Pension Adjustment Reversal (PAR)
To encourage Canadians to save for retirement, the Income Tax Act (ITA) allows individuals to take part in tax-assisted retirement savings. The system is based on an overall limit of 18% of an individual’s earned income, to a specified dollar limit. The overall limit applies to total retirement savings under RPPs, DPSPs, RRSPs and PRPPs. For more information on the limits, go to MP, DB, RRSP, DPSP, ALDA, TFSA limits and the YMPE.
Individuals who are members of RPPs and DPSPs have a pension credit reported each year. The pension credit is the benefit the member earned under the plan during the calendar year. The method used to calculate the pension credit depends on the type of plan. With RPPs, the method also depends on the type of provision (defined benefit or money purchase). A member’s pension adjustment (PA) is the total of their pension credits from all RPPs and DPSPs of the employer that the member participates in during the year. The PA reduces the member’s contribution limit to RRSPs and PRPPs in the following year.
Pension adjustments make sure that all employees at similar income levels will have access to comparable tax-assisted retirement savings, regardless of what type of retirement savings plan they belong to.
A past service pension adjustment (PSPA) ensures that benefit upgrades and past service purchases to defined benefit (DB) pension plans are charged against the 18% limit.
A PAR is used to restore an individual's RRSP deduction limit when a member terminates their membership in a DB provision of a RPP or DPSP.
The key element in determining if an individual is eligible for a PAR is the membership. As noted above, a PAR is calculated when the membership is terminated and not when the employment is terminated. An individual is considered a member as long as they have money in the plan.
For example, two members terminate their employment on November 1, 2018. Employee A transfers their benefits to an RRSP on December 17, 2018 and employee B decides to leave their entitlement in the plan until they retire as the fund is generating a good return on investments. Employee A has terminated membership and is therefore entitled to a PAR for the year 2018. Employee B still has an entitlement to benefits under the plan and therefore is still a member and not eligible for a PAR.
In a DPSP or defined contributions (money purchase) pension plan, the PAR is the amount of the employer contributions that are unvested at termination of membership. In a DB provision the PAR is generally the difference between:
- the PAs and PSPAs earned to termination of membership, and
- the commuted value of benefits.
For more information on PARs, go to Guide RC4137, Pension Adjustment Reversal Guide.
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