Ms. Rodriguez, a retired teacher in Regina, purchased a prescribed annuity to supplement her retirement income. The annuity pays her $1,500 per month. If the 'interest' portion of her first year's payments is calculated to be $8,000 (based on the prescribed formula), how will her annuity income be taxed in that year?

Question: Ms. Rodriguez, a retired teacher in Regina, purchased a prescribed annuity to supplement her retirement income. The annuity pays her $1,500 per month. If the 'interest' portion of her first year's payments is calculated to be $8,000 (based on the prescribed formula), how will her annuity income be taxed in that year?

Answer options: ✅ The $8,000 interest portion will be taxed, and the remaining $10,000 will be considered a return of capital and tax-free.

• The entire $18,000 received will be taxable as income.
• Only 50% of the $8,000 interest portion will be taxable.
• The entire $18,000 received will be tax-free as it's a return of her original capital.

Correct answer: The $8,000 interest portion will be taxed, and the remaining $10,000 will be considered a return of capital and tax-free.

Explanation: For prescribed annuities, a portion of each payment is considered a return of capital (tax-free) and the remainder is interest (taxable). The interest component is determined by a prescribed tax formula using the annuitant's age, cost, and guaranteed period.