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.
Looking For Professional Help?
If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.
Related Articles
- Calculate The Pension Adjustment
- Registered Pension Plan (RPP)
- Defined Contribution Pension Plan
- Defined Benefit Pension Plan
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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?
No. Your pension plus the RRSP room you have is about what you would have had without the pension.
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?
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.
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.
Paul,
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.
Correction: Our company is forcing those of us from a DB into a DC at the end of 2010.
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.
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.
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.
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.
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?
The AVC would be an RRSP contribution and you would have to have RRSP contribution room available.
Hello,
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?
Kathy,
The transfer is not an RRSP contribution. It is a lateral trnasfer from one registered account to another.
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?
@Mike:
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.
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.
Rob,
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%.
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.
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.
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