Tax implications

Let’s face it, taxes aren’t the most exciting topic. But, it’s important to understand the connection between paying for your leave, your taxable income and your RRSP contribution room. Let’s start with the April 30 deadline.

You have until April 30 of the year following the end of your leave to let us know if you want to pay for it. This will make your tax situation simpler. Think of April 30 like a best before date.

If your leave ends in 2018, its best before date is April 30, 2019.

You still have five years to make payments, but if you wait to tell us you plan to pay until after April 30, your tax treatment gets a bit more complicated.

Timeline for buying back a leave

Before April 30

I told you before the April 30 deadline. Now what?

If you tell us you intend to pay for your leave before the April 30 deadline, you won’t need approval from the Canada Revenue Agency (CRA).

We’ll calculate a pension adjustment for each calendar year in which your leave fell. This reduces your RRSP contribution room, whether you pay for all, some or none of your leave.

If your leave started in September 2016 and ended in August 2017, then it spans two calendar years. You’d get separate pension adjustments for each of those two years.

If your pension adjustment is more than your RRSP contribution room, your contribution room will go to zero the following calendar year.

Why is my pension adjustment a different amount than the cost of my leave?

The cost of your leave will always be less than your pension adjustment. This is because the expected future value of your pension is generally more than the actual cost of your leave.

If you're like a typical full-time teacher with a salary around $78,000 and you pay about $10,000 for your leave, your pension adjustment will be around $14,000.

The bottom line

When you’re working and contributing to the plan, you get pension adjustments.

Once you tell us you plan to pay for your leave (or you make a payment), we’ll send you an additional pension adjustment for each year your leave spanned. This will come as a T4A.

If your leave started in August 2016 and ended in September 2017, you’ll get additional separate pension adjustments for each of 2016 and 2017. If you’ve already filed your taxes for those years, fill out this form and file it with the CRA.

After April 30

I missed the April 30 deadline. Now what?

If you missed your April 30 deadline, and you still want to pay for your leave, here’s what you need to know:

  1. Call us at 1 (800)-668-0105 and let us know you’d like to pay.

  2. We’ll contact the Canada Revenue Agency (CRA).

  3. If the CRA approves, we’ll send you a letter letting you know.

  4. If the CRA doesn’t approve, they’ll send you a letter and we’ll need to refund any payments you’ve made for your leave to date. If this happens, call us at 1 (800)-668-0105 with your letter from the CRA in hand so we can talk about your options.

What if I still want to pay for my leave?

We’ll prepare what’s called a past service pension adjustment (PSPA).

The PSPA reflects the expected future value of your pension if you pay for your leave. The PSPA usually has to be approved by the Canada Revenue Agency (CRA).

The CRA will compare the size of the PSPA we prepare to your available RRSP contribution room.

The bottom line

What happens if my PSPA is less than my RRSP contribution room?
You’ll have enough contribution room to pay for your leave. The CRA will reduce your contribution room by the size of your PSPA and you can go ahead and pay.

What if my PSPA is greater than my RRSP contribution room?
You may still have some wiggle room. You can generally go over your RRSP contribution room by up to $8,000 before the CRA will tell you no, and not approve your PSPA.

If the CRA doesn’t approve your PSPA and you still want to pay for at least a portion of your leave, consult a professional financial advisor to discuss your options.

Are my taxes affected?

Are my taxes affected?

It depends if you pay with online banking or cheque or with RRSPs.

Paying with online banking or cheque

When you pay with online banking or cheque you’ll be eligible for a tax deduction that will likely reduce your taxable income.

We’ll send you a tax receipt in February for payments you made in the previous calendar year. Use the information on this receipt to apply your deduction when you file your taxes.

You can only apply this deduction for the year in which you made the payments.

If you paid in 2018, we’ll send you a tax receipt in February 2019 that you can use for your 2018 tax return.

The bottom line

When you’re on leave (and assuming that teaching is your only source of income), your cash flow is likely lower than when you’re working, so you’d pay less tax for this period. A tax deduction may be less valuable if you pay for your leave when your income is lower.

Interest starts once your leave ends. While rates can go up or down, our annual rates have recently tended to hover below 2%.

TIP: Deciding when to pay for your leave involves a lot of different factors. These could include the length of your leave, any expected changes in your salary or job status or perhaps, a major purchase on the horizon. Consult a professional financial advisor about your options.

Paying with RRSPs

When you pay for your leave with RRSPs, you’re moving money from one kind of tax-sheltered retirement plan to another.

When you transfer money from an RRSP to pay for a leave you won’t be eligible for the same tax deduction had you paid through online banking or by cheque.

The bottom line

  • If you pay with RRSPs, there may be administration fees from your financial institution.
  • Unlike RRSPs, you can’t withdraw from your pension. Once you transfer those funds you won’t see them again until you retire.
  • While you’re moving money out of your RRSPs and into your pension, you don’t regain that RRSP contribution room. Think of it like a tube of toothpaste. Once you push the paste out of the tube, you can’t put it back in.
Take me to my Buyback Centre Impact to your pension Cost and payment options