RRSP-Pension Adjustments

Pension Adjustments

So you noticed that you received a pension adjustment from your employer, but don’t know what that means?

A pension adjustment (PA) is income accrued to you, in your pension plan, to put everyone on equal footing in terms of the annual RRSP contribution limit. It is the value of the pension benefits that accrue to individuals who are members of employer sponsored Registered Pension Plans (RPPs), or Deferred Profit-Sharing Plans (DPSPs). A PA will reduce your RRSP contribution limit.

Your PA is calculated by your employer; and you can see the exact amount in Box 52 of your T4 slip.

How do RRSPs and PAs relate?

The RRSP contribution deduction for a particular year will be limited to 18% of earned income from the preceding year, minus the pension adjustment from the preceding year. Generally speaking, only an employee who is enrolled in an RPP or a DPSP will have a PA. However, unregistered and foreign pension plans may, in certain circumstances, also give rise to a PA.

A PA is a complex calculation performed by a pension actuary. A PA includes amounts that have accrued to an employee in the plan, even if they have not vested, thus the person may never actually receive a pension benefit for the year.

Note: The most important thing about a PA is that they reduce your RRSP contribution room for the year, they don't affect anything else on your tax return!

What happens when you leave a pension or a DPSP?

You'll receive a pension adjustment reversal (PAR)!

A pension adjustment reversal (PAR) occurs when an employee leaves a pension or a deferred profit-sharing plan before their right is fully vested. A PAR results in a reduced pension benefit for the employee. The PAR restores its RRSP deduction room to compensate for the loss of the RPP or the DPSP benefits.

You can see the PAR in Box 2 of a T10 slip issued by the employer.

My pension plan got an upgrade, what happens now?

If your employer upgrades your pension plan, you will receive a past service pension adjustment (PSPA). A PSPA represents the value of a pension plan’s improvement, this is granted to an employee in a year, in respect to previous years.

Unlike the PA, the PSPA is not reported on a T4 slip but instead, is reported by an employer or administrator within 60 days of the decision to improve the pension. A special slip, T215 or T10, reporting the amount of the PSPA, would be issued.

How does this affect your RRSP?

A PSPA reduces the RRSP contribution limit for the year. Your PSPA may be even greater than the contribution limit for the year. This has no immediate effect other than to make your current year’s contribution nondeductible. Nondeductible contributions can be withdrawn or carried forward for future years.

Note: If your PSPA is greater than the contribution limit for the year, it can result in a negative unused contribution room, which would then reduce your contribution limit for future years.

Luckily for you, the CRA will calculate your RRSP contribution limit based on contributions made (T4- Box-52 and T10-Box 2 on your T215 slip) and issue a notice of assessment or reassessment. In short, your latest notice of assessment or reassessment will reflect your RRSP limit for next year.