Service Buyback—Tax Implications

(Background music: Welcome page with a logo of the Government of Canada Pension Centre.)

At the Government of Canada Pension Centre, we're here to help.

Hi, my name is Bruce.

Are you thinking of buying back your past service? Then let's look at how your income tax and adding past service to your pension work together.

First, we need to cover a bit of theory.

There are three main topics you need to understand.

I will explain how they interact with each other. Registered Retirement Savings Plan (RRSP Contribution Room), Pension Adjustment (PA), and Past Service Pension Adjustment (PSPA).

(When the narrator says “I will explain how they interact with each other …,” a grey text box appears in the top-right corner of the screen, with the words REGISTERED RETIREMENT SAVINGS PLAN [RRSP]/PENSION ADJUSTMENT [PA]/PAST SERVICE PENSION ADJUSTMENT [PSPA] in white letters. The text box disappears.)

Your RRSP contribution room is the amount you can contribute to an RRSP in a year. You can find your available contribution room on your latest notice of assessment from the Canada Revenue Agency or CRA.

Your contribution room limits how much you can invest in RRSPs and in your pension from a registered pension plan.

It also limits the past service you may be able to buyback.

(The narrator is standing next to small whiteboards, which are on the right side of the screen. When he says “You can find your available contribution room …,” the words “RRSP contribution room = Amount you can contribute to an RRSP in a year” are written on the first whiteboard, next to the narrator.)

Contributions you make to your RRSP reduce your RRSP contribution room dollar for dollar.

It is a bit different for contributions to a registered pension plan like the Public Service Pension Plan.

Your pay services have to measure the value of the pension you accumulate in a year.

The value of the pension you accumulate will adjust your RRSP room.

This adjustment is called well a Pension Adjustment or PA.

The Pension Adjustment shows in box 52 of your T4 slips.

Similar to the contributions you make to an RRSP, the Pension Adjustment reduces your RRSP contribution room.

(When the narrator says “This adjustment is called … well, a Pension Adjustment, or PA,” the words “Pension adjustment [PA] reduces RRSP room based on the value of your pension for the year/Box 52 of T4” appear on the second whiteboard. The information on the boards disappears.)

Now, let's get into how your service buyback affects your RRSP contribution room.

Just like a pension adjustment measures the value of pension you actively accumulate while employed, a past service pension adjustment measures the value of the past service you are buying back.

The amount of past service pension adjustment also reduces your RRSP contribution room.

We only need to calculate a past service pension adjustment for service that occurred after 1989.

(When the narrator says “… a Past Service Adjustment measures the value of the pension …,” a text box appears with the words PAST SERVICE PENSION ADJUSTMENT [PA]. The text box disappears upward.)

If you don't have enough RRSP room for the Canada Revenue Agency to approve your past service pension adjustment, your service buyback back will not be valid.

However, if you pay for your service that occurred after 1989 with your existing RRSPs, it will reduce the amount of past service pension adjustment we need to report.

To reduce your past service pension adjustment, we have to receive your RRSP transfer before we finalize your buyback.

OK, got that? Good! Don't forget that you can review any parts of this video whenever you like.

All right, let's move on.

(The screen becomes entirely back for a few seconds, with the words TAX DEDUCTIBILITY OF PENSION CONTRIBUTIONS written in white.)

You may decide to transfer funds from your RRSP or from another registered pension plan to pay for your service buyback. If you do, you cannot claim the amount paid as an income tax deduction.

If you pay for your service buyback with payroll deductions or with a cheque or bank draft, you may be able to claim all or some of the payments.

Claiming these pension contributions reduces the income on which you need to pay tax.

How you claim these deductions depends on the following limitations.

Service that occurred after 1989 is the one with the least limitations.

You can claim the full amount of these pension contributions as a tax deduction from your income for the tax year in which you pay them.

(When the narrator says “Service that occurred after 1989 is the one with the least limitations …,” the following text appears on the first whiteboard, at the right side of the narrator “Service that occurred after 1989 is the one with the least limitations.” The information disappears.)

Service before 1990 is divided in two categories.

The first one is past service while you contributed to a registered pension plan.

This can be service for which you paid contributions and later received a return.

The maximum amount you can claim as a tax deduction from your income for this service is $3,500 per year, minus other pension contributions.

Other contributions mean other cash payments made toward your pension.

These include payroll deductions and payments by cheque or bank drafts.

Your other pension contributions will limit the maximum amount you can claim.

If you cannot claim the full amount of these contributions, don't worry you can deduct the balance in future years.

(When the narrator says “Service before 1990 is divided in two categories …,” the following text appears on the second whiteboard, at the right of the screen “Service before 1990 [underlined]/Past service while you contributed [the words while you contributed are underlined] to a registered pension plan:/$3,500 per year minus other pension contributions/Fully tax deductible.” The information disappears.)

The second one is past service while you did not contribute to a registered pension plan.

The amount you can claim as a tax deduction from your income for these pension contributions is limited to $3,500 per year.

Contrary to the service, while you contributed to a pension plan, if you make other pension contributions, they will not affect the limit.

If you pay more than $3,500 in a year for these contributions, you can deduct the balance in future years.

One more thing about service while you did not contribute, there is a maximum lifetime amount that you can claim. The formula to calculate the maximum is $3,500 times the number of years or partial years of this type of service you bought back.

(When the narrator says “The second one is past service while you did not contribute …,” the following text appears on the same whiteboard “Service before 1990 [underlined]/Past service while you did not contribute [the words did not contribute are underlined] to a registered pension plan:/$3,500 per year/Formula: $3,500 × the number of years.” The information disappears.)

Lastly, if you were earning high salaries, your buyback may include contributions to the Retirement Compensation Arrangement or RCA.

You can claim the full amount of these pension contributions as a tax deduction from your income for the tax year in which you pay them.

(When the narrator says “Lastly, if you were earning high salaries …,” the following text appears on the third whiteboard “High Salaries—may include contributions to the Retirement Compensation Arrangement [RCA]/Fully tax deductible.” The information disappears.)

I hope this was helpful to you.

Our goal was to guide you to better understand the relation between your service buyback and your income tax.

If you need more information on this topic, feel free to contact us or visit canada.ca/pension-benefits.

(When the narrator says “… feel free to contact us or visit …,” the words CANADA.CA/PENSION-BENEFITS appear on the bottom of the screen. The text disappears.)

Thanks for watching.

(Text on screen: Check us out: facebook.com/PSPC.SPAC, instagram.com/pspc_spac, twitter.com/pspc_spac, youtube.com/PWGSCanada)

[Music stops]

(Public Services and Procurement Canada signature)

(Canada Wordmark)