What is a Pension Adjustment?
If you received benefits from your employer through registered pension plans (RPP), deferred profit sharing plans (DPSP), or any other retirement plans, this amount will make up your pension adjustment for the applicable tax year.
When you file your income tax and benefits return, you will record your pension adjustment on line 20600.
Your employer or plan administrator is responsible for providing your pension adjustment amount.
When you receive your T4, Statement of Remuneration Paid tax slip, you can find your pension adjustment amount in box 52 of your slip or box 034 of your T4A, Statement of Pension, Retirement, Annuity and Other Income slip.
You can use Form T2033 to move funds between registered plans on a tax-free basis.
Pension Adjustment Calculation
The pension adjustment calculation depends on the type of pension plan.
Here’s how to calculate the pension adjustment for a registered retirement plan and a deferred profit sharing plan.
Registered Retirement Plan
Your registered retirement plan can either be a defined benefit provision or a defined contribution plan (also referred to as ‘money purchase provision’).
Under a defined benefit provision, the pension adjustment calculation formula is: (9 × your benefit earned) – $600.
Your pension credit will be zero if this formula results in a negative amount.
Under a money purchase provision, the pension adjustment calculation is:
- Employer contributions during the tax year, or in the first 2 months of the following year, in respect of the previous year,
- Employee contributions
- Forfeitures depending on the vesting period,
- Any applicable surplus
Deferred Profit Sharing Plan (DPSP)
Under a deferred profit sharing plan, your pension credit amount which determines your pension adjustment is calculated by the sum of your employer’s contributions to the plan plus any related earnings that are allocated but not paid, and forfeitures —based on vesting period, less any amounts refunded.
The calculation is as follows:
- Employer contributions made in the year for the member,
- Forfeited amount(s) and related earnings allocated (but not paid) in the year to the member under the plan,
- Amounts in 1 and 2 above that have been paid out in the year or the first 2 months of the next year if all of these conditions are met:
- the amount is equal to or less than 50% of the money purchase limit,
- the amount is greater than 18% of the current year’s compensation received from your employer,
- the amount is equal to or less than 18% of the prior year’s compensation received from your employer
How Does a Pension Adjustment Affect RRSPs?
The Registered Retirement Savings Plan (RRSP) is a savings and investment account that the Canadian government introduced to encourage Canadians to save for retirement.
The RRSP is a tax-sheltered account and for every tax year, you can reduce the tax you pay by contributing to the RRSP and applying the corresponding RRSP deduction.
This limit indicates your contribution room which is defined as the amount that you can contribute to either your or your spouse’s or common-law partner’s registered pension plan.
Your contribution room also indicates how much you can deduct on your tax return for the applicable tax year.
Your pension adjustment and other parameters are used to determine your RRSP deduction limit for the following year.
As shown by the CRA, this is how your RRSP deduction gets calculated:
- Your unused deduction room at the end of the preceding year,
- The lesser of the two following items:
- 18% of your earned income in the previous year
- the annual RRSP limit (for 2021, the annual limit is $27,830)
That exceeds one of the following items:
- your pension adjustments (PA)
- a prescribed amount
- Your pension adjustments reversal (PAR),
- Your net past service pension adjustment (PSPA)
In essence, your pension adjustment affects the RRSP deduction you can claim and consequently impacts how much you can reduce your taxes by or claim in a tax refund.
What is a Pension Adjustment Reversal (PAR)?
You may need to end your membership in an RPP or a DPSP.
When this happens, you may have a pension adjustment reversal that restores your RRSP deduction limit.
A PAR increases your RRSP deduction limit for the applicable tax year.
Generally, you only get a pension adjustment reversal under a DPSP or a money purchase provision if you are not fully vested at termination.
You will receive a T10, Pension Adjustment Reversal (PAR) slip that shows your PAR amount in box 2.
However, you are not expected to report this amount on your income tax and benefit return.