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.