ARCHIVED DISTRIBUTION 1992-008

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February 26, 1992

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

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. PURPOSE

1.1 The purpose of this bulletin is to clarify the Income Tax treatment of contributions paid into the Public Service Superannuation Account.

1.2 The bulletin also explains the Past Service Pension Adjustment (PSPA).

1.3 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.

2. INTRODUCTION

2.1 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.

2.2 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.

3. POLICY

  1. COUNSELLING

    3.1 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.

    3.2 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.

    3.3 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.

  2. TAX DEDUCTIBILITY OF PENSION CONTRIBUTIONS

    3.4. CURRENT CONTRIBUTIONS

    Contributions paid into the Superannuation Account for current day-to-day service continue to be fully deductible under the Income Tax Act.

    3.5. PAST SERVICE CONTRIBUTIONS

    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.

    3.6. ELECTIONS MADE PRIOR TO MARCH 28, 1988

    Where the service is prior service for which the employee had previously contributed to the 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.

    3.7. ELECTIONS MADE ON OR AFTER MARCH 28, 1988 (For pre 1990 service)

    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).

    3.8. ELECTIONS FOR SERVICE WHICH OCCURRED AFTER DECEMBER 31, 1989

    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).

    3.9. STATEMENTS REQUIRED BY REVENUE CANADA

    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.

  3. PAST SERVICE PENSION ADJUSTMENT

    3.10 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.

  4. ELECTIONS AND RECIPROCAL TRANSFERS NOW IN EFFECT

    3.11 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.

4. PROCEDURES/INSTRUCTIONS

4.1 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.

4.2 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".

4.3 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.

5. RESPONSIBILITY

5.1 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.

5.2 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.

5.3 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.

6. INQUIRIES

6.1 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.

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): $

  1. For election made prior to March 28, 1988

    () 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.

  2. For Election made on or after March 28, 1988

    () 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.

__________________
DATE

___________________
SIGNATURE OF PERSONNEL OFFICER

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:

  • Cash cost
  • Public Service: 01-01-63 to 30-05-80 (broken periods) $10, 055.94
  • Pensionable Employment: 15-07-80 to 21-09-87 $25, 371.40
  • Total Cash Cost $35,427.34
  • Monthly Payments $293.50

Review of file shows:

  1. P.S. 01-01-63 to 09-07-67 is contributory service.
  2. P.S. 28-11-79 to 30-05-80 is non contributory Service.
  3. P.E. 15-07-80 to 21-09-87 is service while a contributor to a pension plan.

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:
  • cost per estimate total cash cost
    • $ 9,060.74
  • $25,371.40 $34, 432.14 cash cost of contributory service
  • $34,432.14 = 97.2%
    • $35,427.34
  • Non-contributory portion: $ 995 .20 = 2.8%
    • $35, 427.34

Scenario 2 :

Had the election been signed in February 1988 your certification for arrears paid in 1991 would have been:

Contributory portion:
  • $ 9 060.74 = 25.6%
    • $35 427.34
  • Non-contributory portion : $26 366.60 = 4.4%
    • $35 427.34

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. ARE ALL PENSION CONTRIBUTIONS FULLY TAX DEDUCTIBLE?

    All contributions paid for current day-to-day service are fully deductible.

  2. ARE PAST SERVICE CONTRIBUTIONS FULLY DEDUCTIBLE?

    No! There are specific tax limits on the amount of past service contributions that are tax deductible. The limits depend on:

    the dates of service,
    the type of service, and
    the date of election.

  3. WHAT ARE THE SPECIFIC LIMITS?
    1. For elections made prior to March 28, 1988:

      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".

    2. 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.
    3. For elections for service which occurred after 31-12-89.

      The contributions for post 1989 service are fully tax deductible.
  4. DO THE DATES OF THE ELECTIVE SERVICE AFFECT THE TAX DEDUCTIBILITY?

    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.

  5. IS A PAST SERVICE PENSION ADJUSTMENT REQUIRED FOR ALL ELECTIONS MADE AFTER JANUARY 1, 1990?

    No. A PSPA calculation is required only where the past service occurred after 31-12-1989.

  6. WHO IS RESPONSIBLE FOR ADVISING EMPLOYEES OF THE TYPE OF SERVICE PURCHASED?

    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.

  7. HOW IS IT POSSIBLE TO DETERMINE WHAT CONTRIBUTIONS HAVE BEEN MADE IN RESPECT OF WHAT TYPE OF SERVICE?

    Calculations on how this is done follow the statement by Revenue Canada in the attached directive.

  8. HOW ARE CFSA/RCMPSA REPAYMENTS TREATED?

    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.

  9. ARE THE DEDUCTION LIMITS THE SAME FOR PENSIONERS?

    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.

QUESTIONS AND ANSWERS REGARDING THE PSPA

  1. WHAT IS A PENSION ADJUSTMENT (PA)?

    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.

  2. WHAT DOES A PENSION ADJUSTMENT DO?

    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.

  3. WHAT IS THE PURPOSE OF THE PENSION ADJUSTMENT?

    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.

  4. WHAT IS A PAST SERVICE PENSION ADJUSTMENT ?

    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.

  5. HOW DOES THE PSPA WORK?

    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.

  6. DOES THE PSPA AFFECT THE VALIDITY OF THE ELECTION OR THE RTA?

    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.

  7. WHY IS A PSPA CALCULATED IF THE ELECTION OR RTA IS NOT AFFECTED?

    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.

  8. 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.

  9. 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.

  10. HOW DOES PSPA RELATE TO THE COST OF PRIOR SERVICE?

    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.

  11. WHO WILL REPORT THE PSPA TO REVENUE CANADA?

    The Superannuation Branch will report the amounts to Revenue Canada.

  12. 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.

  13. 13. WHAT HAPPENS TO THE ELECTION OR THE RTA IF THERE IS NO RRSP "ROOM" OR NOT ENOUGH "ROOM"?

    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.

  14. CAN THE INDIVIDUAL CHOOSE TO WITHDRAW RRSP FUNDS AND TRANSFER THE MONEYS TO THE PSSA, FOR PSPA PURPOSES?

    Yes. The transfer would reduce the PSPA by the same amount as the transferred funds.

  15. SHOULD ELECTIONS OR RTAs BE HELD-UP UNTIL THE PSPA PROCESS IS ESTABLISHED?

    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.

  16. WHAT WILL HAPPEN WHEN PSPA IS FULLY IMPLEMENTED?

    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.

  17. HOW ARE RETURNS OF CONTRIBUTIONS (ROC), AND OTHER LUMP SUM PAYMENTS NOW TRANSFERRED TAX FREE TO AN RRSP AFFECTED BY THIS PROCESS?

    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.

  18. IS RRSP "ROOM" LOST IF NOT USED IN THE CURRENT YEAR?

    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.

  19. ARE ELECTIONS AND RTAs FOR SERVICE PRIOR TO 1990 AFFECTED BY THE PSPA?

    No! The PSPA rules apply only to service on or after 01-01-1990.

  20. CAN INDIVIDUAL EMPLOYEES BE PENALIZED BECAUSE THEY HAVE NOT RECEIVED A PSPA CALCULATION FOR POST 31-12-1989 SERVICE?

    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.

DOCUMENT 4

EXAMPLES OF PAST SERVICE PENSION ADJUSTMENT 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
1 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.

1 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
2 LESS PA originally reported for the period: $2,189.65
2 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.

2 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

3 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
3 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.

3 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

4 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
4 LESS PA originally reported for the period: $1,850.00 339.65
4 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.

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

5 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
5 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.

5 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

6 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
6 LESS PA originally reported for the period: $2,360.00 " nil"
6 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.

6 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.

7 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

7 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.