1992-008-e.html
February 26, 1992
DISTRIBUTION
You will find attached an information package on the tax deductibility of
pension contributions and on Past Service Pension Adjustments (PSPA). As you no
doubt appreciate, this topic is quite complex. For this reason, we supplemented
our regular Services Pay Directive with a number of documents which will help
you become familiar with PSPA. You will find attached:
Yours truly,
Original Signed by R. Gravel
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R. Gravel A/Director General
Compensation Directorate
DOCUMENT 1
SERVICES PAY DIRECTIVE
COMPENSATION DIRECTIVE : 1992-008 (04)
February 26, 1992 Ottawa,
Canada K1A 0S5
SUBJECT: Tax Deductibility of Superannuation Contributions
1
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PURPOSE
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1.1
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The purpose of this bulletin is to clarify the Income Tax treatment of
contributions paid into the Public Service Superannuation
Account.
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1.2
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The bulletin also explains the Past Service Pension Adjustment
(PSPA).
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1.3
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It also contains a Question and Answer section; a Form for reporting past
service contributions to Revenue Canada (with instructions) and a number of
examples or the PSPA calculation.
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2
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INTRODUCTION
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2.1
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The changes to the Income Tax Act known as Tax Reform became law in 1990. Most
of these changes apply to 1990 and later years. It provides a new tax treatment
for retirement savings. It also allows for an increase in the maximum annual
contribution limits for Registered Retirement Savings Plans (RRSP) and an
offset in the limit each year to reflect pension credits earned under
Registered Pension Plans (RPP). The offset in the RRSP limit is processed
through the Pension Adjustment (PA) and the Past Service Pension Adjustment
(PSPA) processes.
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2.2
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Attached to this bulletin is a list of questions and answers that will assist
Personnel Offices in explaining the tax deductibility of pension contributions
and the PSPA. However, employees should be encouraged to discuss their specific
tax information requirements with their District Taxation Office who have the
necessary expertise regarding Income Tax matters.
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3
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POLICY
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A
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COUNSELLING
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3.1
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Personnel Offices must take extreme care in providing individuals with
information regarding the purchase of prior service. One of the factors
sometimes taken into consideration when purchasing prior service is the tax
deductibility of the contributions payable; however, because of frequent
changes in Income Tax requirements, it may not always be to an employee's
advantage to purchase prior service. Since an election is a contract, which is
revocable only under very limited and specific circumstances, employees should
be cautioned to consult with their District Taxation Office to ensure that
their expectations regarding the deductibility of past service contributions
are correct BEFORE completing the election form.
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3.2
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Counseling is especially critical when an employee makes a past service
election just prior to retirement. The employee must understand that a past
service election will NOT always increase the net entitlement especially when
the past service contributions are not fully tax deductible. Personnel Offices
should provide employees with a benefit estimate both with and without
the elective service so that the employee can determine if it is financially
beneficial to purchase the service. Otherwise, the employee may be in a
position where due to tax implications, the net cost of the service purchased
is greater than the net benefit, and the election cannot be
revoked. For example, an employee could
elect to purchase a period of service which would increase the benefit by
$150.00. If the cost of the service was $120.00 per month, the net benefit
increase would be $30.00 per month. However, the increase in benefit also means
an increase in benefit also means an increase in taxable income. Since only
$3,500 of the past service contribution is tax deductible, the increase in
income tax required may actually result in a loss of total
benefit.
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3.3
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As well, Personnel Offices must advise employees who have elected or are now
electing for past service which occurred after 31-12-1989 that the election
will be reported to Revenue Canada and may have the effect of reducing the
amount the employee can contribute tax free to an RRSP in the current or future
years. This is further explained in the section on Past Service Pension
Adjustment.
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B
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TAX DEDUCTIBILITY OF PENSION CONTRIBUTIONS
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3.4
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CURRENT CONTRIBUTIONS
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Contributions paid into the Superannuation Account for current day-to-day
service continue to be fully deductible under the Income Tax
Act.
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3.5
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PAST SERVICE CONTRIBUTIONS
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Contributions paid into the Superannuation Account for past service are tax
deductible depending on the following: the type of service being
purchased; the date of the election, and the
dates that the service occurred.
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3.6
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ELECTIONS MADE PRIOR TO MARCH 28, 1988
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Where the service is prior service for which the employee had previously
contributed to the
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Public Service Superannuation Plan and had received a return of contributions,
the Tax deductibility is limited to $3500.00 per year minus contributions paid
for current and other elective service. Where
the service is prior service for which the employee had not been subject to the
Public Service Pension Plan, the Tax deductibility is limited to $3500.00 per
year in addition to the contributions paid for current day-to-day
service.
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3.7
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ELECTIONS MADE ON OR AFTER MARCH 28, 1988 (For pre 1990 service)
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Where the service is prior service for which the employee had contributed to
ANY pension plan, the tax deductibility is limited to $3500.00 per year, minus
contributions paid for current and other elective service. (Example: prior
service with an outside employer where the employee had contributed to a
pension plan). Where the service is prior
service for which the employee had not been contributing to ANY pension plan,
the Tax deductibility is limited to $3500.00 per year in addition to the
contributions made for current service. (Example: prior noncontributory public
service).
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3.8
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ELECTIONS FOR SERVICE WHICH OCCURRED AFTER DECEMBER 31, 1989
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Where the period of elective service occurred after December 31, 1989, the
deduction paid in respect of such a period are fully tax deductible. The
deductibility may be subject to a Past Service Pension Adjustment approval by
Revenue Canada as explained in the Section - PAST SERVICE PENSION ADJUSTMENT.
(See Section C, Paragraph 3.10).
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3.9
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STATEMENTS REQUIRED BY REVENUE CANADA
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As in previous years, Revenue Canada will require certification of the type of
service purchased in order to determine the Tax deductibility of the past
service contributions. Personnel Offices MUST provide employees with the
necessary statement specifying the amount of the past service contributions as
per the T4/relevé 1, and the type of service being purchased. It is
specially important to provide these statements to employees who elected for
periods of Pensionable Employment /Military Service on or after March 28,
1991. Personnel Offices will not be able to
determine from the employee's file whether or not he/she contributed to a
pension plan during a period of pensionable employment. However, since the
majority of elections for Pensionable Employment are for periods of
contributory service, the statement should show that the contributions paid are
in respect of a period while the employee was a contributor under a pension
plan. Should the employee indicate he was subject to a
non-contributory plan during the period in question, you should verify this
fact with the Superannuation Branch before issuing the statement to that
effect. A revised Statement indicating the type
of information Revenue Canada requires is attached. This should be copied for
use by Personnel Offices. Employees should be advised to file the statement
with their Income Tax Return. Again this year,
Personnel Offices serviced by the Regional Pay System will be provided with a
listing of employees who have commenced an arrears deduction or whose arrears
deduction has changed during the year.
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C
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PAST SERVICE PENSION ADJUSTMENT
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3.10
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In June 1990, Revenue Canada introduced the Pension Adjustment (PA) System.
This System was described in Services Pay Directive 1991-007(04) dated January
24, 1991. From the Pension Adjustment reported
on the T4, along with other information available to Taxation (for example,
earned income), Revenue Canada can establish an individual's Registered
Retirement Savings Plan (RRSP) "room". RRSP "room" is the
amount of money an employee can deposit tax free into an RRSP. It is calculated
based on 18% of the previous year's earned income (up to certain yearly
maximums) minus the Pension Adjustment figures reported on the previous year's
T4. Revenue Canada has now introduced the Past
Service Pension Adjustment (PSPA) System. PSPA works in much the same way as
the PA, that is, it reduces the "room" that is available to purchase
RRSPs. PSPA is calculated only in respect of past service which occurred
after 31.12.1989.
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D
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ELECTIONS AND RECIPROCAL TRANSFERS NOW IN EFFECT
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3.11
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The Superannuation Branch will calculate, and report to Taxation, a PSPA for
employees who have already elected to purchase or transfer post 1989 service.
This PSPA will be taken into account in Revenue Canada's calculations of future
RRSP "room". Until the PSPA System is
fully integrated with the Public Service Superannuation Act (PSSA), the PSPA
amounts will be used to reduce RRSP "room" only. The validity of
elections and Reciprocal transfers under the PSSA is not affected at this time,
regardless of whether sufficient "room" is available. Once the PSSA
is amended, past service elections or Reciprocal Transfers will not be valid
unless Revenue Canada has approved the PSPA.
Where an individual who has already elected for service does not now have
sufficient RRSP "room" to allow the purchase, Revenue may request
that the employee withdraw existing RRSPs in order to open up sufficient
"room". In such circumstances, the employee may wish to make a direct
transfer of the RRSP funds to the PSSA. Such a transfer would reduce the PSPA
reported and would also reduce the total amount owing on the
election. The On-line estimate System will be
modified to include information regarding the PSPA relating to the period of
estimated service. The PSPA information, along with the employee's Revenue
Canada statement showing RRSP "room" will allow the employee to
determine the effect of the PSPA on RRSP "room". A further
instruction will be issued when the modifications are made. Until that time
Personnel Offices should continue to provide the employee with the regular
on-line estimate with the understanding that if the employee does in fact elect
for the service, RRSP "room" may be affected.
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4
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PROCEDURES / INSTRUCTIONS
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4.1
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The Superannuation Branch will calculate the PSPA and report the amount to
Revenue Canada. This calculation will be performed for all elections and
Reciprocal Transfer Agreements which contain service occurring after December
31, 1989.
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4.2
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Revenue Canada will determine the effect of the reported PSPA on the
individual's available RRSP "room". Revenue Canada will then provide
the individual with a revised statement advising of any reduction to the
individual's RRSP "room".
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4.3
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It should be noted that in many cases the PSPA will be nil and there will be no
effect on RRSP "room". For example: the PSPA will be "nil"
I all cases where the employee is purchasing prior contributory Public Service,
CFSA service, RCMPSA service, or other service where the individual, at the
time the service occurred, was a member of a pension plan with a benefit rate
equal to or greater than the PSSA. However, if the Return of pension
contributions was transferred to an RRSP, this would create a PSPA for the
service.
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5
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RESPONSIBILITY
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5.1
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Personnel Offices are responsible for providing employees with the statements
required by Revenue Canada setting out the type of past service purchased,
using the attached statement.
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5.2
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Personnel Offices are also responsible for advising employees regarding their
past service elections. As noted, particular care should be taken to ensure
that employees are fully aware that an election is an irrevocable contract in
most circumstances. If the decision on whether or not to elect is dependent on
the Tax deductibility of the past service payments, the individual should check
the tax status with the District Taxation Office to determine the deductibility
in his/her particular case.
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5.3
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Personnel is not responsible, at this time, for providing employees with
information on the PSPA except to advise employees that a past service election
may affect RRSP "room". The Superannuation Branch will perform the
appropriate PSPA calculations once an election has been finalized. More
information on PSPA will be issued once the process is in place.
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6.
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INQUIRIES
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6.1
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Inquiries regarding the content of this directive should be addressed to the
Compensation Advisory Group, Marg Bambrick at (819) 956-2058 or Adèle
Gervais at (819) 956-2096.
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DOCUMENT 2 FORM AND INSTRUCTIONS
INSTRUCTIONS TO EMPLOYEE
The attached form will be completed by your Personnel Office
and will indicate the PERCENTAGE of total past service contributions relating
to each "type" of past service purchased under the Public Service
Pension Plan. This form must be filed along with
your tax return. Although Registered Pension
contributions are all reported together on your T4, the tax deductible amount
varies depending on the type of past service that you have
purchased. The tax deduction limits of past
service payments are described below. Reported
in Part A. (Election was made prior to March 28, 1988).
Where the service is prior service for which you had previously
contributed to the Public Service Pension Plan and had received a return of
contributions, the Tax deductibility is limited to $3500.00 per year minus
contributions paid for current service and for other elective
service. Where the service is prior service for
which you had NOT been subject to the Public Service Pension Plan, the Tax
deductibility is limited to $3500.00 per year in addition to the contributions
paid for current day-to-day service. Reported in
Part B. (Election was made on or after March 28, 1988).
Where the service is prior service before 01-01-1990 and you
had contributed to ANY pension plan, the tax deductibility is limited to
$3500.00 per year, minus contributions paid for current and other elective
service. Where the service is prior service
before 01-01-1990 and you had not contributed to ANY pension plan, the Tax
deductibility is limited to $3500.00 per year, in addition to the contributions
made for current service. Where the elective
service occurred after 31-12-1989, the past service contributions are fully
deductible. In order to determine the
contribution paid in respect of each type of service, you simply multiply the
total past service contribution by the percentage indicated in the respective
space on the form.
To: Revenue Canada / Québec - Taxation
Re: Name:_____________________________
S.I.N.: _______________________________
Date of Election:________________________
PAST SERVICE CONTRIBUTIONS PAID IN THE 19___ TAXATION YEAR (AS
INDICATED ON THE T4, T4A SLIPS OR RELEVES 1 OR 2): $________
A -
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For election made prior to March 28, 1988
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( )
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Of the total contributions in respect of past service, _______________%
represents contributions for a period while this employee was a
contributor under the Public Service Superannuation Act and _________%
represents contributions for a period while he/she was not a contributor
under the PSSA.
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B -
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For Election made on or after March 28, 1988
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( )
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Of the total contributions in respect of past service, _______________%
represents contributions for a period (prior to 01-01-90) while this employee
was a contributor under a Pension Plan, and ____________% represents
contributions for a period (prior to 01-01-1990) while he/she was not a
contributor to any Pension Plan; another___________% represents
contributions for service which occurred after 31-12-89. There is no
requirement for the "while/while not split" in respect of the
contributions for service after 31-12-89.
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___________________
DATE
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__________________
SIGNATURE OF
PERSONNEL OFFICER
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Example on how to segregate contributions paid for service "while a
contributor" from those for service "while not a
contributor". Election signed February
1990. Deductions started February 1990. Elective
Service Notice DSS 2097 shows:
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Cash cost
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Public Service: 01-01-63 to 30-05-80 (broken periods)
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$10, 055.94
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Pensionable Employment: 15-07-80 to 21-09-87
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$25, 371.40
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Total Cash Cost
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$35,427.34
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Monthly Payments
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$293.50
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Review of file shows:
A) P.S.
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01-01-63 to 09-07-67 is contributory service.
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B) P.S.
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28-11-79 to 30-05-80 is non contributory Service.
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C) P.E.
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15-07-80 to 21-09-87 is service while a contributor to a pension plan.
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Scenario 1: You must
split the P.S. line. To do this, prepare estimates of cost for each period
using the online estimate system (it does not matter if you use current
salaries and date of calculation, as long as you use the same ones for both
estimates). From the estimates we find
that: period (A) (63-67) has a cash cost of $9060.74
and period (B) (79-80 has a cost of $995.20 Using
the estimates and the DSS 2097:
Contributory portion:
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cost per estimate total cash cost
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A)
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$ 9,060.74
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$25,371.40
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$34, 432.14
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cash cost of contributory service
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B)
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$34,432.14 =
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97.2%
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$35,427.34
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Non-contributory portion:
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$ 995 .20 =
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2.8%
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$35, 427.34
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Scenario 2 Had the
election been signed in February 1988 your certification for arrears paid in
1991 would have been:
Contributory portion:
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$ 9 060.74 =
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25.6%
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$35 427.34
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Non-contributory portion:
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$26 366.60 =
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74.4%
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$35 427.34
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You will also have to perform these calculations if an
election covers both service prior to and after 31-12-89. Arrears paid in
respect of post 1989 service will have to be reported separately on the tax
statements. The "while/while not" identification is not required for
post 1989 service.
DOCUMENT 3 QUESTIONS AND ANSWERS
GENERAL QUESTIONS AND ANSWERS ON DEDUCTIBILITY OF PENSION
CONTRIBUTIONS
1.
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ARE ALL PENSION CONTRIBUTIONS FULLY TAX DEDUCTIBLE?
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All contributions paid for current day-to-day service are fully
deductible.
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2.
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ARE PAST SERVICE CONTRIBUTIONS FULLY DEDUCTIBLE?
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No! There are specific tax limits on the amount of past service contributions
that are tax deductible. The limits depend on:
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the dates of service, the type of service, and
the date of election.
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3.
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WHAT ARE THE SPECIFIC LIMITS?
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(i)
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For elections made prior to March 28, 1988:
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Where the service is prior service for which the
employee had previously contributed to the Public Service Pension Plan and had
received a return of contributions, the Tax deductibility is limited to
$3,500.00 per year minus contributions paid for current service and for other
elective service, This is service "while a
contributor". Where the service is prior
service for which the employee had not been subject to the Public Service
Pension Plan, the Tax deductibility is limited to $3500.00 per year in addition
to the contributions paid for current day-to-day service. This is service
"while not a contributor". (ii)
For elections made on or after March 28, 1988, for service prior to
01-01-90: Where the service is prior service for
which the employee had contributed to ANY pension plan, the tax
deductibility is limited to $3500.00 per year, minus contributions paid for
current and other elective service. (Example: prior service with an outside
employer where the employee had contributed to a pension plan). This is service
"while a contributor". Where the
service is prior service for which the employee had not been contributing to
ANY pension plan, the Tax deductibility is limited to $3500.00 per year in
addition to the contributions made for current service. (Example: prior non
contributory public service). This is service "while not a
contributor" NOTE: The term
"while and while not" have been adopted to indicate service when the
individual was or was not contributing to a pension plan.
(iii) For elections for service which occurred after
31-12-89. The contributions for post 1989
service are fully tax deductible.
4.
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DO THE DATES OF THE ELECTIVE SERVICE AFFECT THE TAX DEDUCTIBILITY?
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Yes. Where the period of elective service occurred after December 31, 1989, the
deductions paid in respect of such a period are fully Tax deductible. The
deductibility may be subject to a Past Service Pension Adjustment approval by
Revenue as explained in the Question and Answer sheet on the PAST SERVICE
PENSION ADJUSTMENT.
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5.
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IS A PAST SERVICE PENSION ADJUSTMENT REQUIRED FOR ALL ELECTIONS MADE AFTER
JANUARY 1, 1990?
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No. A PSPA calculation is required only where the past service occurred
after 31-12-1989.
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6.
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WHO IS RESPONSIBLE FOR ADVISING EMPLOYEES OF THE TYPE OF SERVICE
PURCHASED?
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The employee's Personnel Office is responsible for providing each employee with
a statement setting out the type of service being paid. Statements must be
provided for new elections or if the arrears payments have changed. Post 1989
arrears must be segregated. It is also important to ensure that employees who
elected on or after 28-3-88 for military service or pensionable employment are
provided with a revised statement.
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7.
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HOW IS IT POSSIBLE TO DETERMINE WHAT CONTRIBUTIONS HAVE BEEN MADE IN RESPECT
OF WHAT TYPE OF SERVICE?
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Calculations on how this is done follow the statement by Revenue Canada in the
attached directive.
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8.
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HOW ARE CFSA/RCMPSA REPAYMENTS TREATED?
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Until now, for Tax purposes, the CFSA/RCMPSA repayment was treated the same way
as arrears contributions for service while a member of the PSSA. That is,
regardless of the date of pension surrender, the tax deduction for service
prior to 01-01-1990 was equal to $3,500.00 less current and other elective
service, Contributions for service after 31-12-1989 are fully deductible
following the PSPA rules. The CFSA/RCMPSA
pension sections provided annual statements to their former pensioners who are
now Public Service employees who have surrendered their CFSA/RCMPSA benefit in
order to count the service under the PSSA. The statement was used by the
employee when he filed his Income Tax Return in order to obtain the appropriate
deduction. For the 1991 Tax Year, an employee
who is repaying a CFSA/RCMPSA benefit is not entitled to ANY Tax deduction for
the repayment. The deduction, however, will be reinstated once proposed
amendments to the Tax Act are passed. Once the legislation is passed employees
will have to write to Revenue Canada to receive any refund that might be owing.
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9.
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ARE THE DEDUCTION LIMITS THE SAME FOR PENSIONERS?
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The present deduction limit for pensioners is $3500.00 (less current if any)
for service occurring prior to January 1, 1990. However, the Department of
Finance will be changing the legislation for certain past service elections.
Under the new legislation the deduction limit will be as
follows: For elections made prior to March 28,
1988: arrears will be deductible up to the amount of pension benefit
earned. For elections made on or after March 28,
1988: arrears will be deductible up to $3500.00 per year (less recoveries of
current contributions, if any). The
reinstatement of the full deduction for pensioners (for pre-March 28, 1988
elections) requires an amendment to the Tax Act. Until the Tax Act has been
amended, the tax deduction is limited to $3500 (less current). When the Tax Act
is amended, the full deduction for pre-March '88 elections will be reinstated
retroactively. Pensioners will have to write to Revenue Canada to request a
refund for previous years.
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QUESTIONS AND ANSWERS REGARDING THE PSPA
1.
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WHAT IS A PENSION ADJUSTMENT (PA)?
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The Pension Adjustment is an amount which represents the value, for Income Tax
purposes, of the pension benefits earned during a calendar year. Pension
Adjustment was introduced in 1991 in respect of the 1990 Tax year.
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2.
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WHAT DOES A PENSION ADJUSTMENT DO?
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The Pension Adjustment reduces RRSP "room", that is the amount an
employee is eligible to deposit Tax free, to an RRSP each year. Each year, an
employee can contribute tax free to an RRSP an amount equal to 18% of the
previous year's earned income (up to certain maximums) LESS the Pension
Adjustment for the previous year.
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3.
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WHAT IS THE PURPOSE OF THE PENSION ADJUSTMENT?
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According to Revenue Canada, the Pension Adjustment System is a amore equitable
way of determining the amount of contributions a person can deposit Tax Free to
an RRSP. Under the previous System, RRSP contributions were based on the actual
contributions an employee paid into a pension plan. For example, the RRSP
contribution limit for most Public Servants was $3500.00 minus current
contributions. On the other hand, a member of a fully employer paid plan could
purchase up to $3500.00 of RRSPs even though the benefits payable out of the
pension plans might be identical. Under the new system, the RRSP contributions
are based on the value of the pensions earned under the various pension plans,
not the contributions paid. In this way, members of plans with similar pension
values would have similar RRSP limits regardless of the contributions each
employee may have paid into the plans.
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4.
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WHAT IS A PAST SERVICE PENSION ADJUSTMENT?
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The past Service Pension Adjustment (PSPA), performs the same function as the
Pension Adjustment (PA). That is, it reduces the contributions an employee can
deposit Tax Free to an RRSP. The PSPA applies only to the purchase/transfer of
past service which occurred after December 31, 1989.
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5.
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HOW DOES THE PSPA WORK?
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When an employee elects to purchase prior service, or transfers service, or
transfers service to the PSSA under a Reciprocal Transfer Agreement (RTA), and
the service occurred after 31-12-89, a PSPA is calculated and reported to
Revenue Canada. Revenue Canada uses the PSPA to reduce the amount an employee
can contribute to an RRSP, either for the current year or for future years.
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6.
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DOES THE PSPA AFFECT THE VALIDITY OF THE ELECTION OR THE RTA?
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At this time, the PSPA is used only by Revenue Canada to reduce RRSP
"room". Elections and RTAs which meet the PSSA requirements remain
valid regardless of PSPA requirements.
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7.
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WHY IS A PSPA CALCULATED IF THE ELECTION OR RTA IS NOT AFFECTED?
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Past service contributions, in respect of post 31-12-1989 service only,
are fully tax deductible. (The 35,000.00 limits do not apply to this service.)
In order to avoid a double tax saving (e.g. deducting the contributions and
also purchasing RRSPs), a PSPA is reported for the service, and the employee's
RRSP "room" is reduced.
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8.
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DOES THE "WHILE A CONTRIBUTOR/WHILE NOT A CONTRIBUTOR" SPLIT
AFFECT THIS SERVICE?
|
No. The contributions for post 1989 service are fully tax deductible regardless
of whether the employee had been subject to any pension plan when the service
occurred.
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9.
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HOW IS THE PSPA CALCULATED?
|
The PSPA is calculated in much the same way as the PA. However the PSPA also
takes into account the original PA reported for the service, and the transfer
of any refunds to an RRSP. Detailed instructions on the PSPA calculation are
explained in this Services Pay Directive.
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10.
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HOW DOES PSPA RELATE TO THE COST OF PRIOR SERVICE?
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Not at all! The cost of prior service is prescribed in the PSSA, (usually based
on salary at date of becoming a contributor, or date of election). PSPA is
calculated based on the salary the individual earned when the service occurred,
but at the benefit rate of the PSSA. PSPA is based on the "value" of
the service, NOT the cost to purchase the service.
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11.
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WHO WILL REPORT THE PSPA TO REVENUE CANADA?
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The Superannuation Branch will report the amounts to Revenue Canada.
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12.
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WHEN WILL THEY BE REPORTED?
|
Probably starting in the Spring of 1992, once all the forms, systems and
procedures are in place, both in Revenue Canada and in the Superannuation
Branch. Once all Systems are in place, the PSPA will be reported to Revenue
Canada as the election or RTA is processed by the Superannuation Branch.
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13.
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WHAT HAPPENS TO THE ELECTION OR THE RTA IF THERE IS NO RRSP "ROOM"
OR NOT ENOUGH "ROOM"?
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At this time, Revenue Canada will simply use the PSPA to reduce future RRSP
"room". Also, there is an $8,000.00 "over-contribution"
limit that should cover the majority of PSPAs. That is, the PSPA could exceed
the existing RRSP "room" by up to $8,000.00 and Revenue Canada would
still approve the PSPA. However, Revenue Canada may ask an individual to
withdraw funds from existing RRSPs in order to open up room to allow the
service. If the individual chooses not to withdraw funds from existing RRSP's,
there is no impact on the election or the RTA under the PSSA, at this time.
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14.
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CAN THE INDIVIDUAL CHOOSE TO WITHDRAW RRSP FUNDS AND TRANSFER THE MONEYS TO
THE PSSA, FOR PSPA PURPOSES?
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Yes. The transfer would reduce the PSPA by the same amount as the transferred
funds.
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15.
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SHOULD ELECTIONS OR RTAs BE HELD-UP UNTIL THE PSPA PROCESS IS
ESTABLISHED?
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Elections and Reciprocal Transfers should continue as they have in the past.
There should be no delays whatsoever as a result of the PSPA requirements.
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16.
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WHAT WILL HAPPEN WHEN PSPA IS FULLY IMPLEMENTED?
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The PSSA must be amended before PSPA can be fully implemented. Once the PSSA is
amended to comply with the Tax rules, an election or RTA will not be valid
unless Revenue Canada approves the PSPA.
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17.
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HOW ARE RETURNS OF CONTRIBUTIONS (ROC), AND OTHER LUMP SUM PAYMENTS NOW
TRANSFERRED TAX FREE TO AN RRSP AFFECTED BY THIS PROCESS?
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ROC transfers directly to an RRSP can continue to be made on a tax free basis
and are not impacted by the PA or PSPA process. ROC payments that had been
transferred to an RRSP will be taken into account in establishing the PSPA
amount if the individual again becomes employed and elects at a later date to
count the service. Payments like severance pay can still be transferred tax
free to an RRSP subject to the limits now in effect.
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18.
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IS RRSP "ROOM" LOST IF NOT USED IN THE CURRENT YEAR?
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No! RRSP "room" can be accumulated. Since the accumulation is based
on a Revenue Canada formula and not simply a specified amount, individuals
should check with their Regional Tax Office to determine their personal limit.
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19.
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ARE ELECTIONS AND RTAs FOR SERVICE PRIOR TO 1990 AFFECTED BY THE PSPA?
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No! The PSPA rules apply only to service on or after 01-01-1990.
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20.
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CAN INDIVIDUAL EMPLOYEES BE PENALIZED BECAUSE THEY HAVE NOT RECEIVED A PSPA
CALCULATION FOR POST 31-12-1989 SERVICE?
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No. The election or RTA remains valid. Revenue Canada can request that existing
RRSPs be withdrawn in order to reduce the employee's PSPA, however, if the
employee chooses NOT to take such action , there is no impact on the election
or RTA at this time. Revenue has indicated that in such a case, future RRSP
"room" would be subject to a reduction. This will change of course
when the PSSA is amended.
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DOCUMENT 4 EXAMPLES OF PAST
SERVICE PENSION ADJUSTMENT CALCULATIONS
EXAMPLES OF PAST SERVICE PENSION ADJUSTMENT (PSPA)
CALCULATIONS Please note that these are
GENERAL EXAMPLES ONLY and do not take into account: exact pay periods,
bi-weekly salary calculations etc. The automated systems designed to perform
the actual calculations will take all these factors into
consideration. The same PA calculation has been
used in all of the examples to illustrate the effects of various scenarios on
the PSPA calculation. (Please refer to Services Pay Directive 1991-007(04)
dated January 24, 1991 for information on PA calculations.) Also, the PSPA
calculations shown may not be the same calculation used in every past service
case. These examples are only intended to give Personnel Offices some
indication of how the PSPA will work. It is
important to note that the PSPA is not related to the cost the individual will
be required to pay to purchase the service under the PSSA.
Example 1 Past service where the
employee had not been subject to any pension plan (E.G. qualifying
period) Service from January 1, 1990 to June 30,
1990 (total period = ½ year) Salary received for the
period: $20,000 Projected annual salary: $40,000
YMPE: $28,900 Benefit Entitlement (i.e. the benefit rate under
the PSSA): = (0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] = $375.70 +
$222.00 = $597.70 Pension Adjustment
(PA): [(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 -
$1,000.00) X ½ year = $4,379.30 X ½ = $2,189.65
The PAST SERVICE PENSION ADJUSTMENT (PSPA) that will be
reported to Revenue Canada is calculated as follows:
PA from above calculation: $2,189.65 LESS PA
originally reported for the period: "nil" PSPA
to be reported to Revenue Canada: $2,189.65 The
PAST SERVICE PENSION ADJUSTMENT (PSPA) reported to Revenue Canada will reduce
the individual's future RRSP "room" (that is, the amount of RRSP
contributions an employee may deposit in the future will be
reduced). The contributions paid in respect of
the past service will be fully tax deductible.
Example 2 Employee was subject to the
Public Service Superannuation Act and had received a return of Superannuation
Contributions which were not transferred to an RRSP.
Service from January 1, 1990 to June 30, 1990 (total period =
½ year) Salary received for the period:
$20,000 Projected annual salary: $40,000 YMPE:
$28,900 Benefit Entitlement: = (0.013 X $28,900) + [0.02 X
($40,000 - $28,900)] = $375.70 + $222.00 = $597.70
Pension Adjustment (PA): [(9 X 597.70) -
$1,000.00] X ½ year = ($5,379.30 - $1,000.00) X ½ year = $4,379.30 X
½ = $2,189.65 The PAST SERVICE PENSION
ADJUSTMENT (PSPA) that will be reported to Revenue Canada is calculated as
follows: PA from above calculation:
$2,189.65 *LESS PA originally reported for the period:
$2,189.65 PSPA to be reported to Revenue Canada:
"nil" The purchase of this
employee's service would have no effect on the individual's RRSP
"room. NOTE: The PSPA will always be
"nil" in cases of prior contributory Public Service/CFSA
service/RCMPSA service/or other service where the benefit rate of the original
pension plan is the same or greater than the PSSA, except where the original
pension contributions were transferred to an RRSP.
The contributions paid in respect of the past service will be
fully tax deductible. * Will be obtained by the
Superannuation Branch for elections and Reciprocal Transfer Agreements. The
employee is to provide this for estimate purposes.
Example 3 Employee was subject to the
Public Service Superannuation Act and transferred the return of Superannuation
contributions to an RRSP. Service from January
1, 1990 to June 30, 1990 (total period = ½ year) Salary
received for the period: $20,000 Projected annual salary:
$40,000 YMPE: $28,900 Benefit Entitlement: =
(0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] = $375.70 + $222.00 =
$597.70 Pension Adjustment (PA):
[(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 - $1,000.00) X ½
year = $4,379.30 X ½ = $2,189.65 The PAST
SERVICE PENSION ADJUSTMENT (PSPA) that will be reported to Revenue Canada is
calculated as follows: PA from above
calculation: $2,189.65 * LESS PA originally reported for the
period: $2,189.65 * PLUS contributions transferred to an
RRSP: $1,016.00 PSPA to be reported to Revenue Canada:
$1,016.00 The purchase of this employee's service would reduce
future RRSP "room" by $1016.00. NOTE:
Where the employee had transferred his original pension contributions to an
RRSP, the amount of the return in respect of post 1989 service must be included
in the PSPA calculation and reported to Revenue Canada.
The contributions in the RRSP could be transferred (back)
directly to the PSSA. This would have the effect of reducing the PSPA reported,
as well as reducing the total cost of the elective service.
The contributions paid in respect of the past service will be
fully tax deductible. * Will be obtained by the
Superannuation Branch for elections and Reciprocal Transfer Agreements. The
employee is to provide this for estimate purposes.
Example 4 Employee was subject to an
outside defined benefit pension plan, received a return of pension
contributions which were not transferred to an RRSP. The outside pension plan
had a benefit rate less than the PSSA rate.
Service from January 1, 1990 to June 30, 1990 (total period = ½
year) Salary received for the period: $20,000
Projected annual salary: $40,000 YMPE: $28,900
Benefit Entitlement: = (0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] =
$375.70 + $222.00 =$597.70 Pension Adjustment
(PA): [(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 -
$1,000.00) X ½ year = $4,379.30 X ½ = $2,189.65
* This calculation is done using the salaries earned with the
outside employer and the benefit rate of the PSSA.
The PAST SERVICE PENSION ADJUSTMENT (PSPA) that will be
reported to Revenue Canada is calculated as follows:
PA from above calculation: $2,189.65 * LESS PA
originally reported for the period: $1,850.00 PSPA to be
reported to Revenue Canada: $339.65 The purchase
of this employee's service would reduce future RRSP "room" by
$339.65. The contributions paid in respect of
the past service will be fully tax deductible. *
Will be obtained by the Superannuation Branch for elections and Reciprocal
Transfer Agreements. The employee is to provide this for estimate purposes.
Example 5 Employee was subject to an
outside defined benefit pension plan, received a return of pension
contributions which were transferred to an RRSP. The outside plan had a benefit
rate less than the PSSA rate. Service from
January 1, 1990 to June 30, 1990 (total period = ½ year)
Salary received for the period: $20,000 Projected annual salary:
$40,000 YMPE: $28,900 Benefit Entitlement: =
(0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] = $375.70 + $222.00
=$597.70 Pension Adjustment (PA):
[(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 - $1,000.00) X ½
year = $4,379.30 X ½ = $2,189.65 * This
calculation is done using the salaries earned with the outside employer and the
benefit rate of the PSSA. The PAST SERVICE
PENSION ADJUSTMENT (PSPA) that will be reported to Revenue Canada is calculated
as follows: PA from above calculation:
$2,189.65 * LESS PA originally reported for the period:
$1,850.00 339.65 * PLUS transfer to an
RRSP: $ 850.00 PSPA to be reported to Revenue Canada:
$1,189.65 The purchase of this employee's
service would reduce future RRSP "room" by $1,189.65
NOTE: The contributions paid into the RRSP could be transferred
to the PSSA. This transfer would reduce the PSPA reported, as well as the cost
of the prior service. The contributions paid in
respect of the past service will be fully tax deductible.
* Will be obtained by the Superannuation Branch for elections
and Reciprocal Transfer Agreements. The employee is to provide this for
estimate purposes.
Example 6 Employee was subject to an
outside defined benefit pension plan, received a return of pension
contributions which were not transferred to an RRSP. The outside pension
plan had a benefit rate greater than the PSSA.
Service from January 1, 1990 to June 30, 1990 (total period = ½
year) Salary received for the period: $20,000
Projected annual salary: $40,000 YMPE: $28,900
Benefit Entitlement: = (0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] =
$375.70 + $222.00 =$597.70 Pension Adjustment
(PA): [(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 -
$1,000.00) X ½ year = $4,379.30 X ½ = $2,189.65
* This calculation is done using the salaries earned with the
outside employer and the benefit rate of the PSSA.
The PAST SERVICE PENSION ADJUSTMENT (PSPA) that will be
reported to Revenue Canada is calculated as follows:
PA from above calculation: $2,189.65 * LESS PA
originally reported for the period: $2,360.00
"nil" PSPA to be reported to Revenue
Canada: "nil" (Where the result is a negative
amount, the PSPA will be "nil"). The
purchase of this employee's service would not affect the individual's RRSP
"room". The contributions paid in
respect of the past service will be fully tax deductible.
* Will be obtained by the Superannuation Branch for elections
and Reciprocal Transfer Agreements. The employee is to provide this for
estimate purposes.
Example 7 Employee was subject to an
outside defined benefit pension plan, received a return of pension
contributions which were transferred to an RRSP. The outside pension plan had a
benefit rate greater than the PSSA Service from
January 1, 1990 to June 30, 1990 (total period = ½ year)
Salary received for the period: $20,000 Projected annual salary:
$40,000 YMPE: $28,900 Benefit Entitlement: =
(0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] = $375.70 + $222.00
=$597.70 Pension Adjustment (PA):
[(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 - $1,000.00) X ½
year = $4,379.30 X ½ = $2,189.65 * This
calculation is done using the salaries earned with the outside employer and the
benefit rate of the PSSA. The PAST SERVICE
PENSION ADJUSTMENT (PSPA) that will be reported to Revenue Canada is calculated
as follows: PA from above calculation:
$2,189.65 * LESS PA originally reported for the period:
$2,360.00 "nil" * PLUS
transfer to an RRSP: $ 1,200 PSPA to be reported to
Revenue Canada: $1,200.00 The purchase of this
employee's service would reduce future RRSP "room" by
$1,200.00. Note: The contributions paid into the
RRSP could be transferred to the PSSA. This transfer would reduce the PSPA
reported, as well as the cost of the prior service.
The contribution paid in respect of the past service will be
fully tax deductible. * Will be obtained by the
Superannuation Branch for elections and Reciprocal Transfer Agreements. The
employee is to provide this for estimate purposes.
Example 8
Employee was subject to an outside money purchased
pension plan, received a return of pension contributions which were not
transferred to an RRSP. The outside pension plan had a benefit rate greater
than the PSSA.
Service from January 1, 1990 to June 30, 1990 (total period = ½
year) Salary received for the period: $20,000
Projected annual salary: $40,000 YMPE: $28,900
Benefit Entitlement: = (0.013 X $28,900) + [0.02 X ($40,000 - $28,900)] =
$375.70 + $222.00 =$597.70 Pension Adjustment
(PA): [(9 X 597.70) - $1,000.00] X ½ year = ($5,379.30 -
$1,000.00) X ½ year = $4,379.30 X ½ = $2,189.65
* This calculation is done using the salaries earned with the
outside employer and the benefit rate of the PSSA.
The PAST SERVICE PENSION ADJUSTMENT (PSPA) that will be
reported to Revenue Canada is calculated as follows:
PA from above calculation: $2,189.65 PA to be
subtracted (Previous PA are not subtracted where the service was with a money
purchased plan) "nil" PSPA to be reported to Revenue
Canada: $2,189.65 The purchase of this
employee's service would reduce future RRSP "room" by
$2,189.65 Note: If the return of the
contributions had been transferred into an RRSP and was later transferred to
the PSSA, this transfer would reduce the PSPA reported, as well as the cost of
the prior service. The contribution paid in
respect of the past service will be fully tax deductible.
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