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?
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{ 19 comments… read them below or add one }
If i’m not vested in a plan yet, would i still have a pension adjustment on my t4?
@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.
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.
@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.
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.
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.
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.
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.
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…
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).
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
Hi Gloria,
Its a complicated calculation, but yes.
…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:-)
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.
Jeff,
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.
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.
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.
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!
Thanks!
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.