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PAs, PSPAs, and PARs:
How do they apply to your pension plan?
The Memorial University
Pension Plan, as a registered pension plan, is subject to certain
regulatory provisions of the Income Tax Act (Canada). Among these
provisions are regulations that impose limits on the amount that
individuals may tax shelter for retirement savings purposes.
The terms Pension Adjustment (PA), Past Service Pension Adjustment
(PSPA) and Pension Adjustment Reversal (PAR) are all related
and represent benefits earned under the Memorial University Pension
Plan for purposes of statutory reporting to the Canada Customs
and Revenue Agency (CCRA), formerly Revenue Canada. Here’s
how they work:
A PA, calculated annually for all employees who earn benefits
under the University Pension Plan, is reported to the CCRA on
an employee’s T-4 and is used to determine an employee’s
room to contribute to a registered retirement savings plan (RRSP).
In any year, you may tax-shelter retirement savings up to 18
per cent of the previous year’s earned income, subject to
certain dollar limits ($13,500 for 2000-2001). These dollar
limits include contributions to RRSPs as well as the value of
benefits earned under a registered pension plan, represented
by the PA. Consequently, when determining the amount of RRSP
contribution room that is generated in any particular year, the
PA applicable to that year must be deducted from 18 per cent
of earned income (subject to dollar limits).
A PSPA also has an impact on an employee’s RRSP contribution
room. Prior service purchases or other benefit improvements
for periods after 1989 may give rise to a PSPA, which is simply
the difference between the actual PAs reported in any given period
and the PAs that would have been reported if the service or benefit
improvement had been recognized in the period to which it relates.
A PSPA must be reported to the CCRA and certified by them before
past service benefit improvements may be provided under the pension
plan. Once certified, a PSPA will reduce the amount of RRSP contribution
room an individual has in the current year.
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RRSP contribution room illustrated The RRSP contribution room
of an individual for 2001 may be determined using the following
formula: where |