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T4084(E) Rev. (12/98) 3215 Table of Contents
Before You StartIs this guide for you?Use this guide if you want information about how to calculate a pension adjustment (PA) amount. All employers who sponsor or participate in a registered pension plan (RPP) or deferred profit sharing plan (DPSP) must calculate a PA for each plan member. In some situations, the RPP's administrator has to calculate the PA. A sponsor of a specified retirement arrangement (SRA), government-sponsored retirement arrangement (GSRA), or an unregistered foreign pension plan with Canadian resident members may also have to report a PA or a prescribed amount. This guide describes:
The guide provides a summary of the basic concepts of calculating pension credits, including a description of the different types of plans and plan provisions. It also contains some general information on the overall limit that applies to tax assistance for an individual's retirement savings and the effect a PA has on the overall limit. Following these introductory chapters, the guide presents examples of how to calculate a PA in each case. Glossary - We have included the definitions of some of the terms used in this guide in a glossary on page 4. You may want to read the glossary before you start. Forms and publications - In this guide, we refer to certain forms and publications. You can get any of these forms or publications from your tax services office. For our addresses and telephone numbers, see the telephone listings under "Revenue Canada" in the Government of Canada section of your telephone book. Internet - Many of our publications are available on the Internet. Our Internet address is: http://www.rc.gc.ca What if you need more help?The plan administrator is the person most familiar with the benefits payable under your registered plan and can answer many of your questions. In this guide we use plain language to explain the laws and terms you need to know to calculate the PA amount. If this guide does not contain enough information to help you or your plan administrator to calculate PA amounts under your plan, please write to:
What's new?This guide includes recent income tax changes and proposed changes that have been announced but were not law at the time of printing. If the proposed changes become law, they will be effective on the dates indicated. This guide was written with these changes in mind. Included in the guide are the following:
We review this guide each year to make sure the information it contains is up-to-date. However, it is possible that there will be legislative changes before the next revision that affects the information in this version of the guide. If you are not sure whether you have the most recent information, contact your tax services office or tax centre. GlossaryThis guide uses plain language to describe how to calculate a pension adjustment. It is not a legal text. In this section, we explain or define the expressions used in this guide. In this guide, references to the "Act" mean the Income Tax Act, and references to the "Regulations" mean the Income Tax Regulations. Additional voluntary contribution (AVC)A member contribution to a money purchase provision that is not required as a general condition of membership in the plan is commonly known as an additional voluntary contribution. Annualized earningsMost plans base benefits on full or partial years of service. You have to calculate the earnings received by part-time employees or employees who worked only part of a year on an annual basis. Do this by dividing the earnings received by the period actually worked, then multiply the result by the period representing a full year's work. For example, under the plan a full year's service may be 12 months per year, 5 days per week, or 1500 hours per year. The formula is: earnings received × 12 months = annualized earnings Benefit earnedThe benefit earned is the portion of a member's pension that is considered to have accrued during the year. It applies to a defined benefit provision only. You generally calculate this by multiplying the plan's formula for the lifetime benefit by the member's pensionable earnings. In the case of a flat benefit plan, the benefit earned would be the year's flat amount. The Regulations limit the benefit earned for each year from 1990 to 1994 to a dollar limit (there is no such dollar limit for years after 1994). The dollar limit applies when the defined benefit provision calculation above produces a higher figure. This would be the case for high-income earners (see the section called "Member with high earnings" on page 17 for more information). The dollar limits are:
The benefit earned can also be affected by an overriding provision in the plan that limits the maximum amount of pension that can be paid. For example, most plans restrict lifetime retirement benefits to the maximum amount allowed under the Regulations. In some plans, the overriding provision is even more restrictive than this legislative requirement. If the overriding provision applies to a member, you calculate the benefit earned using the overriding provision rather than the plan's regular pension formula. If the overriding provision is the limit imposed by the legislation, the benefit earned is one of the following amounts, whichever is lower:
We show how to apply an overriding provision in the section called "Member with high earnings" on page 17. The dollar limit or overriding provision outlined above can also affect the benefit earned if retroactive benefits are provided and you have to redetermine the pension credits. We discuss retroactive benefits and redetermination of pension credits in the section called "Disability and other leaves of absence" on page 20. Connected personA connected person is someone who:
Also, a person may be a connected person if shares of the employer or a corporation related to the employer are owned by:
Deferred profit sharing plan (DPSP)A DPSP is an arrangement where an employer may share the profits from the employer's business with all employees or a designated group of employees. A DPSP provides benefits based on the contributions made out of the profits or in reference to the profits of participating employers. Defined benefit limitThe defined benefit limit is the greater of:
The defined benefit limit is one of the factors used in the legislative formula that limits the maximum lifetime retirement benefits that can be paid from a defined benefit provision. The terms of most plans limit lifetime retirement benefits to this maximum, but they can be even more restrictive. Whatever the limit, it is usually a provision that overrides the regular formula for calculating pension benefits. We show how to apply such an overriding provision in the section called "Member with high earnings" on page 17. Defined benefit provisionA defined benefit provision uses a pension benefit formula which provides a specified level of pension income. Please see the section called "Calculating Pension Credits - Basic Concepts" on page 7 for a description of the various forms of defined benefit provisions. EarningsEarnings mean the amount of compensation that your plan uses to calculate pension benefits earned. The Regulations require that you exclude benefits for a certain range of earnings when you calculate the benefit earned (described above) for 1990 to 1994. We show how to exclude benefits for a range of earnings in the section called "Member with high earnings" on page 17. The ranges of earnings are:
The exclusion also applies if retroactive benefits are provided and a redetermination of pension credits for any of the above years is required. We discuss retroactive benefits and redetermination of pension credits in the section called "Disability and other leaves of absence" on page 20. Forfeited amountA forfeited amount is an amount a member no longer has rights to under a DPSP or a money purchase provision. Amounts are often forfeited when a member terminates employment before employer contributions have vested. If these forfeited amounts are allocated to the remaining members, include them in the pension credit of the remaining members. Government-sponsored retirement arrangement (GSRA)A GSRA is an unregistered retirement plan that provides retirement income to individuals who are not employees of the government or another public body, but who are paid from public funds for their services. Money purchase limitThe money purchase limit is as follows:
You can get information on the average wage from Statistics Canada. Your telephone book contains telephone numbers for your local Statistics Canada office. You can also contact the Employment and Earnings Statistics Division in Ottawa by telephone at (613) 951-4090. The terms of a DPSP or money purchase provision of an RPP may limit contributions to satisfy certain limits in the legislation that involve the money purchase limit. Also, the terms of most defined benefit provisions limit lifetime retirement benefits to the maximum allowed under the Regulations. One of the factors in the legislative formula for determining maximum benefits is the defined benefit limit (described above) which, in turn, involves the money purchase limit. Money purchase provisionA money purchase provision provides a pension benefit based upon whatever the member's account will buy at retirement. The section called "Calculating Pension Credits - Basic Concepts" on page 7 provides more information on money purchase provisions. Multi-employer plan (MEP)A MEP is a registered pension plan in which a group of employers participate. Please see the section called "Calculating Pension Credits - Basic Concepts" on page 7 to determine if your plan is considered a MEP. PA offsetThe PA offset is used in the pension credit formula (described below). The offset was $1,000 until the end of 1996. Starting in 1997 and afterwards, the offset is $600. Throughout this guide, we will use $600 as the offset. Pension adjustment (PA)The PA is an individual's total pension credits for the year. It measures the level of retirement saving in a year by or for an individual in an employer's RPPs and DPSPs, and possibly, some unregistered retirement plans or arrangements. If an individual participates in only one employer-sponsored plan and cannot or does not make additional voluntary contributions, the year's PA equals the pension credit. An individual's PA in a year reduces the maximum amount that an individual can deduct for RRSP contributions for the next year. A PA can be nil, but it is never a negative amount. Pension adjustment (PA) limitsThe PA limits for a single-employer plan are set out in subsection 147.1(8) of the Act, and for a multi-employer plan, in subsection 147.1(9). For specified multi-employer plans, subsection 8510(7) of the Regulations sets out the limits. A plan or plans causing the PA limits to be exceeded for one or more individuals can have the registration of the plan revoked. The changes to the money purchase limit (defined above) reduce the PA limits in the Act from 1996 to 2003. Subsection 8509(12) of the Regulations contains a transitional relieving provision to ensure that an otherwise acceptable defined benefit RPP will not be revoked. In general terms it provides that, if the defined benefit pension credits of a member exceed the money purchase limit in any year from 1996 to 2003, the portion of the pension credits that is more than the money purchase limit, but less than $15,500, is disregarded. If the pension benefit is the sum of a defined benefit provision and money purchase provision which results in the total PA exceeding the money purchase limit, then the plan can be revoked. Example 17 shows how subsection 8509(12) applies to an RPP. While not required to do so, the terms of some plans actually limit contributions or benefits to the PA limit. Pension creditA pension credit reflects the value of the benefit that a member earns under a DPSP or a money purchase or defined benefit provision of an RPP. An employee's PA is the total of their pension credits. Round all pension credits to the nearest dollar. If the amount is the same distance between two dollar amounts, round it to the next highest dollar. Pension credit formulaUse the pension credit formula to arrive at the pension credit only for a defined benefit provision of an RPP (except a SMEP). Multiply the benefit earned by 9 and then subtract the PA offset [i.e. (9 × benefit earned) - $600]. If the calculation results in a negative amount, the pension credit is nil. ProvisionProvision refers to the terms of a pension plan that describe how benefits are determined for a member. There may be more than one provision in a pension plan. Resident compensationAn individual's resident compensation is the total of the individual's salaries, wages, and other amounts from an office or employment, excluding amounts that are exempt from income tax in Canada by virtue of a tax convention or agreement. This term is used to calculate pension credits or prescribed amounts under foreign pension plans and specified retirement arrangements (SRAs). ServiceService refers to the number of years and partial years of service since the member joined the plan for which the plan provides retirement benefits. Plans often refer to this as pensionable service or credited service. Use the service described in your particular pension plan text to determine the benefits payable. Express partial years as fractions of the year. Specified Multi-Employer Plan (SMEP)A SMEP is a registered pension plan that is sponsored by a group of employers which satisfies certain conditions. See the section called "Calculating Pension Credits - Basic Concepts" on page this page to determine if your plan is a SMEP. Specified Retirement Arrangement (SRA)An SRA is an unfunded or partially-funded pension plan, other than a plan that is regulated by federal or provincial pension benefits legislation, or a plan or arrangement that is a retirement compensation arrangement, or would be if the employer contributed to it. Under the arrangement, payments are to be, or may be, made after an individual ends employment. An SRA does not include an arrangement where payments are to end by the individual's 69th birthday or by the day that is five years after the individual terminates employment, whichever is later. It also does not include an arrangement where funding is regulated by pension benefits legislation. Neither does it include an arrangement that is not subject to federal pension benefits legislation, but is being funded as though it were. SurplusA surplus is an amount that has not, at a particular time, been allocated to plan members. In a money purchase pension plan, a surplus does not include forfeited amounts and related earnings, or regular earnings of the plan, that will be allocated to members. Usually, a surplus will only occur in a money purchase plan when a defined benefit plan converts to a money purchase plan or when a money purchase plan replaces a defined benefit plan. Surplus amounts held under defined benefit provisions have no effect on PA. Year's Maximum Pensionable Earnings (YMPE)YMPE is the amount of earnings, defined by the Canada Pension Plan, on which benefits from the Canada Pension Plan and Quebec Pension Plans are based. YMPE amounts for the years 1990-1998 were:
You can get YMPE information from the Trust Accounts Section of your tax services office. Calculating Pension Credits - Basic ConceptsTax-assisted retirement savings arrangements are designed and administered to provide income to individuals at retirement. Using these arrangements, Canadians can get tax assistance to build their retirement savings. The system is based on an overall limit of 18% of an individual's earned income, to a dollar maximum. The overall limit applies to total retirement savings under employer-sponsored registered pension plans (RPPs), and deferred profit sharing plans (DPSPs), and registered retirement savings plans (RRSPs). Each DPSP and each provision of an RPP produce a pension credit for the member. The pension credit is a measure of the value of the benefit earned or accrued during the calendar year. The method you use to calculate pension credits depends on the type of plan and provision. A member's pension adjustment (PA) is the total of that member's pension credits from all plans in which the member's employer participates in the year, excluding RRSPs. The PA reduces the maximum amount that a member can deduct for contributions to an RRSP for the following year. The first year in which PAs had to be calculated was 1990. There are no PAs for earlier years. The first year that RRSP deduction room was reduced by PAs was 1991. RRSPs do not generate pension credits or PAs.All employers who sponsor or participate in an RPP or DPSP must calculate a PA for each of their employees that participate in the plan. In some situations, the RPP's administrator must calculate the PA. For example, this would be the case if, while on a leave of absence from employment, the member makes RPP contributions directly to the administrator. A union or employer association may also share responsibility for calculating a PA. This would be the case if the RPP is a specified multi-employer plan and the union or employer association receives multi-purpose payments, a portion of which is then contributed to the RPP. Generally, the employer has to report the PA for each employee to us on a T4 or T4A information slip by the last day of February each year. In some situations, the RPP administrator has to report the PA. Since the PA has to be calculated according to the plan as it is registered, it is important that the administrator file amendments to a plan within the 60-day filing requirement under the Regulations. The employer should also ensure that the plan(s) in which it participates will not provide benefits that cause a member's PA to be more than the specified limits. This is important because we may have to revoke the plan(s) if the limits are exceeded by any member. You can find the limits for single-employer plans and multi-employer plans in subsections 147.1(8) and (9) of the Act. There are no limits for a specified multi-employer plan, unless the plan contains a money purchase provision. The limit in this case is found in subsection 8510(7) of the Regulations. Deferred profit sharing plans (DPSPs) and registered pension plans (RPPs) both generate PAs. The designs of these plans usually vary to suit the nature and size of the employer's business, the philosophy of the employer, and legislative requirements. Some arrangements allow or require members to contribute, some do not. DPSPA DPSP is not subject to any provincial pension legislation. However, it is subject to the Income Tax Act. Under a DPSP, an employer's contributions are paid by reference to profits or out of profits. They can be a percentage of the employer's profits or a percentage of the member's earnings. Members cannot contribute to the plan. The plan usually pays the benefits in a lump sum. You include DPSP pension credits for the year in the member's PA. RPPAn RPP can be regulated by provincial and federal pension legislation (e.g., the Income Tax Act and the Pension Benefits Standards Act.). An RPP, which may require or allow member contributions in addition to employer contributions, produces a retirement benefit that is generally paid out monthly. You include RPP pension credits for the year in the member's PA. There are two basic types of benefit provisions for RPPs:
Certain plans are comprised of more than one benefit provision or take into account the benefits under another plan or provision. For example, a plan may be comprised of a defined benefit provision and a money purchase provision. Or, the benefits under a defined benefit provision may be reduced by the benefits under a money purchase provision or under a DPSP. You have to calculate a pension credit for each provision, or for each plan if it is a DPSP. When referring to RPPs in this guide, we make the following distinctions: Single-employer plansSingle-employer plans contain a money purchase provision, a defined benefit provision, or both. One employer generally sponsors such a plan for its employees. In certain cases, more than one employer can contribute to the same plan. This does not necessarily make the plan a multi-employer plan, which we describe next. References in this guide to single-employer plans include plans in which more than one employer participates, but that do not fit the following description. Multi-employer plans (MEPs)Generally, MEPs are RPPs that a group of employers sponsor. However, not all plans to which more than one employer contributes are MEPs. We only consider an RPP to be a MEP if, at the beginning of the year, it is expected that no more than 95% of the active plan members will work for any one of the employers or group of related employers at any time during the year. If this is not the case, we consider the plan to be a single-employer plan. A union can participate in an RPP as an employer for union employees. For 1995 and later years, a union, its locals, and branches are considered a single employer. Specified multi-employer plans (SMEPs)A SMEP is an RPP offered by a group of employers, or by a union acting together with such employers, that satisfies the following conditions:
If it meets all the above conditions, the RPP automatically qualifies as a SMEP. We may also designate an RPP to be a SMEP if it satisfies certain conditions. To get more information about SMEPs or about designations, contact our Registered Plans Division. You can find the address and telephone numbers in the front of this guide. Calculating Pension Credits for Deferred Profit Sharing Plans (DPSPs)To calculate pension credits:
Any further reference in this chapter to forfeited amount(s) means allocated forfeitures and related earnings. Also, the legislation requires that the employer limit its annual contributions to a DPSP for an employee in the three ways outlined below, as they apply. The legislative limit may or may not be detailed in the plan text. Moreover, the plan text may limit employer contributions in a way that is more restrictive than the legislation. The following describes the legislative limit:
In Example 1, we assume that the employer is the only participant in the DPSP and participates in no other registered plan. We also assume the year is 1997 and combined contributions and forfeited amounts are restricted to one-half the money purchase limit or 18% of member earnings, whichever amount is less. Example 1
If two or more employers participate in the same DPSP for a member, each employer has to calculate and report that part of the member's pension credit that arises from working for that employer. In Example 2, we assume that the maximum each employer can contribute under the terms of the plan is $1,000 and that there were no forfeited amounts. Example 2
Calculating Pension Credits for Single-Employer Registered Pension Plans (RPPs)Money purchase provisionPension credits include:
Do not include in the pension credit certain contributions that were made in the year, but that are for an earlier year(s). For more information, see the section called "Disability and other leaves of absence" on page 20. In Example 3, we assume that the employer is the only participant in the plan and participates in no other registered plan. The year is 1997. Note that while contributions are based on a percentage of earnings, the legislation requires the plan to have an overriding limit on total contributions and allocated forfeitures of 18% of member earnings or the money purchase limit, whichever amount is less. Example 3
If two or more employers participate in the same money purchase provision for a member, the plan administrator may have to calculate the portion of the member's contributions, or the amounts allocated to the member, that are to be included in the pension credit for each employer. This is important in some cases to avoid exceeding the PA limit. The following is an example of such a determination assuming that:
Example 4
Defined benefit provisionCalculate pension credits based on the benefit earned by the member in the RPP during the year. Use the full amount of the benefit earned, even if the benefit is not yet vested. The first step to determine the pension credit is to calculate the benefit earned during the year by doing the following:
The final step is to apply the pension credit formula: (9 × benefit earned) - $600 = pension credit If the calculation results in a negative amount, the pension credit is nil. To calculate the benefit earned, you should apply the following rules: Current year's earnings - In final, best, or career average provisions, you have to use the earnings for the year the pension credit is being calculated, even when benefits are based on earnings in other years. However, from 1990 to 1994, you may have to exclude benefits for a certain range of earnings when calculating the benefit earned. For more information, see the description of earnings in the Glossary on page 5 and the section called "Member with high earnings" on page 17. Excluded benefits - Do not include the following benefits when calculating the benefit earned:
Note
Postponed retirement - If a member continues to accrue benefits under the provision beyond age 65, you calculate the benefit earned for the year in the usual manner. An increased pension may be provided to a member who has stopped accruing benefits and postpones receiving a pension beyond age 65. If the increased pension is more than the actuarial equivalent of a pension payable at age 65, you have to include the extra amount when you calculate the benefit earned for the year. This applies to members over age 65 who earned such additional pension in the year. You can use any reasonable method to estimate the amount of the excess. Year's maximum pensionable earnings (YMPE) - Use the YMPE for the year that the pension credit is being calculated, even if the benefit formula requires the use of the YMPE for other years. The following examples show how to calculate the benefit earned and pension credits for several types of defined benefit provisions. Flat benefitTo calculate the benefit earned in the year, multiply the fixed amount by either the number of months or the fraction of the year worked during the year, depending on how the flat rate is expressed. Example 5
Percentage of contributionsCalculate the benefit earned by multiplying the percentage defined under the plan by the member's contributions made in the year. Example 6
Final, best, or career average earningsTo calculate a member's benefit earned, multiply the plan's benefit rate by the member's pensionable earnings. Example 7
Integrated formulas
Example 8
Example 9
* If the member had more than 35 years of service at the beginning of the year, the offset would not apply. If the member reaches 35 years of service in the year, pro-rate the benefit earned.
Example 10
* If the member had more than 20 years of service at the beginning of the year, the offset would not apply. Combination of benefit formulasThe defined benefits under one plan may be combined with those provided under another plan or a provision of the same plan. The combination results in the defined benefits being reduced or increased by benefits under another provision or plan. If we do not cover the combination of benefits for your plan, please contact our Registered Plans Division.
In more complex situations where, for example, there is a dollar limit on the benefit earned, apply the dollar limit separately to each plan or provision before calculating the second and subtracting it from the first. If this applies to you, please contact our Registered Plans Division. Example 11
In this case, the employer decides to split the $600 offset equally between the two plans when calculating the pension credit.
Example 12
In certain combinations where defined benefits are reduced by money purchase benefits, the contributions accumulated in the member's money purchase account may be large enough that benefits under the defined benefit provision will likely never apply, not even for future service benefits. A transitional rule applies in this instance provided that all the following conditions are met:
The transitional rule takes into account benefits arising under the money purchase provision from contributions made before 1990. The transition period ends with 1999. If you meet the above conditions, contact our Registered Plans Division for help to calculate PA. Benefits based on the greater or lower of two formulasSome plans contain more than one formula, and benefits are determined according to the formula that produces the greater benefits, or in some cases, the lower benefits. You have to take all formulas into account when calculating the benefit earned. The Regulations do not permit the greater of a defined benefit provision and money purchase provision. Example 13
Benefit rates linked to serviceIf the benefit rate changes with years of service, you have to consider this when you calculate the benefit earned. Example 14
Note Calculating Pension Credits for Multi-Employer Plans (MEPs)AMEP may have several participating employers and a large membership. A plan in which more than one employer participates is not necessarily a MEP. See the section called "Calculating Pension Credits - Basic Concepts" on page 7 for a description of this type of plan. Money purchase provisionThe calculation of a pension credit is the same as the calculation for a money purchase provision of a single-employer plan. Defined benefit provisionYou calculate a pension credit for a defined benefit provision in the same way as you do a defined benefit provision of a single-employer plan, except for a member who:
The rules take account of the fact that an employer may not have all the information needed to calculate defined benefit pension credits, such as information about a member's employment in the year with other employers who participate in the plan. In each of the three scenarios above, the pension credit formula is prorated for both the benefit earned and the PA offset by the portion of the year worked with each employer. Each employer has to calculate a pension credit as though the member had not worked for any other employer. As an employer, you have to annualize the amount earned by the member while the member worked for you. Use the fraction of the year actually worked by the member to calculate the benefit earned. Apply the same fraction to the $600 offset in the pension credit formula. In the next example, assume YMPE for the year is $35,800. Example 15
You can ask for a waiver of these modified rules that require you to annualize earnings and prorate the $600 offset by writing to our Registered Plans Division. The address of the Registered Plans Division is given at the front of this guide. Calculating Pension Credits for Specified Multi-Employer Plans (SMEPs)Money purchase provisionYou generally calculate the members' pension credits the same as you would for a money purchase provision of a single-employer plan. However, the rules for contributions or payments stated in the following section called "Defined benefit provision" also apply if:
Defined benefit provisionTo calculate a pension credit for a defined benefit provision, you generally follow the money purchase rules, regardless of the plan's defined benefit formula. However, there are some variations. Also, you have to calculate pension credits for all employees for whom you make contributions, not just plan members. For a defined benefit provision of a SMEP, the pension credit for a calendar year equals the total of:
Indirect contributions - Treat all indirect contributions made through a union or employer association as contributions for the year in which they are remitted to the union or employer association, even though they may be for a previous calendar year. Multi-purpose payments - A union or an employer association that receives multi-purpose payments (e.g., combined payments for pension and health plan benefits) in a calendar year determines what part of the payment is a contribution to the SMEP. For reporting purposes, the union or association notifies each employer who remitted multi-purpose payments either of the portion that is the contribution to the plan or how to determine that portion. If an employee remits multi-purpose payments directly to the union or employer association, the union or employer association has to notify the plan administrator of the portion that is a contribution to the plan. The administrator reports the PA in this case. These notifications must be made in writing by January 31 of the year after the year for which the PA is calculated. The union or employer association should also give the employer and plan administrator the applicable seven-digit plan registration number. Direct contributions - The plan administrator, rather than the employer, reports the PA that arises from any contributions to the plan that an employee makes directly to the administrator. Contributions directly to the administrator would occur, for example, if the member were to purchase additional benefits for the year. Also, a member may be allowed to make contributions directly to the administrator while on a leave of absence. Additional contributions by an employer - Employers can make additional contributions to a defined benefit provision of a SMEP that are not determined by some measure, such as hours worked, specific to individual employees. Registration rules do not allow similar additional contributions to a money purchase provision. These additional contributions must be allocated to employees for inclusion in their pension credits for the year. The allocation is based on each employee's usual share of the regular employer contributions to the plan in a year. To allocate the additional contribution, use the following formula: A × C = Employee's portion of additional contributions Where: A is the employer's contributions for an employee made on an employee-specific basis under the provision; B equals the total of the employer's contributions for all employees made on an employee-specific basis under the provision; and C equals the additional employer contributions. Example 16
Calculating Pension Credits for Foreign PlansPension credits for foreign plansIf an individual gets pension benefits because of services provided in Canada for the foreign employer or for services outside Canada for an employer in Canada, determine the pension credit for the year as follows. For years 1992 to 1995, the individual's pension credit is the lesser of:
For years 1996 to 2003, the individual's pension credit is the lesser of:
For years after 2003, the individual's pension credit is the lesser of:
Under certain circumstances, an alternative method of calculating pension credits under a foreign plan may be more appropriate. You can send a written request for an alternative determination to the Registered Plans Division for approval. Prescribed amounts for members of foreign plansIf a Canadian resident was primarily employed outside Canada by a foreign employer and was entitled to a benefit under the foreign employer's pension plan, an amount is prescribed which reduces the deduction limit for the year in a registered retirement savings plan (RRSP) equal to the following. For years 1994 to 1996, the individual's prescribed amount is the lesser of;
For years 1997 to 2004, the individual's prescribed amount is the lesser of;
For years after 2004, the individual's prescribed amount is the lesser of;
If you have questions about calculating pension credits or prescribed amounts for foreign plans, please contact our Registered Plans Division. Calculating Pension Credits for Specified Retirement Arrangements (SRAs)Determine a pension credit for an SRA only under the following circumstances:
In addition, if a person belongs to an SRA, but also has a PA from another plan(s) they belong to (e.g., an RPP, DPSP, or foreign pension plan) a pension credit for the SRA is calculated only where the PA from the other plan(s) is less than the following limits. If the PA from the other plans is greater than the limits, no pension credit for the SRA needs to be calculated. 1. For 1993 to 1995, if the individual's PA amount from other plans is less than the following formula:
where;
B is the PA calculated for the other plans.
Under certain circumstances, an alternative method of calculating pension credits under a SRA may be more appropriate. If you have questions about this calculation, or you want to make a request for approval of an alternative determination, please contact our Registered Plans Division. Calculating Prescribed Amounts for Government-Sponsored Retirement Arrangements (GSRAs)GSRAs have amounts prescribed by the Regulations which reduce the amounts an individual can contribute to their registered retirement savings plan (RRSP). For 1994 to 1996, the prescribed amount for a GSRA is equal to the money purchase limit minus $1,000. For years after 1996, the prescribed amount for a GSRA is equal to the preceding year's money purchase limit. If you have questions about calculating prescribed amounts for GSRAs, please contact our Registered Plans Division. Special SituationsThis section primarily describes how to calculate pension credits for defined benefit provisions in special situations. If your specific situation is not adequately covered in this chapter, contact the Registered Plans Division. You can find the address and telephone numbers in the front of this guide. For money purchase provisions of single-employer plans and of MEPs, and for SMEPs and DPSPs, you may need to use this section to calculate pension credits for two special situations. The special situations are:
Member with high earningsWhen calculating the benefit earned, you may have to modify the plan's formula to exclude benefits for a certain range of earnings. The description of earnings in the Glossary on page 5 outlines the exclusionary range and the years for which this rule applies. Also, if the benefit earned using the plan's formula is more than the dollar limit on the benefit earned, you use the amount of the dollar limit as the benefit earned. The description of benefit earned in the Glossary on page 4 outlines the years for which a dollar limit applies and the amount of the dollar limit. If the benefit earned for a member using the plan's regular formula is more than the maximum amount of pension permitted to be paid according to an overriding provision in the plan, use the overriding provision to calculate the benefit earned. We discuss overriding provisions in the description of benefit earned in the Glossary on page 4. If more than one of the above rules apply, use the lowest of the amounts as the benefit earned to calculate the member's pension credit. The next three examples show how to apply these rules if the member worked a full year. Example 23 shows how to apply these rules when a member with high earnings works only part of a year. In Example 17, we show how an overriding provision in the plan that limits benefits affects the benefit earned. For this example, we assume the overriding provision is equal to the maximum pension allowed by the legislation. If the overriding provision in your plan is more restrictive, use it to calculate the benefit earned. We also assume that the year is 1997. Example 17
In this example, the pension credit is $14,900, which would otherwise exceed the PA limits of 147.1(8) of the Act and make the plan revocable. In this case, subsection 8509(12) of the Regulations permits the pension credit of $14,900 without making the plan revocable. For years before 1995, certain ranges of earnings were excluded when calculating the benefit earned (see the definition of Earnings in the Glossary on page 5). In Examples 18 and 19, we use the year 1993 to show how to exclude benefits for a range of earnings. In Example 18, we assume the overriding provision in the plan limits benefits to the legislative maximum. However, the member has not earned benefits high enough that the maximum applies. Example 18
* This amount is less than the dollar limit of $1,500 on benefit earned (see the Glossary on page 4), so the dollar limit is not a consideration here. ** The PA offset for 1993 was $1,000 (see the Glossary). In Example 19, we show how both a dollar limit on the benefit earned and an exclusion of a range of earnings applies. For this example, we assume the year is 1993 and the overriding provision limits benefits to the legislative maximum. Example 19
* The PA offset for 1993 was $1,000 (see the Glossary). Member who works for two or more employers in a yearSingle-employer plan - If a member earns benefits under the same defined benefit provision for employment with two or more employers in the year, each employer must calculate a pension credit for that member. In the next example, assume YMPE for the year is $35,800. Example 20
Each employer would then report the pension credit that reasonably applies to the member's service with that employer, e.g., prorated to service:
Employers can also choose any reasonable way to split the credit, if they prorate or share the $600 offset. Another possibility is for one of the employers to calculate the pension credit without considering the $600, letting the other employer use the full $600 offset in its calculation. Member who works only part of a yearMember who joins the plan in the yearIn a flat benefit plan, the benefit earned will generally be prorated to the portion of a full year of service credited to the member. To calculate the benefit earned under a career, final, or best average plan, use the member's actual service and annualized earnings. Member who retires in the yearCalculate the benefit earned the same way as you would for a member who joins the plan during the year. Member who ends employment in the yearIf employment ended in the year, calculate the benefit earned in the same way as for a member who joins the plan during the year. Example 21 shows the benefit earned and pension credit calculations under a flat benefit plan for the above three situations. We assume the benefit earned is not limited by an overriding provision (see Benefit earned in the Glossary on page 4). Example 21
Example 22 shows the benefit earned and pension credit calculations in a career, final, or best average plan for the above three situations. Example 22
In Examples 17, 18, and 19, we outlined certain rules that apply to the calculation of the benefit earned when a member with high earnings works a full year. Those rules relate to a dollar limit on the benefit earned, the exclusion of benefits for a range of earnings, and an overriding plan provision limiting the maximum pension payable. Example 23 shows how those same rules apply in a career, final, or best average plan for the above three situations where a member with high earnings works only part of a year. In this example, we assume:
Example 23
Therefore, the benefit earned of $1,722.22 is based only on a portion of the member's annualized earnings, not the full $150,000. The portion of the member's annualized earnings that results in a benefit earned of $1,722.22 can be determined in the following way. On earnings up to the YMPE, the benefit earned under the plan is $33,400 × 1.4% = $467.60. Since the total benefit earned is limited to $1,722.22, the benefit earned on earnings above the YMPE is $1,254.62 ($1,722.22 - $467.60). In this case, to determine the earnings necessary to get a benefit earned of $1,254.62 ($? × 2% = $1,254.62) divide the benefit earned by 0.02. $1,254.62/0.02 = $62,732 Therefore, total earnings necessary to have a benefit earned under the plan of $1,722.22 are: On the first $33,400 × 1.4% = $ 467.60 Since the year is 1993 and the total earnings are $96,132, you have to repeat the earnings exclusion rule according to (ii) above: (1.4% × $33,400) + [2% × ($96,132 - $11,111 - $33,400)] = Benefit earned apportioned for service is the lowest of: (i) plan formula: (ii) earnings exclusion rule: (iii) dollar limit on benefit earned: (iv) overriding plan provision: Pension credit: (9 × $875) - $1,000** = $6,875 * Unlike the calculations in (i), (ii), and (iv), do not apportion the dollar limit on benefit earned for service. ** The PA offset for 1993 was $1,000 (see the Glossary). Part-time employeesCalculate the benefit earned and the pension credit in the same way as for a member who works only part of a year. In a flat benefit plan, you generally prorate the benefit earned to the portion of a full year of service credited to the employee. We show how to calculate the benefit earned and pension credit for a part-time employee in Example 21. Under a career, final, or best average plan, base the benefit earned on the member's actual service and annualized earnings. We show how to calculate the benefit earned and pension credit for a part-time employee in Examples 22 and 23 (Example 23 relates to a member with high earnings). Disability and other leaves of absenceNote Benefits earned or contributions made during a period of absenceAll plans - You have to calculate a pension credit if contributions are made by or for a member, or if a member continues to earn benefits, while absent because of disability or other leave of absence. This applies even though the member may not be receiving pay, or is receiving a reduced rate of pay during the absence. Treat the period of absence as a period worked by the employee. If the formula for contributions or lifetime retirement benefits includes earnings, use a reasonable estimate of the annual rate of pay that the member would have received if he or she worked full-time throughout the year. Defined benefit provision of a MEP that is not a SMEP - A participating employer usually has to calculate and report the member's pension credit based on benefits earned by the member. However, if the member deals directly with the plan administrator instead of the employer during periods of absence, reduced earnings, or disability, the plan administrator can apply to us for written permission to report a part of the member's pension credit. The administrator should send that request to our Registered Plans Division. If permission is given, the employer calculates and reports the pension credit that applies to benefits for services actually rendered, and the administrator calculates and reports the rest. SMEP - As noted in the section called "Calculating Pension Credits for Specified Multi-Employer Plans (SMEPs)" on page 15, an administrator has to calculate and report the PA that results from contributions that a member makes directly to the administrator. Benefits granted, or contributions made, retroactively for a period of absenceFor this special situation:
However, retroactive contributions do not include contributions made in year X for year X, nor do they include employer contributions made in January or February of year Y for year X. Treat such contributions as though they were made during (not after) the period of absence.
Money purchase provision of all RPPs - Redetermine the PA for each (post-1989) year of the uninterrupted period of absence for which retroactive contributions are made. The redetermined PA is the total of:
However, if a retroactive contribution for year X is made in year Y before you have calculated and reported the PA for year X, treat the retroactive contribution as if it were made in year X. You then calculate the PA in the usual way and avoid having to calculate a redetermined PA for year X. Also, we consider a redetermined PA to be an amended PA. As such, if the difference between the previously-reported PA and the redetermined PA is less than $50, you may not have to report the redetermined PA. Please see the exceptions to this administrative rule in the section called "Reporting the pension adjustment (PA)" on page 25. In Example 24, we assume that the plan requires the employer to make retroactive contributions when a member elects to do so. Also, the retroactive contributions are in the amount that would have been made if there were no period of absence. Example 24 5% × member's earnings by employer and member, for a total of 10% Period of absence: August 1, 1997, to March 31, 1998 Actual earnings:
Contributions to plan:
Rate of earnings for full-time employment:
Retroactive contributions made in April 1999 for:
Redetermined PA:
If the retroactive contributions for the period of absence in 1998 were made before the employer had reported the 1998 PA (for example in January 1999), the 1998 PA would be calculated simply as: 10% × $50,000 = $5,000. You also have to redetermine the PA under a money purchase provision if, on or before April 30 of year Y, a plan member makes a written commitment with the employer or plan administrator to make retroactive contributions for all or any portion of the period of absence that ended before year Y. In this case, the PA for each year in which the absence occurred is the total of:
Note Defined benefit provision - Redetermine the PA for each (post-1989) year of the member's uninterrupted period of absence that retroactive benefits are being provided. The redetermined PA for a year under a defined benefit provision of a plan (other than a SMEP, which we deal with next) is the PA for that year recalculated to include the retroactive benefits. In other words, it is the total of the PA as originally reported for the year and the additional PA resulting from the retroactive benefits. However, if retroactive benefits for year X are provided in year Y before you have calculated and reported the PA for year X, treat the retroactive benefits as if they were provided in year X. You then calculate the PA in the normal way and avoid having to calculate a redetermined PA for year X. Also, we consider a redetermined PA to be an amended PA. If the difference between the previously-reported PA and the redetermined PA is less than $50, you may not have to report the redetermined PA. For exceptions to this administrative rule, please see the section called "Reporting the Pension Adjustment (PA)" on page 25. In the next example, we assume that retroactive benefits are being provided under a single-employer plan for the full period of a member's absence. Example 25 1.5% × average of final 3 years earnings Period of absence: August 1, 1997, to March 31, 1998 Service for:
1997 earnings:
1998 earnings:
PA originally reported for:
Retroactive benefits provided: April 1999 Redetermined PA for:
In some cases, the amount of the redetermined PA can be reduced by amounts transferred from another RPP or RRSP. If your situation includes transferred amounts, contact the Registered Plans Division for help. Defined benefit provision of a SMEP - There is no redetermination of PAs. Include employer contributions to fund a period of absence in the same or an earlier year in the PA reported annually. The only employee contributions for a period of absence that you should include in the PA reported annually are:
Do not include any other employee contributions for retroactive benefits in the PA reported annually or in a redetermined PA. Instead, include them in a past service pension adjustment (PSPA). See our publication called Past Service Pension Adjustment Guide [T4104(E)] for more information. Reporting - The employer or plan administrator who reported the PA as it was originally calculated has to file an amended T4 or T4A Supplementary for each year that the redetermined PA is calculated by the following deadlines:
Please mark the amended T4 or T4A Supplementary form with the word "amended." The amended form should contain all the data that appeared on the original form, except for the redetermined PA which should go in box 52. See the section called "Reporting the Pension Adjustment (PA)" on page 25. Also, if necessary, change the year already appearing on the form to the year for which you are making the redetermination. Optional form pays higher benefit than normal formA plan may permit members to choose alternative forms of benefits on retirement. For example, retiring members may be able to give up a guarantee associated with the normal form of benefit in exchange for receiving a higher pension without a guarantee. If this occurs, you have to calculate every member's benefit earned by assuming that each member has or will choose the form of benefit that results in the highest pension, excluding bridging benefits (highest pension rule). There are two exceptions to this highest pension rule. They are in the case where:
(If the guarantee is more than 10 years, you have to calculate every member's benefit earned using the value of the full guarantee period, not just the value of the part that exceeds 10 years.) In applying this highest pension rule, you don't have to calculate the exact amount of the highest pension. You can use any reasonable method for estimating the highest pension. For example, it may be appropriate to calculate the benefit earned by using a higher benefit rate. Whatever the method, you have to use it to calculate the benefit earned for all members of the plan. In Examples 26 and 27, we assume the optional form of payment results in the normal form of payment being increased by a factor of 1.1667. As can be seen, the pension credit is the same whether you apply the factor to the benefit rate or to the benefit earned. Example 26
Example 27
This rule applies, regardless of the form of benefits the member may choose, even if the member has retired in the year. It applies in particular when the benefits depend on the level of survivor benefits, inflation adjustments, or benefit guarantees. Payment of bonuses or back payTo calculate the benefit earned, you generally have to include bonuses or back pay in earnings for the calendar year in which they are received. This applies if bonuses or back pay are considered pensionable earnings according to the plan. This is the case even if the plan treats bonuses or back pay as earnings for a different (usually earlier) year under the plan. Therefore, if a member receives a bonus or back pay and accrues lifetime pension benefits in the year for which you are calculating the pension credit, you should calculate it according to the rules set out in this guide. If a member receives a bonus or back pay in a year (the current year) that relates to services provided in an earlier year but does not accrue lifetime pension benefits in the current year (for example, the member retired in the earlier year), you still have to determine a pension credit for the current year. Calculate it by subtracting the actual pension credit determined for the earlier year from a redetermined pension credit using actual earnings in the earlier year plus the bonus or back pay. In the next example, we assume the current year is 1999. Example 28
There may not be any difference between the redetermined and originally determined pension credits. For example, this could happen if the member had already reached the maximum pension payable in the earlier year because of sufficiently high earnings before taking the bonus or back pay into account. It could also happen if the member had reached a maximum period of service under the terms of the plan before the earlier year. If this is the case, a nil PA would be the result. If your situation is different from those described, contact our Registered Plans Division for help. Benefit formula amended during the yearIf the benefit formula is amended during the year, and the amendment applies back to the beginning of the year, you should use the new benefit formula to determine the benefit earned. However, you should use the previous formula for members to whom the new formula does not apply, such as members who have ended employment. If the amended formula applies only to benefits earned after a given date in the year, you have to calculate the benefit earned by applying the appropriate formula to each of the affected periods of service in the year. Example 29
Salary deferral leave plansA salary deferral leave plan is a written arrangement between an employer and employee. Its terms permit the employee's annual salary or wages to be reduced over a specified period (deferral period) in order to self-fund a leave of absence at a later time. Section 6801 of the Regulations provides greater detail on the conditions that apply to such arrangements. Generally, the following rules apply for determining pension credits:
Example 30
There may be exceptions to these general rules. If you think your plan is an exception to the rules, contact our Registered Plans Division for help. Employee on loan to or from another employerWhen an employer who participates in an RPP loans an employee to a non-participating employer, the borrowing employer has to calculate pension credits and report a PA for the employee if, during the period of the loan:
The lending employer has to give the borrowing employer all relevant information to do the calculation. If you are the borrowing employer, under a money purchase provision the pension credit is the amount of contributions that the employee and the lending employer made based on earnings you paid. Under a defined benefit provision, the pension credit is based on the benefit earned according to the plan formula using the period worked for you as service. If the employee receives earnings from both the lending and borrowing employers during the year, the two employers calculate pension credits and report a PA for the period that the employee worked for them. Under a money purchase provision, contributions are split between the two employers in proportion to the earnings paid by them. Under a defined benefit provision, the benefit earned can be prorated between employers in proportion to the pensionable earnings. The $600 PA offset can also be prorated or otherwise split between the employers. Another possibility is for one of the employers to calculate the pension credit without reference to the $600, letting the other employer use the full $600 offset in the calculation. In Example 31, we show how employers calculate pension credits for a money purchase provision. In Example 32, we show how to calculate a defined benefit provision, assuming that the $600 is prorated in proportion to the pensionable earnings with each employer. Example 31
Reporting the Pension Adjustment (PA)If you need help regarding T4 or T4A reporting requirements, see our publication called Employers' Guide to Payroll Deductions [T4001(E)], or contact the Payroll Deductions section of your tax services office. Report the PA on the T4 Supplementary that you have to file on or before February 28 of each year. However, the reporting deadline is different if benefits are granted, or contributions are made, retroactively for a period of absence by April 30 of the year after the period of absence ended. For more information, see the section called "Disability and other leaves of absence" on page 20. The PA amount must appear in box 52 of the T4 slip. If the PA is zero, write "nil" in this box, a PA cannot be less than zero. Also, the registration number of the RPP or DPSP must appear in box 50, unless the member's PA is nil and the member made no contributions to the plan. Round all pension credits to the nearest dollar. If the amount is the same distance between two dollar amounts, round it to the next highest dollar. The employer is also responsible for reporting the pension adjustment when a member earns benefits:
The plan administrator of a MEP may choose to report on a T4A Supplementary the PAs related to the above periods of absence. However, the plan administrator must first apply for and receive written permission from the Registered Plans Division. On the T4A, record the PA amount in box 34 and the plan registration number in box 36. Do not report a PA for a person who died during the year. If an employer's business operations end during a calendar year before the T4s for that year become available, you should use a previous year T4 Supplementary form to report the PA amount, changing all references to the previous year on the form to the calendar year that business operations ended. There may be a situation that requires you to recalculate a previously-reported PA. You do not have to report the amended PA if the difference between the previously-reported PA and the amended PA is less than $50. However, this administrative rule doesn't apply if an employee wants his or her PA to be accurately reported or if Revenue Canada asks you to report the amended PA. If you have to report an amended PA, please mark the amended T4 form or the amended T4A Supplementary form with the word "amended." The amended form should contain all the data that appeared on the original form, with the exception of Box 52 which should contain the amended PA. Also, please ensure that the amended form reflects the tax year for which you are making the amendment. Connected Persons Joining a Registered Pension PlanIf an individual is, or was at any time after 1989, a connected person as defined in the Glossary on page 5, the employer has to file Form T1007(E), Connected Person Information Return, within 60 days of the date that the individual joins the plan. Similarly, the employer has to file Form T1007(E) within 60 days of the date that such an individual starts to accrue benefits under the plan following a period in which no benefits accrued. The connected person identified on Form T1007(E) may see the RRSP deduction limit for the year in which they join an RPP (or start to accrue benefits under an RPP following a period in which no benefits accrued) reduced by a prescribed amount. The prescribed amount will be equal to one of the following amounts, whichever is less:
The prescribed amount will be zero if the connected person's 1990 PA is more than zero, or if the connected person's 1991 RRSP deduction limit was reduced by a prescribed amount. Please see our guide called RRSPs and Other Registered Plans for Retirement [T4040(E)] for more information.
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