Understanding The Pension Adjustment (PA)?

by Tax Guy - Burlington Accountant on February 18, 2011 Print This Post Print This Post

If you are a member of a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP), your annual RRSP deduction limit is reduced by the pension adjustment (PA).

The pension adjustment is used to ensure that there is fairness for those who contribute to RRSP’s and those who participate in company pension plans.  It accounts for your employer’s contributions or benefit savings depending on whether the plan is DPSP or an RPP and is reported on your T4.

The pension adjustment is a complex calculation for defined benefit plans but for the purposes of our discussion the pension adjustment reflected on your 2007 T4 will used to adjust your 2008 RRSP contribution room.  This is due to the timing of when RRSP contributions can be made and when your T4’s can be issued.

For money purchase plans (MPP’s) the pension adjustment is simply your employers’ contribution to your plan. For defined benefit plans, the PA is a little more complicated.

Pension Adjustment For Defined Benefit Pension Plans

The calculation employer and employee required contributions to a defined benefit plan is not done in an employee by employee basis. Instead the calculation is done for a group of employees and the amount of employer contributions for an individual employee is not known.

The government has developed a formula to calculate the PA for members of a defined benefit pension plan as follows:

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

For example, Jack earned $75,000 last year and belongs to a 2% defined benefit pension plan. His PA will be (9 x (2% of $75,000) – $600] or $12,900.

Do You Have A Question About The PA?

If you have a question or comment about the pension adjustment, please ask your question in the box below.

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If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.

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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{ 9 comments }

Beth February 24, 2012 at 3:09 pm

There is more than $2,000 difference between the contributions made by my employer to a Registered Pension Plan in 2010 and the PA amount used to calcualte my RRSP limit for 2011. Does this suggest that a mistake has been made, or do I just not understand how it is calculated?

Troy MacNevin March 6, 2012 at 4:14 pm

I am in a defined contribution plan. Should my voluntary contributions be added with the company’s contributions for one total under pension adjustments? Or should the company’s contribution fall under pension adjustment and my voluntary contributions fall under RPP deduction?

Tax Guy March 6, 2012 at 4:59 pm

It’s doesn’t truly matter. The PA is used to adjust your RRSP limit.

Paul January 9, 2013 at 11:39 am

I am leaving my job to return to university. I want to move my pension money into a locked RRSP with another financial institution. My issue is my pension balance is much larger than my RRSP allowance for the year. Can I just move the RRSP allowance into a locked fund or can I ask to move the entire pension balance? I was in a defined contribution plan. My employer matched my contribution at 9% for a total of 18% being contributed to my pension.

Thanks,

Paul

Burlington Accountant January 9, 2013 at 12:55 pm

Paul,
The pension is a registered plan and integrated with the RRSP’s. It considered a direct transfer between registered plans. No issue with RRSP room.

Paul January 10, 2013 at 10:07 pm

Thanks Burlington.

Angela Fregin January 16, 2013 at 5:53 pm

I am wondering what the best approach is to the following. My husband just started a new job where he can contribute to his pension as well as the company does. The issue we are having is this, we were told that it would be a Pension Adjustment on his income tax, so that means he can’t claim it as a tax break to help with his taxes. Is it better to do an RRSP on our own without adding to teh company one that way he gets a tax break or just contribute to the company one and not get a tax break at the end of the year?
Would really appreciate some advice.

Tax Guy - Burlington Accountant January 18, 2013 at 12:31 pm

The tax break is exactly the same. there is just a timing difference. Making the RRSP contribution means you get a refund when you file. If the employer makes it, the tax deducted is less now.

It’s better to take the pension.

Kevin March 3, 2013 at 12:51 pm

My wife earned 54095.Her db pension employer contributed 8615 she paid 4751.Has she overpaid?

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