Credit earned in the Teachers' pension plan is linked to RRSP contribution room. The greater your pension benefit, the less room you will have available to contribute to an RRSP. The connection between pension benefits and RRSP room is one way the Canada Revenue Agency (CRA) ensures equity for Canadians saving for retirement through various tax-sheltered arrangements.
What if I buy back during my absence?
Every member of a registered pension plan receives an annual pension adjustment (PA). The PA, which appears on your T4 or T4A slip, represents the deemed value, for tax purposes, of the pension benefits you earn during the calendar year.
If you choose to pay for your buyback while on leave, you will receive a PA for the service, just as you would if you worked during your absence. Your current RRSP contribution room will be reduced by the amount of your PA.
A PA can reduce your RRSP room to zero but it cannot make your RRSP room a negative number. Unused RRSP contribution room can be carried forward.
Lifetime limits
You can receive PAs for up to five years of credit for eligible leaves and up to three additional years for pregnancy and parental leaves (maximum one year for each child). Any leaves in excess of these limits will require approval from the CRA before the credit can be added to your service record. If approval is not given, you will be ineligible to buy back the leave.
What if I buy back after my absence?
Paying before April 30
If your purchase is made prior to April 30 of the calendar year following the year your absence ended, you will receive a PA.
Paying after April 30
If your purchase is made after April 30 of the calendar year following the year your absence ended, you will receive a past service pension adjustment (PSPA).
A PSPA is the sum of all the pension adjustments for the years you are buying back and will affect your RRSP room in the year it is certified. If you have sufficient RRSP room, CRA will certify your PSPA and you will be permitted to buy back. If the PSPA is denied, the buyback will be denied and your payments will be returned to you.
You can increase the chances of CRA approval of a PSPA by paying for your purchase of credit through an RRSP transfer. An RRSP transfer will lead to a corresponding reduction in your PSPA.
If you choose to pay for a buyback by transferring money from your RRSP, the amount of your PSPA will be reduced.
What are the tax deductibility rules?
Briefly stated, the rules fall into two broad categories, based on the period of the absence you are buying back.
Service after Dec. 31, 1989
If you buy back an absence that occurred after Dec. 31, 1989, the full amount is tax deductible in the calendar year it is made and cannot be carried forward to a future tax year. Your ability to use the full amount of the deduction depends on your taxable income in the year you make the payment for the buyback of credit.
Service before Jan. 1, 1990
For service before Jan. 1, 1990, the rules hinge on whether you contributed to a registered pension plan during your absence.
Where can I get more information?
If you are buying back credit that spans several years, consider consulting a tax accountant.
The rules concerning PAs, PSPAs and tax deductibility can be complex. We'll provide more information when you apply to buy back credit. You can always contact one of our pension benefits specialists for more information on your benefit options.