As a member of a Registered Pension Plan (RPP), the benefits you earn under PSPP are subject to the Income Tax Act. For every year that you are active in PSPP, your employer will report a Pension Adjustment (PA) which represents the value allocated by the Canada Revenue Agency (CRA) to increase your PSPP benefit entitlement. This PA will reduce your Registered Retirement Savings Plan (RRSP) contribution room.
Additionally, if you buy prior service that occurred after 1989, a Past Service Pension Adjustment (PSPA) will be associated with the prior service you are buying. This PSPA represents the value allocated by CRA to the increase in your PSPP benefit entitlement, and will reduce your RRSP contribution room for your past service in the same way a PA does for your current service.
When the CRA reviews your tax return, they will consider your PAs and PSPAs in determining the amount of RRSP contribution room that will be available to you for the following year.
A PSPA has the same effect on your RRSP contribution room as making an RRSP contribution. CRA will only certify the PSPA if it is less than your total available RRSP contribution room. If the PSPA cannot be certified by CRA, you will not be able to proceed with buying the service unless you do a Qualifying Transfer, which we cover in the section below.
Prior service can be bought using funds from an existing RRSP or Locked-In Retirement Account (LIRA). This type of transaction is called a Qualifying Transfer and will reduce your PSPA by the value of the funds transferred from the RRSP or LIRA. This means you can reduce or even eliminate the amount of RRSP contribution room taken up by buying prior service. If you wish to make a Qualifying Transfer, be sure to indicate on your Buyback Election the amount you will be transferring from your RRSP or LIRA.
Timing is Important
If the Qualifying Transfer is not the only payment you will be making to buy the prior service, it should be the first one received. All payments must be received before the due date shown on the Buyback Proposal.
We will adjust the PSPA before sending it to CRA which will help you maximize your RRSP contribution room. If any other payment is received by us before the transfer of registered funds, the full PSPA will be reported to CRA.
If the PSPA cannot be certified because it is higher than your RRSP contribution room, CRA will contact you and supply you with the information you will need to complete a Qualifying Withdrawal. This means you would remove the required amount from your RRSPs and pay tax on the withdrawal. If you cannot complete a Qualifying Withdrawal, you will not be able to proceed with buying the service. For more information about Qualifying Withdrawals, please contact CRA.
If you know at the time you receive your Buyback Proposal that you will not be buying the full period of prior service, please contact PSPP as soon as possible for more information on how to buy a portion of your service. Reducing the amount of service you will be buying before you have started to make payments may result in a smaller PSPA.
If you have already started to make payments towards your prior service and decide to buy only a portion of the service covered in your Buyback Proposal, the PSPA will not be prorated. We will report your PSPA to CRA after your first payment is received and will not be able to amend the PSPA once it has been issued by them.
More on Buying Prior Service
