Limits on pension credit

As required by the Income Tax Act (ITA), if you buy pension credit for any period after 1989, we will calculate a past service pension adjustment (or PSPA). This PSPA represents the estimated value of the additional pension that will result from your purchase of pension credit.

We are required to send your PSPA to the Canada Revenue Agency (CRA) for approval. Because your RRSP contribution room is reduced by the amount of your PSPA, we need CRA to confirm that you have enough contribution room to accommodate the PSPA. If you don't have enough room, you'll have four options. You can:

  • Buy a smaller amount of pension credit (so that your PSPA is smaller)
  • Pay for some or all of the pension credit using funds transferred directly from an RRSP (which will also reduce the amount of your PSPA)
  • Make a "qualifying withdrawal" where you withdraw funds from your RRSP to create the required contribution room and pay in cash (you will be taxed on any amount you withdraw)
  • Terminate the purchase and receive a refund of your payment (no pension credit will be added to your record)

Note that the PSPA calculation is affected by cash payments (including payment by payroll deductions). If you're paying for your buyback by lump sum cash payment or payroll deductions and your PSPA is larger than your RRSP contribution room, you'll likely have to choose from one of the alternate options above.

Limits on PSPP benefits

Under the ITA, there’s a limit to the amount of pension benefit you can receive from the PSPP each year for pension credit earned after 1991. Typically, you will be affected by this limit if your average annual salary is $192,606.67 in 2022 (limit changes yearly). The Retirement Compensation Arrangement (RCA) provides a supplementary pension for the amount of pension that exceeds the ITA limit. However, if you’re affected by this limit, you don’t qualify for an RCA benefit if you’re buying back pension credit for certain types of service including:

  • post-1991 service for membership in another registered pension plan (except OPSEU Pension Plan), and/or
  • service purchased after the 24-month costing window closes (and other buybacks at actuarial cost)

The cost of buybacks that don’t qualify for an RCA benefit will take this ITA limit into account.

Tax deductibility of payments

For a buyback of past service with a PSPP employer within your 24-month costing window, the cost payable to the PSPP is limited to the amount based on your annual salary that corresponds with the ITA benefit limit (which changes annually and is $193,715 for 2022 and will be tax deductible based on the conditions below.

Buyback contributions relating to salary level that corresponds with the ITA benefit limit are made to the Retirement Compensation Arrangement (RCA) and are tax deductible in the year they are made if they are matched by your employer.

For a buyback of service with a PSPP employer after your 24-month costing window closes, or a non-PSPP employer service at any time, the cost payable to the PSPP is calculated as the actuarial cost of the benefit being purchased capped at the maximum benefit under the ITA and will be tax deductible under the conditions below. No RCA benefits may be purchased for buybacks of credit at actuarial cost.

Payment to the PSPP for pension credit related to a period of employment from January 1, 1990, onward will be tax deductible if:

  • You pay by cheque or payroll deduction
  • Your buyback is approved by the Canada Revenue Agency

Payment to the PSPP for pension credit for a period of employment before January 1, 1990, may or may not be tax deductible depending on:

  • The cost of your buyback
  • Your annual salary when you apply for your purchase
  • Your PSPP contributions

If you pay for your buyback by transferring funds from another registered pension plan (RPP), an RRSP or a locked-in retirement account(LIRA), your payment will not be tax deductible. This is because you have already received a tax deduction for these funds.

Please note that funds cannot be transferred to the RCA from an RPP, RRSP or LIRA.

For more details on tax deductibility, call us at 416-364-5035 or toll free at 1-800-668-6203 (Canada & U.S.A), or contact your personal tax adviser.