies inside the term, the remaining payments or their value go to the beneficiary or to the estate.

It is not longevity insurance and it should never be sold as such. It is a way of converting a lump sum into a scheduled income over a defined window, which is genuinely useful for a bridge: from an early retirement to the start of a pension, or from a severance to age 65, or across the years before public benefits are claimed.

Where registered money is used the Act limits the shape. The definition of retirement income in subsection 146(1) of the Income Tax Act permits an annuity payable to the annuitant for the annuitant’s life, or an annuity for a term of years equal to 90 minus the age in whole years of the annuitant at the maturity of the plan, or of the spouse or common law partner. That formula is the source of the familiar term certain to age 90 contract. Source: Income Tax Act, subsection 146(1), Justice Laws Website, read 8 September 2026.

Registered money against non registered money

Where the purchase comes out of a registered retirement savings plan, a registered retirement income fund, a locked in account or a pension, every dollar of every payment is taxable income in the year it is received. Nothing in that money has been taxed yet, so nothing comes back tax free. The T slip arrives every year for the life of the contract.

Where the purchase comes out of money that has already been taxed, each payment is partly a return of your own capital and partly interest the insurer has credited. Only the interest is income. Paragraph 60(a) of the Income Tax Act provides the deduction for the capital element of each annuity payment included in income under paragraph 56(1)(d), and section 300 of the Income Tax Regulations sets out how that capital element is determined.

Locked in money adds a third layer, because pension legislation, federal or provincial depending on the plan, governs what a locked in contract may look like and when it may start. Settle that question before comparing payments, since the options are narrower than for ordinary registered money.

Prescribed taxation and what it does

A non registered annuity is taxed in one of two ways and the difference is large. The default is accrual. Subsection 12.2(1) of the Income Tax Act requires a taxpayer holding an interest acquired after 1989 in a life insurance policy to include, on each anniversary day, the excess of the accumulating fund over the adjusted cost basis of the interest. In an annuity that produces a taxable amount that is high in the early years and falls away later.

A prescribed annuity contract is excluded from subsection 12.2(1) by name. Section 304 of the Income Tax Regulations sets the conditions. The annuitant must be an individual other than a trust, or one of the specified trusts the Regulation lists. All payments must be equal annuity payments made at regular intervals not less frequently than annually. No loans may exist under the contract, and the holder’s rights must not be disposable except in the narrow circumstances the Regulation allows.

What prescribed status does is level the taxable portion. Instead of a taxable amount that is front loaded and then shrinks, the same interest amount is reported in every payment for the life of the contract. The practical effect is a lower reported income in the early years than the accrual method would produce, which matters wherever income tested benefits or a recovery tax are in play. Source: Income Tax Regulations, sections 300 and 304, Justice Laws Website, read 8 September 2026.

Indexing

An indexed annuity increases the payment each year, either by a rate stated in the contract or by reference to a published measure of inflation where the insurer offers that form. It is the only feature in the product that addresses the risk described two sections below.

It is bought with income. The starting payment on an indexed contract is materially lower than on a level contract bought with the same money, and the crossover point where cumulative indexed income overtakes cumulative level income sits well into the contract. Someone who expects a short retirement is paying for a benefit they will not collect.

The middle position is usually the sensible one. Index part of the income and leave the rest level, or annuitize part of the capital and keep the remainder invested where it can grow. Very few households need every dollar of retirement income to behave the same way.

The decision is final

Once payments begin you generally cannot undo the contract. A straight life annuity has no surrender value and nothing to cash in. A prescribed annuity contract in particular must not permit the holder to dispose of their rights, because that is one of the conditions in section 304 of the Regulations. The irreversibility is not a design flaw, it is the source of the payment.

That has a direct planning consequence. Annuitize only the portion of capital you are confident you will never want back, and not one dollar more. Money that might be needed for a roof, a move, a health event or a gift to a child does not belong in a contract that cannot be reopened.

Health belongs in the conversation too. A life annuity is priced on average longevity, so a person in poor health buying a standard contract is subsidising the pool. Some contracts are underwritten for health and can produce a different payment for the same money, which is a question worth asking before signing anything.

Inflation risk, stated plainly

A level payment buys less every year. Over a retirement that may run twenty five or thirty years the erosion compounds, and the payment that felt comfortable at the start can feel thin by the end. This is the strongest argument against annuitizing everything and it should be said out loud in every meeting where an annuity is discussed.

The counterweight is that most Canadian retirees already own indexed income. The Canada Pension Plan or the Quebec Pension Plan and Old Age Security are adjusted for inflation under their own legislation, and for many households those form the inflation protected floor on which everything else sits.

A workable framing is to match the shape of the income to the shape of the spending. Costs that rise with prices, food, housing, care, are better covered by indexed income. Obligations fixed in dollars are covered comfortably by a level payment. Deciding which is which takes an afternoon and prevents the most common annuity mistake.

Against a systematic withdrawal

The realistic alternative is not a savings account. It is a systematic withdrawal from a registered retirement income fund or an investment portfolio. That approach keeps ownership, keeps flexibility, keeps whatever remains for the estate, and keeps the risk. Two risks in particular: the portfolio may run out, and a poor run of returns early in retirement can permanently reduce what the remaining capital will support.

An annuity removes both of those on the annuitized portion, and it removes flexibility and estate value along with them. Nothing is gained for free here. You are exchanging control and legacy for certainty and duration, and whether that exchange is worth making depends entirely on what the household needs and what it already has.

Most sound plans decline to choose. They annuitize a floor, meaning the amount required to cover the spending that cannot be cut once public benefits are counted, and they leave the balance invested where it retains flexibility and growth. The question is never whether annuities are good. It is how much of a particular household’s income should be certain.

Protection, deferral, and what to ask for

The payments are the obligation of the life insurer that issued the contract. Assuris, the compensation body for Canadian life insurance policyholders, protects those obligations within the limits it publishes. The Canada Deposit Insurance Corporation does not apply. The money paid for an annuity is not a deposit and the contract is not a deposit account.

There is also a deferral option few people know exists. The Income Tax Act permits an advanced life deferred annuity, and under subsection 146.5(1) the periodic annuity payments must commence no later than the end of the calendar year in which the annuitant attains 85 years of age. A lifetime purchase limit applies and it is indexed, so check the current figure with the Canada Revenue Agency.

When you ask for a quote, ask for it properly. Request the same money priced as single life and as joint and last survivor, with and without a guarantee period, level and indexed, and on the non registered version ask for the taxable portion both as a prescribed contract and without prescribed status. That comparison, not a rate, is what decides the question.

Frequently Asked Questions

Continue Learning

The annuities product page sets out how a contract is arranged here. For the alternative, read how a registered retirement income fund is drawn down and sequence of returns risk, which is the risk an annuity removes. The pension against the commuted value is the same decision in a different wrapper, and the Old Age Security recovery tax explains why the taxable portion of a payment matters so much after 65.