How Is Annuity Income Reported? 
In Canada , immediate and deferred annuities are , with one exception , taxed on an accrual basis . The growth or income is taxed as earned , not as received . How the income is taxed , depends , if it is interest income or , in the case of Guaranteed Investment Fund -LRB- GIFs -RRB- , interest , dividends or capital gains . Prescribed Annuities enjoy special taxation -LRB- Section 304 of Income Tax Act -RRB- . They are taxed on a straight line basis rather than on an accrual basis . If you qualify for a prescribed annuity then total amount of `` expected '' interest is averaged based on the number of payments . For example invest in a prescribed life income annuity and your `` life expectancy '' is 22 years . The amount of investment DIVIDED BY `` life expectancy '' EQUALS return of your principle and it is not taxed . The annuity payment SUBTRACT the return of your principle is taxable . The tax savings can be substantial , which is why prescribed annuities are often used to increase after tax income . Especially for those who prefer guaranteed interest income . A life insurance policy can replace the capital for your estate . Depending on the the individual circumstances , increases of after tax income can be 50 % or more . Implementing a strategy involving payout annuities is sometimes complicated , it is however , always permanent . Search for Retirement / Financial planner in your area . Then look for an experienced life insurance broker with a professional designation such as a CLU or CFP . If you have further questions , or feel that I could be of assistance please contact me . 