Tax Implications

Past Service Pension Adjustment (PSPA) Certification

Under the Income Tax Act rules for Registered Pension Plans (RPP), a plan may not recognize periods of past service that occurred after December 31, 1989 for pension purposes unless officials of the Canada Revenue Agency (CRA) certify the PSPA calculated and reported in respect of that service. If your RRSP deduction limit (RRSP room) does not permit the certification of the PSPA, your prior service cannot be counted and any payments you may have made will be refunded to you.

Generally, this certification depends on whether the PSPA exceeds your unused RRSP room at the end of the previous year by more than $8,000. Your unused RRSP deduction limit for the previous year is indicated on your most recent "Notice of Assessment" issued by CRA.

If you have made maximum RRSP contributions over the years, your RRSP deduction limit may be insufficient to allow certification of the PSPA associated with your past service. In this situation, CRA will contact you and may allow up to a negative $8,000 RRSP deduction limit to certify a PSPA. In this case, you would be unable to make additional RRSP contributions until your RRSP deduction limit reaches a positive value. As an alternative, you may transfer RRSP funds directly to the Superannuation Sector. Another option is that CRA may allow you to designate a qualifying RRSP withdrawal to allow the PSPA to be certified.

Normally, a direct transfer of funds from your RRSP received prior to the PSPA calculation reduces the amount of the PSPA reported to CRA. If you feel you may not have sufficient RRSP room to allow certification of the PSPA, you may wish to consider paying part of your past service by completing a Direct Transfer under subsection 146.3(14.1) or paragraph 146(16)(a) or 146.3(2)(e) form for RRSP transfers.

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Deductibility of Registered Pension Plan Contributions

Payments made through a direct transfer from registered vehicles, i.e. regular RRSP, locked-in RRSP, registered pension plans, deferred profit sharing plans (DPSP) and Locked-in Retirement Account (LIRA) are transferred on a tax sheltered basis. The Income Tax Act provides that the amount of such a transfer is not included in calculating an individual's income, nor can that individual claim any deduction for the amount of the transfer.

The tax deductibility of cash contributions (monthly instalments or lump sum payment by cheque) paid to buy back service is as follows:

• For contributions for service which occurred prior to January 1, 1990, and for which you contributed to an RPP, the tax deductibility is limited to $3,500 per year minus current contributions and other past service contributions.
• For contributions for service which occurred prior to January 1, 1990, and for which you did not contribute to an RPP, the tax deductibility is limited to $3,500 per year, in addition to contributions made for your current service. The total overall tax limit for these contributions is determined as follows: $3,500 x the number of years or partial years of this type of service purchased.
• Contributions for service which occurred after December 31, 1989 are fully tax deductible for the tax year in which they were paid. There is no limit to the tax deductibility of post-1989 contributions provided you have equal net taxable income for that year. You may consult Chapter 1 of CRA's guide entitled RRSP's and Other Registered Plans for Retirement (T4040) for further information on the tax deductibility of Registered Pension Plan contributions.

Deductibility of Retirement Compensation Arrangement (RCA) Contributions

The Income Tax Act requires that any RCA portion of the cost of past service must be paid by a cash payment(s). Normally, RCA contributions are fully tax deductible in the year you make them.

You cannot pay for RCA contributions via a direct transfer of registered funds such as a regular RRSP, a locked-in RRSP, another Registered Pension Plan, a DPSP or a LIRA, for example.

For additional information regarding your tax situation please contact your local CRA office.