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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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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greg Slevar March 11, 2010 at 7:14 am

If i’m not vested in a plan yet, would i still have a pension adjustment on my t4?

Tax Guy March 11, 2010 at 3:49 pm

@Greg: Yes you would. If you quit before you vest in the plan, you will have a pension adjustment reversal to restore your RRSP room for the amount of employer pension credits you did not receive.

PenRRSP March 13, 2010 at 8:17 am

Hello, I am trying to clearly understand the RRSP room I have, or had for 2009. I contribute to a DC plan through work, The company matches up to 75% or 4.2% of my bi-weekly pay. I contribute 6% which is the maximum we are aloud, my 2009 Deduction statement reads:
It reads: I have 18% of my earned income(I won’t publish)
The max is 21k
my 2008 PA is roughly 16k

Bottom line states my deduction limit for 2009 is roughly 16k?

Our ignorance level is high in this regard. We figured we take our Pension contributions(both EE & ER) and subtract it from the 21k max we are aloud. Leaving us with around 5k to contribute to our 2009 RRSP.

Tax Guy March 14, 2010 at 10:06 am

@PenRRSP: Your prior year PA reduces your RRSP contribution limit. Assuming you had the full RRSP limit available ($21k) your RRSP room abould be the difference. Now your Notice of Assessment will report any room carried forward.

Appleton Leon March 17, 2010 at 7:37 am

Assume from part of ‘Notice of Assessment’:
18% of 2008 earned income of $100,000 = $18,000
2008 pension adjustment $ 5,000
RRSP deduction limit for 2009 $13,000 *(A)

My question is that

which of RRSP deduction limit for 2009, $13,000 or $18,000, I shall claim if in 2009 my employer gives $0 pension (0 in box 52 of T4) and I bought $18,000 RRSP, part of which contributed from my employer.

Tax Guy March 17, 2010 at 9:03 am

Hello Appleton:
According to your Notice of Assessment, your RRSP limit for 2009 is $13,000. This is your deduction limit for 2009. If you contributed $18,000 during 2009 then you have over contributed by $5,000 and are now subject to a 1% penalty tax per month for each month you had over contributed more than $2,000. Since I’m not sure at what point you exceeded $15,000 of contributions during 2009, but the penalty would apply from that point forward and until your 2010 RRSP deduction limit kicked in (assuming 2010 income was $100,000 you would have had an additional $18,000 and the penalty would no longer apply to your RRSP effective January 1, 2010.

Your 2008 PA reduced your 2009 RRSP deduction limit. You should check your Notice of Assessment or contact the CRA to determine what your limit is for a given tax year.

Confused May 22, 2010 at 8:54 am

I’m really regretting joining the DB pension plan at work, I contriubte the max allowed ($1500 a year) but now find out that translates into a $13,000+ Pension Adjustment, leaving me about $2,000 room to contriubte to an RRSP – so I will only have $3,500 for a deduction, which means I’ll end up paying more tax instead of getting a refund – this seems ludicrous and was not explained when I joined the company plan…I was just told that the only way to leave the plan (so I can contribute to an RRSP) is to leave the company. I’ve been in the plan for 6 years, our company was bought out and it’s only in the last two years that I’ve noticed the Pension Adjustment so I thought the new parent company was doing something wrong but from my research now, it seems that it’s right, just really unfair. How can more than $13,000 of RRSP contriubtion room be eaten up when the only deduction I will get is the $1500 I have contributed and my company pension plan is only worth about $5,000 right now.

Tax Guy May 22, 2010 at 9:21 am

Why are you disappointed? Your DB pension plan really means you don’t have to save as much as those without one. Would it be fair for someone who does not have a guaranteed pension to be limited to contribute the same as someone who does?

Look at this this way: Your DB pension plan is your RRSP contribution, except that you know what you will get. Your ability to contribute to an RRSP is accordingly reduced. This makes the system fair.

Confused May 22, 2010 at 9:53 am

Hi Tax Guy,
Because of my work pension plan I can contribute next to nothing to an RRSP, (I just checked my assessment again, I have $1,531 unused room from 2009 – with the calculation of 18% of income, minus pension adjustment, I have $697 contribution room – so a total of $2,228 for 2010 – I will contriubte all of that – so won’t have any unused room next year – so presumably next year I will have a limit of about $697 again – which means next to nothing as a deduction (oh, sorry my $1500 contribution to the work plan)…which means no refund, but probably a hefty tax bill – I really hope this all pays off when I retire as if I stay with this company, I won’t have any RRSP contributions moving forward. People without a company plan can contribute 18% of their income to an RRSP – the company doesn’t put anything in now, just when I retire, if the plan is able to pay out to everyone at that time, I think it’s a bit of a gamble…

Tax Guy May 25, 2010 at 12:42 pm

Hello Confused:

I understand your confusion about not being able to contribute much to an RRSP and get a tax deduction. However, an RRSP is really a “replacement” for a pension plan. If you contribute to a pension, you do not need an RRSP and conversely, if you don’t have a pension, you need to have an RRSP.

The tax deduction is not really an issue because your and your employer’s contributions to your pension reduces your taxable income immediately. You effectively see your tax deduction on your paycheque in the form of higher after tax income.

Here is an example: A person earns $40,000 per year and is a member of a pension plan. Under the terms of the pension plan, they must contribute $5,000 to the plan and their employer also contributed $5,000. The employee’s paycheques for the year reflect the fact they were only paid $40,000.

The above person is in EXACTLY THE SAME BOAT as someone making $50,000 and contributing $10,000 to an RRSP. The only difference is that this individual pays tax on $50,000 and gets refund at tax time whereas the pension participant simply paid less tax to begin with.

If you don’t like the risk of the pension plan, you can always opt out and do it on your own, but you will loose the employer contributions and the guaranteed return (pension have to guarantee a 7.5% annual return).

Gloria Tong July 24, 2010 at 2:51 pm

I would like to know if I am a member of Defined benefit Pension Plan, my employer and me both contribute 4% of annual salary to this plan just start from this year. (Total : 8%)
I would like to know when I filling income tax for 2010, is it the both portion should be deduct from RRSP room

Tax Guy July 25, 2010 at 8:21 am

Hi Gloria,
Its a complicated calculation, but yes.

Confused July 24, 2010 at 4:12 pm

…ah but I can’t opt out – the only way to opt out is to leave the company – they said they don’t contriubte anything now, it’s just the pension payments when I retire – and the max I am allowed to contribute is $1500 a year – in the past, I have always had to contribute to RRSPs to avoid paying tax at the end of the year (even though I pay plenty throughout the year)….I find it hard to believe I will still be in good shape when I retire by only contributing $1500 a year – don’t know how much the employer puts in eventually….still my hands are tied so there’s nothing I can do….think I’ll take a vacation with the money I would have put into an RRSP this month:-)

jeff russell August 19, 2010 at 7:31 pm

I contrbute to a defined benefits plan for several years. What should be the difference in the way my PA is calculated if I begin to make additional voluntary contributions (avc)? My eligible RRSP room should drop or be used up by my AVC. I want to find out the difference in how the PA is calculated, ie no avc versus avc. Revenue Canada (I gues it’s Canada Revenue Agency now) directed me to document T4084(E). I printed the document, and on page 4 of the Glossary, voila, they define avc. Problem is I can’t find anywhere in this document where avc is used in the PA calculation.

Tax Guy August 23, 2010 at 1:01 pm


The formula for the PA in relation to a defined benefit plan is (9 x benefit entitlement) – $600. Your AVC contributions do not impact the PA.

Your AVC limit would be the $600.

Toronto Teacher August 25, 2010 at 3:05 pm

Tax guy,

I’m a teacher just starting out in the Ontario Teacher’s Pension Plan. If I use your formula above for determining how much RRSP room I will have left (and my employer pays 10-12% of my salary into the OTPP), my calculation gets me well over the maximum RRSP contribution level. Do teachers in the OTPP always max out their RRSPs with their pension contributions, or have I just done the calculation wrong – quite likely the latter!

Any help would be appreciated.

Tax Guy August 25, 2010 at 3:26 pm

The first thing to understand is that between RRSP’s and pensions, the maximum contribution one can make to a plan is 18% of earned income to the annual maximum ($22,000). There are some timing differences between the PA for defined benefit plans and other plans.

I say this because I have had a few questions from people who participate in defined benefit pension plans who seem upset that they could not contribute much to an RRSP.

Given the level of contributions to the plan, I would say that you would reach the maximum RRSP contribution by participating in the plan. The only real downside to participating in a defined benefit plan such as teachers or government pensions is that your ability to use the home buyers plan is limited.

Toronto Teacher August 25, 2010 at 3:33 pm

Thanks! One other thing occurs to me. Do I receive any tax credits for my participation in the plan, as I would with an RRSP contribution?

This blog is superb!

Tax Guy August 25, 2010 at 3:37 pm


There are no credits or deductions available.

Pension contributions are not included in your taxable income. The money you put in an RRSP was taxed at source and you get your money back after you file your tax return.

All things equal, you are better off with the pension because you never paid tax on the contribution to begin with.

Mike September 6, 2010 at 7:32 pm

I will be paid up in my DB plan in about 6 months. If I continue to work but am no longer contributing will I still get a PA each year? If so will it be reduced by what I used to contribute i.e. $5000/yr?


Tax Guy September 9, 2010 at 8:25 am

You will still get a PA each year. The PA is based on the benefit you will receive. See the calculation in the articel above.

Tahir September 23, 2010 at 9:09 pm

I worked for Nortel for about 7 years under a defined pension plan. This resulted in virtually no room for any RRSP contributions. However when I was laid off, the lump sum amount that was availaible was only around $30K.
I understand that Nortel and most other companies deposit very little money yearly and rise dramitically towards the retirement age. So in effect, I have lost out on the RRSP contributions.
I there a pension/RRSP adjustment that I can claim from the government?

Tax Guy September 26, 2010 at 9:00 am

No. Your pension plus the RRSP room you have is about what you would have had without the pension.

Josie November 10, 2010 at 8:11 pm

Our company is forcing those of us in a DB into a DC at the end of 2010. 2011 onwards they will match the first 5% of our contributions. Assume: 2009 income $100,000, PA $8,000, 2010 RRSP deduction limit $10,000. Question 1: If my income doesn’t change in 2011 and I contribute $10,000 of my income, will my PA be $5,000(because that’s the max the company will contribute?

Tax Guy November 12, 2010 at 10:45 am

You may or may not have a pension adjustment reversal (PAR) as a result of the change. Your pension plan will let you know the amount and this can then be added to your existing RRSP contribution room to determine the available room.

In other words, the conversion should not cause you any issues.

Paul February 20, 2011 at 10:15 pm

A Pension Adjustment Reversal will only occur if the past service DB benefit is converted to a DC balance. If the plan is just DC for the future, then no PAR will occur. DC pension adjustments are calculated as the total employee and employer contribution.

Tax Guy February 21, 2011 at 4:32 pm

The PAR is related to the DB pension plan and occurs when a taxpayer ceases to be a member of the DB plan. This will occur when converting to a DC plan or commuting the pension to a locked-in RRSP.

Josie November 10, 2010 at 8:13 pm

Correction: Our company is forcing those of us from a DB into a DC at the end of 2010.

Wayne November 29, 2010 at 1:57 pm

I was involuntarily retired beginning Jan 1, 2010. I recieved a retirement allowance in 2010 and began drawing income from a defined benefit pension plan. My RRSP contribution limit based on 2009 earned income and my 2009 PA is very small. Under the circumstances can I have my 2010 contribution limit recalculated since my former employer is no longer contibuting on my behalf to a pension plan.

Tax Guy November 30, 2010 at 10:46 am

Your RRSP contribution limit is based on your prior years’ earned income, plus carry forward room. If you were part of a defined benefit pension plan and you began drawing the benefit, then you will not have a pension adjustment reversal.

If you took the commuted value of your defined benefit pension plan, then possibly you could have a PA reversal.

HimSelf December 4, 2010 at 2:48 pm

In the year that a member of a DB pension plan begins taking their DB pension is the PA adjustment applicable for that year prorated. For example if the pension commences July 1, is the PA half of what it would otherwise have been had the person not taken their pension.

Tax Guy December 4, 2010 at 3:47 pm

The calculation is as above. The benefit entitlement is the percentage of income for the year. If you worked half a year, it’s the income times the percentage less $600 for the year.

Marshall Dillon December 12, 2010 at 4:08 pm

The reply to jeff russell’s question (August 19, 2010 at 7:31 pm) did not mention the impact to RRSP room. A contribution of say $4500 to the AVC should result in an immediate tax savings of around $2070 (assuming a 46% tax rate). Is it correct that the $4500 AVC would have no impact on the PA but would reduce the RRSP contribution room by $4500?

Tax Guy December 13, 2010 at 10:41 am

The AVC would be an RRSP contribution and you would have to have RRSP contribution room available.

Kathy December 28, 2010 at 7:57 am


I recently left a company that I had participated in a defined benefit contributory plan. I took the option to transfer the funds into a locked in RSP. My question is does that count as RSP contribution and affect my limit that I can contribute to my RSP for this tax year?

Tax Guy December 28, 2010 at 10:54 am

The transfer is not an RRSP contribution. It is a lateral trnasfer from one registered account to another.

Mike January 3, 2011 at 9:10 pm

My company changed from a defined benefit to a defined contribution model. I do not have any RSP carry forward room. My last statement show I would have a contribution room of around $8000, but there is a pension adjustment of $3000, which reduces my contribution limit to around $5000. With the changes done in our company the pension part got resolved. Does this mean I would be allowed to contbute overall $8000 this year?

Tax Guy January 4, 2011 at 9:16 am

The close out of the defined benefit plan may have resulted in a pension adjustment reversal which would open up room. The PA would affect next year’s taxes. However, without seeing the actual statements it is difficult to assess.

Most financial institutions should be able to review the statements and let you know.

Rob January 20, 2011 at 11:58 am

I am in an defined contribution pension plan and feel like the PA is double-dipping. In my DC plan, the company contributed 5% last year which becomes the PA for this year. The company also contributes 5% this year. Of the 18% I can contribute this year, 5% is used by the PA and 5% is contibuted by the company, leaving 8% for me to contibute. But, 18% never gets contributed. The 5% the in this years PA is the 5% contributed last year, so the one 5% contribution by the company actually uses up 10% of RRSP contribution room.

Tax Guy January 20, 2011 at 12:34 pm

In a DC plan, the PA is comprised of the amount deducted from your paycheque for the pension and the amounts the employer put into the plan.

Take a look at your last pay stub from the prior year and the terms of the plan. It may show that the company is deducting 5% of your pay and then matching the contribution to arrive at 10%.

Rob January 20, 2011 at 12:39 pm

Actually, I put in 8% and the company matches 5%. That’s my point. The maximum that can be contibuted to my RRSP will always be 13%. The other 5% in PA doesn’t exist anywhere in a current value or future value investment, it’s purely a value that reduces contribution room.

Tax Guy January 20, 2011 at 1:37 pm

The 13% is in the plan. Check with your pension provider.

To figure out how much you can pun in the RRSP, look at last years Notice of Assessment and deduct the dollar amount the 13% represents.

Gone February 18, 2011 at 1:02 pm

I was in DC RPP at a previous employer. I contributed 4%, and the employer matched 4% of salary. The vesting period to keep the employers match was 2 years. I did not stay at this job long enough to keep the employers match. However, my current T4 from them still shows their portion of the contributions in the pension adjustment. Since this money has been ‘clawed back’, should this be corrected, or is this collateral damage for leaving before their contributions were vested?

Tax Guy February 18, 2011 at 1:56 pm

It will be adjusted on the T4 for the year you left, or you may receive a Pension Adjustment Reversal. These can take time. If you left last year, speak with the employer.

nancy February 18, 2011 at 1:54 pm

What is the difference between the pension adjustment and the rpp contribution amount? or rather, how do they relate? does line 207 get deducted from my future rsp contribution room like line 206 does? or is it just 2 different things?

Tax Guy February 18, 2011 at 2:02 pm

Box 206 is a disclosure of the PA to determine your contribution limits. It tells the CRA how much was contributed to your RPP by both you and your employer.

207 is your contribution to the plan.

cat February 18, 2011 at 1:55 pm

I am not legally seporated from my husband but we have not live togther scince Aug/2010 do we atill file togther?

Tax Guy February 18, 2011 at 2:01 pm

You are considered separated if you have been living separate and apart from your spouse for more than 90 days due to a breakdown in the relationship. See: http://www.cra-arc.gc.ca/bnfts/mrtl/sprtd-eng.html

Paul February 21, 2011 at 3:16 pm

Should the Pension Adjustment have some kind of reflection of what is actually being placed in the pension by you employer? I was in a defined benefit plan for 9 years and over those 9 years had a total pension adjustment of 60K.

When I left the company I was told my pension had a locked in Commuted Value of $27K, less than half of all my pension adjustment numbers, would that be correct?

Tax Guy February 21, 2011 at 4:45 pm

The PA for a DB plan reflects the value added to your pension as opposed to the contributions. In the end it is the same as making an RRSP contribution.

Paul February 21, 2011 at 7:12 pm

I guess this is where I’m confused………….based on my pension adjustment numbers the value of the pension should be at least 60K.

At this point in time I feel as though I am out 30K of contribution room, e.g. I had pension adjustment remove 60K of my contribution room in the last 9 years yet my commuted value is only 27K

Tax Guy February 21, 2011 at 8:05 pm

It’s not an easy concept to grasp, but you only need to know that RRSP contributions and pensions are fully integrated and there is no difference to the contributions in the end.

There are entire books on this subject and it is too technical to explain here.

Tax Guy February 21, 2011 at 8:28 pm

In rethinking my last response, I think this explanation may help:

There is a formula in the article above. Effectively, the PA is the benefit entitlement you will receive in retirement less a pre-set contribution adjustment.

If you earn $75,000 a year and belong to a 2% DB plan, your PA would be (9 x 2% x $75,000) – $600 or $12,900. While your actual contribution to the plan may be a fraction of the $12,900, your employer’s contribution, over your working life will amount to the extra amount. Now this may be paid by your employer this year or it may be paid in the future depending on whether the plan is fully funded.

In the above example, the person would have earned $13,500 of RRSP room and would still have $600 remaining of RRSP room … which is the $600 from the formula! This is by design not be accident.

If you were to commute your pension, you would probably receive somewhere in the neighbourhood of the $12,900 from the formula.

MJ February 22, 2011 at 2:46 pm

Hello! I’m trying to figure out if my RRSP deduction limit for 2010 needs to take into account any contributions I made to my company-sponsored pension. For example, on my 2009 statement, I have a 2010 deduction limit of, say, $10,000. If I contributed $3000 to my pension in 2010, does that mean the maximum I can claim in RRSP contributions for 2010 is $7000? Or I can contribute/claim $10000 to the RRSP for 2010, and my $3000 pension contributions will be calculated as part of my 2011 RRSP deduction limit?


Tax Guy February 22, 2011 at 4:57 pm

Your 2010 RRSP deduction limit is reported on your latest 2009 Notice of Assessment or reassessment. There is no adjustment required.

Your employers RPP contributions are based on 2010 earnings. So, you will have reduced RRSP room for 2011.

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