Buying back credit is almost always a good financial choice, but there are tax implications you need to consider.
What you need to know
Telling us you plan to pay for your buyback reduces the likelihood that your buyback will need to be approved by the Canada Revenue Agency (CRA), but this doesn't mean that you have to pay right away.
Here's how it works:
- If you declare your intent to buy back or pay for your buyback before April 30 of the calendar year following the year your absence ends, we'll issue a pension adjustment (PA).
- If you don't, we'll issue a past service pension adjustment (PSPA). If you receive a PSPA, the CRA will have to verify whether you have enough unused RRSP contribution room to complete the buyback.
If you're paying for some or all of your buyback after April 30 of the year following the end of your leave, you must inform or contact us before you start paying. Once you inform us of your decision to buy back, you'll need to allow three business days for us to issue and submit your PSPA before making your payment.
According to the Income Tax Act, we can't accept payments made before we submit your PSPA to the CRA. If you send your payment before the date we provide, we must return the money to you
Why it's important to declare your intent
By telling us that you intend to buy back your leave, you essentially buy yourself time by securing your eligibility for a PA, which doesn't require CRA approval and just like your employment PA, reduces your RRSP room for the next calendar year. This way, you'll avoid the complication of a PSPA which requires CRA approval. By declaring your intent, you're not committing to paying for your buyback, you're just buying yourself time to decide.
You can speak to a personal tax advisor, an independent financial advisor or even one of our Pension Benefits Specialists. Whomever you decide to consult, keep in mind that you have until April 30 of the calendar year following the end of your leave to secure your eligibility for a PA.
Consider consulting a tax accountant
If you're buying back credit that spans several years, you may wish to speak with a tax specialist.
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 us for more information on your benefit options.