Your buyback may affect your income tax in two ways: by reducing
your available RRSP room, and by reducing your taxable income.
Your buyback and your RRSP room
Canada’s Income Tax Act sets out rules that limit the total amount of
tax-sheltered savings you can accumulate in different types of
retirement savings plans. Under these rules, the benefit you earn in
the OPSEU Pension Plan for periods after 1989 reduces your available
RRSP contribution room.
PENSION ADJUSTMENTS (PAs)
A pension adjustment (PA) is an estimate of the benefit earned during
each year. A PA is calculated for your pension earned during the year.
- is reported each year on the T4 slip issued by your employer, and
- reduces your contribution room for the following tax year.
Buying back credit for periods of past service after 1989 also reduces
your RRSP room. In some cases, your buyback may result in an
additional pension adjustment. Where this is the case, the additional
PA amount will be reported on a separate T4A issued by OPTrust or
included in the pension adjustment reported on the T4 slip issued by
your employer. You will need to report your PAs on your income tax
PAST SERVICE PENSION ADJUSTMENTS (PSPAs)
For other buybacks, the rules are more complex. In these cases,
OPTrust must get prior approval of a “past service pension
adjustment” (PSPA) from CRA. Once you have informed us of your
agreement to purchase the credit, we will calculate the amount of
your PSPA and forward it to CRA for approval. CRA will approve your
PSPA if you have enough RRSP room.
If your PSPA is approved, we will process your payment according to the option you
selected. You do not have to report your PSPA on your annual income tax return.
If you don’t have enough RRSP room and your PSPA is denied, you may still be able to
complete your buyback. This may be done either by:
- paying for your buyback through a qualifying transfer from an existing RRSP, or
- making a qualifying withdrawal from your RRSP to create the additional room needed for the approval of your PSPA.
If this applies to you, CRA will provide you with additional information.
Your buyback and your taxable income
Contributions to the OPSEU Pension Plan are tax deductible. This applies to your regular
contributions, which are reported each year on the T4 slip you receive from your
employer. It also applies to most buyback payments made to the Plan. (Buyback
payments made through direct transfers from a tax-sheltered source such as an RRSP
are not tax deductible.)
OPTrust will provide you with an official income tax receipt, reporting any tax deductible
buyback payments you make in a given year. Your receipt will be mailed by
February of the following year, in time for you to report the buyback contributions on
your annual income tax return.
UNDERSTANDING THE TAX IMPLICATIONS
The income tax rules regarding buybacks can be complex. If you are buying back
pre-1990 credit, you should pay particular attention to the rules for deducting your
buyback contributions from your taxable income. Depending on your personal
circumstances, you may want to consult a tax professional about how your buyback
will affect your income tax situation.