Calculate The Pension Adjustment

by Tax Guy - Burlington Accountant on February 22, 2011 Print This Post Print This Post

The pension adjustment (PA) represents an individuals total pension credits for the tax year. The PA reduces the amount of RRSP contribution room that an individual can make.

For defined benefit pension plans, the calculation of the PA can be complex. Generally, the PA represents and employee and employers contribution to an registered retirement savings plan (RRSP), deferred profit sharing plan (DPSP), money purchase pension plan or MPP (also known as a defined contribution pension plan), or to a defined contribution pension plan.

Make-Up Of the PA

  • The PA for a DPSP = The employers contribution to the plan
  • The PA for a MPP = The actual contributions made by the employer to the plan
  • The PA for a Defined Benefit Pension Plan = A complex mathematical calculation (well not really, see below).

The PA Defined Benefit Pension Plans

The actual contributions to a defined benefit pension plan are not directly reflected in the PA. Rather the PA reflects the current value of the future benefit entitlement. Stated a little differently, the PA reflect what you would put into an RRSP to get the same benefit in the future assuming you get the same rate of return as the pension. The calculation is:

For 1997 and later: [(9 x benefit entitlement) – $600]
Before 1997: [(9 x benefit entitlement) – $1,000]

Here is an example: Assume you a taxpayer earns $75,000 per year and participates in a 2% defined benefit pension plan. Their RRSP limit on $75,000 is $13,500 (18% of $75,000). Their PA would be:

(9 x 2% x $75,000) – $600 or $12,900.

Note that the 9 x 2% equals 18%! This is the RRSP limit for the year. The maximum defined benefit RPP contribution as it relates to the PA is 1/9 of the RRSP limit.This shows that the defined benefit pension and the RRSP contributions are related.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 3 comments }

Jim February 22, 2011 at 6:24 pm

CRA changed the T4A slip for 2010. In prior years both my registered pension plan payments and unregistered (supplementary) pension pension plan payments were shown combined in box 16 and included for pension splitting. In 2010 only the registered pension plan amounts show up in box 16. Unregistered plan amounts show in box 109 and are therefore included in “other income”; not eligible for pension splitting. CRA representatives have not been able to point me to a clear definition that excludes unregistered plans from pension splitting. Can you explain why this is not eligible pension income and where it is defined as such?

Thanks

Tax Guy February 23, 2011 at 1:04 pm

If the payments meet the requirements of 118(8)(e) and 118(8)(f) then the supplemental payments would qualify for the pension income tax credit. s.118(8)(f) excludes payments from an unfunded supplemental plan.

John Jacob April 9, 2011 at 9:10 pm

Thank you for clarifying this (my previous employer has been foot-dragging).
When you say “unfunded”, I presume that means that the funds for the supplemental pension are not from a fund held in trust for us, the pensioners. In my case, the fund is paid from current earnings of the company.

Also, would it make a difference if I had contributed part of my salary over the years to “earn” this unfunded pension?

John

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