Limits and taxes
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)
Limits on PSPP benefits
Since 1991, the Income Tax Act (ITA) has limited the amount of pension you can build in the PSPP each year. You'll hit the limit if your average annual salary is approximately $159,000 or more (this is a 2015 figure, subject to change). Any pension benefits for past OPS pension credit that exceed the limit will be paid from the Public Service Supplementary Benefits Account (PSSBA), not from the PSPP, if you purchase the buyback within the 24-month costing window. If you buy back after the 24-month costing window closes, your PSPP pension will be limited to the maximum pension under the ITA and any pension above the limit cannot be paid from the PSSBA.
Note: If you are affected by the limit, any pension credit you buy for a period from 1991 onward – from membership in the registered pension plan of a non-OPS employer in Canada – does not qualify for a supplementary benefit from the PSSBA.
Tax deductibility of payments
For a buyback of past OPS service within your 24-month costing window, the cost payable to the PSPP is limited to the amount based on your annual salary up to the maximum contributory salary rate (approximately $206,931.00 for 2014, subject to change) and will be tax deductible based on the conditions below. Any cost amount on salary above the maximum rate will be paid to the PSSBA and will not be tax deductible.
For a buyback of OPS service after your 24-month costing window closes or for non-OPS 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.
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.
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.