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CD 2006-002: Information Notice to Employees

Income Tax Information Concerning Retiring Allowances, Returns of Contributions, Transfers of Transfer Value Payments, and Transfers to Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs)

This document is intended to answer the most common income tax questions you have about the retiring allowance you will receive from the federal government, your allowable deductions for past service contributions you make under the federal government's pension plan, and payments you receive from that pension plan. If, after reading the parts of this document that apply to your situation, you still have questions concerning your income tax situation, you should contact your local Canada Revenue Agency (CRA) Tax Services Office. The telephone numbers for these offices are shown in the government pages of your telephone book or you can visit one of their local offices. Both the CRA telephone numbers and addresses are available at the following internet address: Contact Us (CRA)

This document is divided into four parts. PART I concerns retiring allowances, PART II concerns deductions for past service contributions, PART III concerns payments from the Public Service Pension Plan and PART IV concerns documentation requirements (the type of documentation you will be required to give your employer if you want to transfer payments to an RRSP/RPP).

PART I -- Retiring Allowances

If you are an employee who is released due to government downsizing, or you otherwise cease to be employed by the government, you will likely receive a retiring allowance, also known as severance pay. Under the Income Tax Act, a retiring allowance is an amount you receive for loss of office or employment, or after you retire from an office or employment to recognize long service. A retiring allowance does not include a superannuation or pension benefit, or a payment received for certain counselling services where that payment is not required to be included in your income.

You can transfer the "eligible" part of your retiring allowance to a registered retirement savings plan (RRSP) or to a registered pension plan (RPP). Your employer calculates the eligible part of your retiring allowance for you, and reports it in Box 26 of a T4A slip. The part of your retiring allowance that is more than the amount that can be transferred is referred to as a non-eligible retiring allowance. This amount, if any, is reported in Box 27 of the T4A slip issued to you. You have to include your retiring allowance as income on your tax return for the year in which you receive it. This means that both amounts reported in boxes 26 and 27 of your T4A slip must be included in your income tax return as income. Please note that for the province of Quebec, the tax slip issued is a Relevé 1. Your retiring allowances are reported in Box O on the Relevé 1.

You can transfer your eligible retiring allowance to your RRSP/RPP in the year you receive it, or within 60 days after the end of that year. You deduct the amount you transfer to your RPP and to your RRSP on your tax return. Attach your official receipts to your tax return to support the amounts you deduct. If you transfer any part of your eligible retiring allowance to an RRSP, you have to complete the appropriate schedule and attach the completed schedule to your tax return.

Q1. I am receiving a severance package from my employer. What effect will this have on my income tax situation?

 A1. You have to include your retiring allowance in your income for the year you receive it. Your employer will issue you a T4A/Relevé 1 slip. You may be able to transfer some or all of your eligible retiring allowance to an RRSP/RPP, and deduct the amount you transfer from your income. Your financial institution or plan administrator who receives the transferred retiring allowance will provide you with an official receipt for the amount you transfer.

Q2. How much of my retiring allowance is eligible for transfer to an RRSP/RPP?

 A2. The part of a retiring allowance that is eligible for transfer is the sum of:

  1. $2,000 times the number of calendar years before 1996 during which you were employed by the employer paying the retiring allowance, or by an " employer related to your employer "; and
  2. $1,500 times the number of years described in (a) that are before 1989 for which employer contributions to a pension plan or deferred profit sharing plan (DPSP) of your employer or an " employer related to your employer " did not vest in you at the time the retiring allowance was paid.

Notes

  1. The phrase " employer related to your employer " means related in law or in fact. The phrase also includes your previous employers whose businesses were acquired or continued by your current employer, and your previous employers if your employment with those previous employers is used to determine your pension benefit under your current employer's pension plan.
  2. Any part of a calendar year before 1996 during which you were employed by the employer paying the retiring allowance, or by an employer related to your employer is considered to be a calendar year. For example, an individual who worked from December 1990 to January 1992 for the employer paying the retiring allowance would have 3 years of service, 1990, 1991 and 1992.
  3. The expression "vest in you at the time the retiring allowance was paid" means that, at that time, you have a right to those employer contributions either as a lump sum payment or as an immediate or deferred annuity (i.e. periodic pension payments).

Q3. What service years are included when calculating the eligible part of the retiring allowance that can be transferred to an RRSP/RPP?

 A3. As indicated in the answer to Q2, any part of a calendar year before 1996 in which you were employed by the employer paying the retiring allowance, or by an employer related to your employer, is included. Accordingly, any calendar year before 1996 in which you were employed by another employer is included if that other employer is related in fact or in law to your current employer, or employment with that other employer in those years is used to determine your pension benefit under the federal government's pension plan.

Although any such year is used by the employer to calculate the eligible part of the current retiring allowance being paid, situations may arise where the employee who receives that retiring allowance must reduce the eligible part. Specifically, where after November 12, 1981, the employee ceased employment with the same employer or with a related employer, and received an eligible retiring allowance for any year that was transferred to an RRSP/RPP, the employee must reduce the current eligible retiring allowance by the amount previously transferred.

No year of employment after 1995 is included in the calculation of the eligible part of your retiring allowance under any circumstances.

Based on these rules, see the following chart to determine what service years will be included by your employer for purposes of calculating the eligible part of your retiring allowance. You can also use this chart to determine how much your employer will calculate as eligible for those years.

YEARS OF SERVICE ELIGIBLE AMOUNT PER YEAR
PRE-1989 POST-1988
Previous employment with the federal government in any year before 1996 that the employee buys back. $2,000 if the employee can receive an immediate or deferred annuity, or a transfer value payment for such a year, but $3,500 in any other case. $2,000
Previous employment with the federal government in any year before 1996 that the employee does not buy back. $2,000 if the employee can receive an immediate or deferred annuity from another federal government pension plan for those years, but $3,500 in any other case. $2,000
Previous employment outside the government in any year before 1996 that an employee buys back. $2,000 if the employee can receive an immediate or deferred annuity, or a transfer value payment for such a year, but $3,500 in any other case. $2,000
Service in any year before 1996 that is credited under the government's pension plan under a reciprocal transfer agreement. $2,000 if the employee can receive an immediate or deferred annuity, or a transfer value payment, but $3,500 if the employee will only receive a return of his own pension contributions. $2,000
Service in any year before 1996 with the Canadian Forces, the Royal Canadian Mounted Police or as a Member of Parliament or a senator. $2,000 if the employee can receive an immediate or deferred annuity, or a transfer value payment from any federal government pension plan for such a year, but $3,500 in any other case. $2,000
Previous employment in a year outside the government that the employee does not buy back. $0 $0

The examples that follow illustrate the application of some of these rules.

Example 1

Facts:

  • An employee was employed 20 calendar years with the federal public service. Of these 20 years, 3 were before 1989, 7 were after 1988 and before 1996, and 10 were after 1995.
  • The employee purchased past service under the government's pension plan for employment in 5 other calendar years before 1989 with an unrelated employer. This service has been fully paid.
  • The employee chose a deferred annuity in respect of the 18 years of pensionable service.
  • The employee's retiring allowance is $37,000.

The employee's eligible retiring allowance is $30,000 ($2,000 x 15 service years before 1996). Employer contributions to the pension plan are vested in the employee for all service years at the time the retiring allowance is paid. In fact, the employee is entitled to a pension that is partially funded by employer contributions made in respect of all the employee's service years before 1996.

Example 2

Facts:

  • Assume the same facts as in example 1, except that the employee chooses a transfer value payment.

The employee's eligible retiring allowance is still $30,000. This is because the transfer value payment includes employer contributions in respect of all service years.

Example 3

Facts:

  • An employee had 5 years of service before 1989 with the federal public service. When the employee was released in 1984, the employee received a $5,000 eligible retiring allowance which was transferred to an RRSP.
  • The employee bought back this service when rehired.
  • The employee worked 7 years after 1988 and before 1996 with the federal public service, and 10 years after 1995.
  • The employee's pension is locked-in.
  • The employee's retiring allowance is $32,000.

The employee's eligible retiring allowance is $24,000 ($2,000 x 12 service years before 1996) because the employee's pension is locked-in. This means that employer contributions to the pension plan are vested in the employee at the time the retiring allowance is paid.

The employee is only entitled to transfer $19,000 ($24,000 - $5,000) to an RRSP. This is because $5,000 had already been transferred to an RRSP for a retiring allowance the employee received for a retirement that occurred after November 12, 1981.

Q4. I received severance pay when I left the military in 1979. I transferred this to my RRSP. Does this have any effect on the part of my eligible retiring allowance that I can transfer?

 A4. No. The income tax law that requires a person to reduce the current eligible retiring allowance by an eligible retiring allowance previously transferred to an RRSP (in respect of years employed by the employer or a related employer) only when the retirement occurs after November 12, 1981.

Q5. In calculating the eligible retiring allowance, is there a maximum number of years used, for example, 35?

 A5. No. Income tax law is separate from the rules in the Public Service Superannuation Act (PSSA). While there is a maximum of 35 years of service when calculating a pension benefit under the PSSA, there is no such limit when determining the eligible retiring allowance. The limit to the number of years used is simply based on the number of years before 1996 in which the employee was employed with the federal public service, or by an employer related to the federal public service as discussed earlier.

Q6. How do I transfer my eligible retiring allowance to an RRSP /RPP without my employer withholding income tax?

 A6. To ensure that your employer does not withhold income tax from the part of your eligible retiring allowance that you want to transfer, arrange to have your employer transfer the funds directly. Income tax does not have to be withheld from an eligible retiring allowance if it is directly transferred by the payor to an RRSP/RPP. There is no special CRA form that has to be completed.

Q7. Can I transfer my eligible retiring allowance to pay for my past service purchase?

 A7. Yes, but your total deduction for the transfer to your registered pension plan to pay your past service contributions, and the transfer to your RRSP cannot be more than the eligible part of your retiring allowance.

Q8. The terms of the Public Service Pension Plan required me to pay twice the contribution rate for my past service purchase. How much of my retiring allowance is eligible for a year in which this past service occurred?

 A8. The eligible amount for any such year after 1988 and before 1996 is $2,000. The eligible amount for a year before 1989 is $2,000 if you can receive an immediate or deferred annuity, or a transfer value payment from any federal government pension plan for such a year, but $3,500 in any other case.

Q9. I was thinking of transferring some of my eligible retiring allowance to an RRSP and the remainder to my RPP to pay for my pre-1990 past service. However, if I transfer all my eligible retiring allowance to an RRSP, and then transfer RRSP funds to my RPP to pay for my pre-1990 past service, would I not be able to get a deduction for the transfer from my RRSP?

 A9. No, you cannot deduct amounts transferred from an RRSP to an RPP. In such a case, you are simply shifting tax-sheltered retirement funds from one retirement investment to another. The provision of the law that governs this type of transfer is subsection 146(16). It provides, among other things, that where an amount from an unmatured RRSP of an annuitant is directly transferred to an RPP for the annuitant's benefit, the amount so transferred does not have to be included in that person's income and cannot be deducted either. Example 4 illustrates this rule.

Example 4
  • Eligible retiring allowance $50,000
  • Transfer to an RRSP $40,000
  • Transfer to an RPP to pay pre-1990 past service $10,000
  • Maximum deduction $50,000
  • Eligible retiring allowance $50,000
  • Transfer to an RRSP $50,000
  • Transfer from an RRSP to an RPP to pay pre-1990 past service $10,000
  • Maximum deduction $50,000

No deduction can be claimed for the $10,000 transfer from the RRSP to the RPP.

Q10. If my retiring allowance is paid over two years 1, and some or all of the amount paid in the final year is not eligible to be transferred to an RRSP/RPP, do I have to transfer the eligible amounts for the years in which I receive them?

 A10. No. If you receive a retiring allowance in a year, you can choose to transfer whatever part of any eligible retiring allowance you received in a previous year from your employer or an employer related to your employer as long as the sum of the amounts you transfer is not more than your total eligible retiring allowance. However, the maximum amount that you can deduct for a year is limited to the amount of retiring allowance you receive and include in your income for that year, provided you transfer the amount to an RRSP/RPP in the year or within 60 days after the end of the year.

1 Treasury Board Policy dictates that your severance pay is payable immediately upon termination. All other retiring allowances may be deferred over a two year period only, that being the year the employee terminates employment and the following calendar year in January.

Where a retiring allowance is paid over two years, the employer will report on T4A slips the amounts paid first as the eligible amounts. Example 5 illustrates this situation.

Example 5
  • Retiring allowance: $60,000
  • Eligible for transfer: $40,000
  • Payment schedule: $30,000 for each year
  2005 2006
Payments: $30,000 $10,000
T4A reporting (eligible/non-eligible) eligible eligible AND $20,000 non-eligible
Transfer to an RRSP/RPP: $10,000 $30,000

In this example, an employee cannot deduct as an eligible retiring allowance transfer to an RRSP/RPP more than the retiring allowance that was paid in 2006, that being $10,000. However, if an RRSP/RPP contribution (transfer or cash purchase) is made within the first 60 days of 2006, the contribution can be deducted for 2005 against the $30,000 eligible retiring allowance included in income for 2005.

If you are claiming a deduction for a retiring allowance transfer to an RRSP/RPP for a year you receive a T4A slip that shows a non-eligible retiring allowance, be sure to attach a statement to your income tax return for that year that reconciles the total amount eligible for transfer and the amounts actually transferred.

Q11. Can I transfer my eligible retiring allowance to any other retirement investment?

 A11. No, you cannot transfer your retiring allowance to any other retirement investment. This restriction applies to investments such as spousal RRSPs, RRIFs, and any pension or similar type plan in another country.

Q12. I heard that if I transfer my eligible retiring allowance to an RRSP/RPP in 1998 or later, I might still have to pay a minimum tax on the amount I deduct for the transfer. Is this accurate?

 A12. No. Changes have been made to the calculation of "adjusted taxable income" for purposes of determining whether a taxpayer has to pay "minimum tax." The effect of the changes is that the amount deducted for an RRSP/RPP contribution will not be added back to calculate adjusted taxable income for minimum tax purposes.

Q13. How is the amount of federal tax withheld determined when my retiring allowance or a return of my pension plan contributions is paid directly to me?

A13. The federal tax withheld is determined by the amount of the payment, and the province in which you reside at the time the amount is paid to you.

Amount of Payment Tax Rate
Less than $5,000 10%
$5,000 to $15,000 20%
Greater than $15,000 30%

If you reside in the province of Quebec, the federal withholding rates are 5%, 10% and 15% respectively. In addition, the Quebec income tax withholdings rates are:

Amount of Payment Tax Rate
Less than or equal to $5,000 16%
Greater than $5,000 20%

Q14. Can an amount in respect of the non-eligible retiring allowance be contributed to an RRSP without income tax withholding?

 A14. If you have an RRSP earned income deduction limit for the year you receive your retiring allowance, you may be able to transfer some or all of your non-eligible retiring allowance to an RRSP without income tax being withheld. However, you have to prepare and provide a signed letter to your employer certifying that you have sufficient RRSP room available and request that a specific amount of the non-eligible portion be transferred to your RRSP, or you can sign and date a copy of the latest "Notice of Assessment" from the CRA indicating your RRSP room available, on which you will indicate the amount to be transferred to an RRSP.

Your current year RRSP earned income deduction limit is shown on your "Notice of Assessment" for the previous year, or on any "Notice of Reassessment" you receive after that notice.

Q15. Does my employer have to withhold income tax on the part of my eligible retiring allowance that is paid to me if I intend to contribute that amount to an RRSP/RPP later in the year?

 A15. Yes. However, your employer does not have to withhold income tax on that part of your retiring allowance if you get a waiver of tax withholding from a CRA tax services office before the amount is paid to you. These offices will usually issue a waiver to you if, among other things, you certify that you will make a contribution to an RRSP/RPP for the eligible retiring allowance you received. You would have to certify that you will make such a contribution in the year the amount is received or within 60 days after the end of that year, and deduct it on your return for the year you receive it.

PART II -- Deductions for Past Service Contributions

Income tax law distinguishes the amount that you can deduct each year for the RPP past service contributions you pay based on a number of different factors. These are whether the service is after 1989 (post-1989 past service), or before 1990 (pre-1990 past service). For pre-1990 past service, the law further distinguishes the amount you can deduct based on whether the past service contributions are considered as being while a contributor or while not a contributor . Lastly, changes to the law that first applied to deductions claimed for 1991 affected what is considered past service while not a contributor in certain situations.

Post-1989 past service contributions

Contributions you make in a year for post-1989 past service are fully deductible for the year in which you pay them regardless of how much you pay as long as the contributions are made in accordance with the plan as registered with the CRA. The law requires you to deduct your post-1989 past service contributions for the year in which you pay them. The next two questions and answers illustrate this rule.

Q1. I want to buy back service for the period in 1992 and 1993 when I worked part time. How much can I deduct?

 A1. You can deduct all the contributions you pay for this past service. You have to deduct them for the year in which they are paid. There is no provision in the law to allow you to carry forward these contributions, and deduct them for another year.

Q2. I worked for a private company during the years 1994 to 1997. I was a member of the company's pension plan. When I started working for the government in January 1998, I bought back all my service with the company. The cost of the purchase was $45,000, and I paid the full amount in 1998. Shortly after I paid it, I went on extended sick leave. I only earned about $39,000 in 1998. Can I still deduct the $45,000 that I paid?

 A2. Yes. If your employment deductions for a year are more than your employment income for the year, you have an employment loss for that year. This loss may be a non-capital loss. A non-capital loss can be carried back three years or forward seven years and used to reduce your taxable income for the year to which you apply it. To figure out if you have a non-capital loss, you can complete a T1A "Request for Loss Carryback" form. If you have such a loss, and you want to carry it back to any of the three previous years, you can send a copy of the completed T1A form to your local tax centre and ask to have an adjustment made to your tax return. You can apply your non-capital loss in any manner you choose.

Pre-1989 past service contributions

The following chart explains which pre-1989 past service contributions are considered while a contributor or while not a contributor .

While a contributor While not a contributor
Contributions for service in a year when you contributed to the same RPP to which you are paying your past service contributions. Contributions for service in a year when you did not contribute to any RPP.
Contributions for service in a year when you contributed to a different RPP than the one to which you are paying your past service contributions, and you signed an agreement after March 27, 1988, to buy the service. Contributions for service in a year when you contributed to a different RPP than the one to which you are paying your past service contributions, but you signed an agreement before March 28, 1988, to buy the service.
  Contributions you paid before March 28, 1988, for service in a year when you contributed to a different RPP .

The following chart explains how much you can deduct each year for your pre-1990 past service contributions. The maximum amount you can deduct each year is dependent on whether the contributions are considered while a contributor or while not a contributor . The question and answers and examples that follow the chart should help you to determine whether the past service you purchased, or intend to purchase, is while a contributor or while not a contributor . They should also help you to determine how much you can deduct each year for the contributions you pay for that service.

Yearly Deduction for Contributions for Past Service "While a Contributor" Yearly Deduction for Contributions for Past Service "While not a Contributor"
Your yearly deduction for these contributions is the lesser of the following two amounts: Your yearly deduction for these contributions is the least of the following three amounts:
the total amount you contributed in the year and all previous years for these contributions, minus the amounts you deducted for these contributions for previous years; and the total amount you contributed in the year and all previous years for these contributions, minus all amounts you deducted for these contributions for previous years;
$3,500 minus the sum of: the yearly limit of $3,500 that applies to these contributions; and
the amounts you deduct for the year for post-1989 service (includes post-1989 current or past service contributions); and $3,500 times the number of service years (includes a part year) to which the contributions relate , minus the contributions you already deducted as while not a contributor for those years.
the contributions you deduct for the year for pre-1989 past service while not a contributor.  
Note
To deduct these contributions for a year, the amount you deduct for the year for any other type of contribution described in this chart has to be less than $3,500. If you cannot deduct your contributions for past service while a contributor for the year in which you pay them, you can carry them forward and deduct them for a future year subject to the same yearly deduction limit.
Note
You can deduct up to $3,500 each year for these contributions as long as the total amount you deduct for all years is not more than $3,500 times the number of service years to which the contributions relate.

Q3. I intend to purchase service for different periods of employment between 1982 and 1986 when I worked as a casual employee with the federal public service. How much can I deduct each year for the contributions I pay for this service?

 A3. As you did not contribute to any RPP for those periods, the amounts you pay for this service would be while not a contributor contributions. The total amount you can deduct for all years for these contributions is the lesser of:

  1. the amount you contribute; and
  2. $3,500 times the number of service years to which the contributions relate, minus the contributions you already deducted as while not a contributor for those years.

As a yearly deduction limit of $3,500 exists for these contributions, if you pay more in a year than the amount you can deduct, you can carry forward the undeducted amount. The undeducted amount you carry forward can be deducted for a future year as long as the total amount you deduct for the years you bought back is not more than the limitation in (b) above. In other words, the maximum amount you can deduct for any subsequent year is the least of:

  1. the undeducted amount;
  2. the yearly limit of $3,500; and
  3. $3,500 times the number of service years to which the contributions relate, minus the contributions you already deducted as while not a contributor for those years.
Example 1

You bought back five years of pre-1990 service and you made a lump sum payment of $25,000. The total amount you can deduct is the lesser of:

  1. $25,000;
  2. $3,500 times the number of service years to which the contributions relate, minus the amounts you already deducted for this contribution for those years.

Therefore, you are limited to a total deduction of $17,500 ($3,500 times 5 service years). You can deduct this amount at the rate of $3,500 each year. The $7,500 excess cannot be deducted for any year.

Q4. I was a contributing member of my previous employer's pension plan. I am entitled to buy back this service under the Public Service Pension Plan. How much can I deduct for the contributions I pay for this past service?

 A4. Contributions for this service are for a period while a contributor . The amount you can deduct for a year for these contributions is the lesser of:

  1. the amount you contribute in the year; and
  2. $3,500 minus the sum of:
    1. all the contributions you deduct for the year for post-1989 service (includes contributions for any post-1989 current or past service); and
    2. contributions deducted for the year for any pre-1990 service while not a contributor.

Any contribution that you cannot deduct for the year it is made can be carried forward and deducted for a future year subject to the same limit. In other words, the amount you can deduct for a future year is the lesser of:

  1. the undeducted amount; and
  2. $3,500 minus the sum of:
    1. all the contributions you deduct for the year for post-1989 service (includes contributions for any post-1989 current or past service); and
    2. contributions deducted for the year for any pre-1990 service while not a contributor.
Example 2

You bought back five years of pre-1990 service for a period in which you were a contributing member of another pension plan. You made a lump sum payment of $25,000 for the service you bought back. You contribute $2,000 each year for current service which you fully deduct.

For your $25,000 past service while a contributor contribution, you can deduct each year the lesser of:

  1. your undeducted amount; and
  2. $3,500 minus the sum of:
    1. $2,000; and
    2. $0.

In this example, you could deduct $1,500 each year for past service while a contributor contributions. You can carry forward the undeducted amount and deduct it for future years subject to the same limit. Accordingly, you can deduct the entire $25,000.

Q5. I was a contributing member of my previous employer's pension plan. On January 1, 1988, I signed an agreement with the federal public service to purchase service from 1981 to 1985. How much can I deduct for the past service contributions that I pay each year?

 A5. As you had to make these contributions under a written agreement you signed before March 28, 1988, the amounts you are paying are while not a contributor contributions. The amount you can deduct each year is the least of:

  1. the amount you contributed each year;
  2. the $3,500 yearly limit; and
  3. $3,500 times the number of service years to which the contributions relate, minus the contributions you already deducted as while not a contributor for those years.

If you are paying more each year than the $3,500 deduction limit, you can carry forward the undeducted amount and deduct it for a future year. The maximum amount you can deduct for any future year is the least of:

  1. the amount you contribute in the future year plus the undeducted amount;
  2. the $3,500 yearly limit; and
  3. $3,500 times the number of service years to which the contributions relate, minus the contributions you already deducted as while not a contributor for those years.
Example 3

You bought back five years of pre-1990 service for a period throughout which you were not a contributor to any RPP. You have been making monthly installment payments of $200 since January 1, 1991. These payments will continue until December 31, 2000. You claimed $2,400 as past service contributions for each of the years 1991 to 1997, for a total of $16,800. For 1998, you can deduct the least of:

  1. your $2,400 installment payments you made in 1998;
  2. $3,500; and
  3. $700 ($3,500 times 5 past service years minus $16,800).

Therefore, for 1998, you can only deduct $700 of the $2,400 you paid in 1998 as past service contributions while not a contributor . You cannot deduct the remaining amount you paid in 1998, or any of the amounts you will be paying in 1999 and 2000 for any year. This is because the total amount you can deduct for the five years of past service you purchased is $17,500 ($3,500 times 5 service years).

Q6. I can only deduct part of the amount that I pay each year for my pre-1990 contributions for past service while a contributor. I have to carry forward the undeducted amount and wait to deduct it when I have not deducted the maximum amount of $3,500 for a future year. Instead of having to carry it forward, could I deduct it against my earned income RRSP deduction limit?

 A6. No. However, you can contribute amounts to your RRSP and then have them directly transferred to pay your past service contributions if the pension plan in which you are a member permits this. If your plan does permit this and you want to do it, you can use a T2033 form to ask your RRSP issuer to make the transfer for you. If you transfer amounts from an RRSP to an RPP in this manner, the amount transferred does not have to be included in income and cannot be deducted either. If your RRSP issuer, and your employer do not have copies of this form, you can get one from any CRA income tax office.

Please note that you can deduct the amounts you contribute in a year to your RRSP up to your earned income RRSP deduction limit for the year.

Q7. From 1987 to 1991, I worked part time for the federal public service. I intend to purchase this past service as it is now eligible service under the Public Service Pension Plan. Can I deduct all of the payments I make for this past service?

 A7. The first step in figuring out how much you can deduct is to determine what part of your past service contribution relates to service after 1989, and what part relates to service before 1990. Your employer should be able to advise you how much of your past service cost relates to each period. Once you have determined this, you can use the information in this document to figure out how much you can deduct each year for your past service contributions.

PART III -- Payments from the Public Service Pension Plan

This part of the document contains some information about payments from the Public Service Pension Plan.

Payments you receive as a monthly annuity from a pension plan are taxable for the year in which you get them. They will be reported by the payor on a T4A/Relevé 2 slip issued in the name of the recipient. Report your monthly annuity payments on your tax return for the year you get them. Annuity payments from an RPP are eligible for the pension income non-refundable tax credit. You can find more information about this tax credit in your Income Tax Guide.

If you contributed to the Public Service Pension Plan, and you are not locked-in, you can get a return of the contributions you made to the pension plan. Your return of contributions is paid in a lump sum. It is reported by the payor on a T4A/Relevé 2 slip issued in the name of the recipient. Report your lump sum return of pension contributions on your return for the year you get it. This payment is not eligible for the pension income non-refundable tax credit.

If you do not want to pay tax on your return of contributions immediately, but would rather defer the taxation of the payment, you can arrange with your employer to have the amount directly transferred on your behalf to an RRSP/RPP. A return of contributions directly transferred to such a plan on behalf of the recipient does not have to be included as income for the year of the transfer, and cannot be deducted either. Please note that if you receive the amount by cheque or in cash, it cannot be transferred, and you have to pay tax on it for the year you get it.

If you are locked-in, you can choose an immediate or deferred annuity, or a transfer value payment. The transfer value payment is an actuarial estimate of the amount which would be required at the time it is paid to fund a particular amount of pension benefit. The amount is arrived at using assumptions about when the pension is payable, future interest rates, and an individual's life expectancy.

If you choose a transfer value payment, it must be transferred to a locked-in RRSP, or other such similar retirement vehicle. However, in certain cases, tax law limits the amount of a transfer value payment that can be transferred on a tax-deferred basis. If your transfer value payment is more than these limits, the excess has to be paid to you, and included in your income for the year in which it is paid. The excess amount that is paid to you will have tax withheld from it. Your employer should be able to tell you more about your transfer value payment.

Remember, you must include amounts reflected as income on any tax slips (T4A, T4A-RCA, Relevé1, Relevé 2) on your income tax return.

Q1. Can I transfer my return of contributions to an RRSP?

 A1. Yes. You can transfer some or all of your return of contributions to an RRSP. Be sure to have your employer directly transfer the amount for you. If it is paid to you either by cheque or in cash, you cannot transfer the amount and you have to include it in your income for the year you receive it. You can use a T2151 form to ask your employer to make the transfer for you. If your employer does not have copies of this form, you can get the form from any CRA income tax office.

Q2. Can I transfer my transfer value payment to an RRSP?

 A2. Yes, but the government's pension plan requires that it be transferred to a "locked-in" RRSP. In addition, in certain cases, tax law limits the amount that can be transferred on a tax-deferred basis. Your employer should be able to tell you more about your transfer value payment, including details about whether you can transfer it to a "locked-in" RRSP, and whether the payment can be fully transferred or whether some of it has to be paid to you, subject to tax withholding at source.

PART IV -- Documentation Requirements

All retiring allowances, returns of contributions and transfer value payments paid directly to you will be taxed at source. Should you wish to transfer these payments directly to an RRSP/RPP, within the prescribed limits or constraints, so that no income tax will be withheld at source, you will be required to provide specific documentation.

To make a transfer, you must provide your compensation advisor with the following documentation:

Eligible Retiring Allowances

The only documentation required to transfer eligible retiring allowances is a letter from you including the amount to be transferred, the name and full address of the financial institution where the monies are to be transferred, and the RRSP account number to which the monies are to be transferred.

Non-eligible Retiring Allowances

The transfer of non-eligible retiring allowance amounts to an RRSP, with the income tax waived at source, is based on your available personal RRSP room which is calculated each year by the CRA and reported on the your "Notice of Assessment". You should check with the CRA to confirm that you have sufficient RRSP room available in the current year.

You can provide a letter that you have signed and dated, certifying that you have sufficient RRSP room available and request that a specific amount of the non-eligible portion of your retiring allowance be transferred to an RRSP. Be sure to include the name and address of the financial institution as well as the account number.

OR

You can provide a copy of your latest "Notice of Assessment" indicating your available RRSP room. You should sign and date this notice noting the amount you want transferred, the name and address of the financial institution, and the account number.

Return of Contributions (ROC)

To transfer an ROC to an RRSP, you must provide written direction as to the disposition of the monies. The information must include: the amount to be transferred (or "FULL AMOUNT"), the name and full address of the financial institution where the monies are to be transferred, and the RRSP account number to which the monies are to be transferred.

The Income Tax Act dictates that where there is a transfer from one pension plan, such as the Public Service Pension Plan (PSPP) to another pension plan (e.g. RRSP) income tax is not to be withheld. Since all the pertinent information as described in the paragraph above is included on CRA's T2151 form, entitled DIRECT TRANSFER OF A SINGLE AMOUNT UNDER SUBSECTION 147(19) OR SECTION 147.3, you can provide your employer with this completed form instead of a letter. It should be noted that a separate T2151 is required to transfer parts of an ROC where multiple transfer destinations (i.e. more than one financial institution) are involved. This form is available from financial institutions and the CRA. You can also download the T2151 from the CRA's Web site at the following internet address:

T2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3

Transfer Value Payment

In order to make the transfer of the inside the income tax limits portion of the transfer value payment to a locked-in RRSP, you must provide:

  1. form PWGSC -TPSGC 2347-18, "Certification of Lock-in for Purposes of the Public Service Superannuation Act or the Pension Benefits Division Act", which must be completed by your financial institution. This form is available from your compensation advisor;

    AND
  2. form T2151, "DIRECT TRANSFER OF A SINGLE AMOUNT UNDER SUBSECTION 147(19) OR SECTION 147.3", which must be completed by you and your financial institution receiving the payment. This form is available from financial institutions and the CRA. You can also download the T2151 form from the CRA Web site at the following internet address:

    T2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3

In order to make a transfer of the outside the income tax limits portion of the transfer value payment, the following documentation is required:

You can provide a letter that you have signed and dated, certifying that you have sufficient RRSP room available and request that a specific amount of the non-eligible portion of your retiring allowance be transferred to a RRSP. Be sure to include the name and address of the financial institution as well as the account number.

OR

You can provide a copy of your latest "Notice of Assessment" indicating your available RRSP room. You should sign and date this notice noting the amount you want transferred, the name and address of your financial institution, and your account number.