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Understanding The Pension Adjustment (PA)?

If you are a member of a Registered Pension Plan (RPP) [1] or Deferred Profit Sharing Plan (DPSP) [2], your annual RRSP deduction limit [3] 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 [4] for defined benefit plans [5] 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 [6].

Looking For Professional Help?

If you’re looking for advice or tax planning services, you can contact me [7] directly through my professional tax practice [7].

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