Paying After April 30 Without Having Declared Intent
If you don't inform us of your intention to buy back your leave and begin paying after April 30, you'll receive a past service pension adjustment (PSPA). This means that your ability to buy back your leave will be subject to approval by the Canada Revenue Agency (CRA).
What is a PSPA?
A PSPA is the CRA's measure of the value of the pension benefit you have earned in the past. The CRA must determine if you have enough RRSP room to accommodate your PSPA before you'll be allowed to complete your 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.
If you have enough RRSP room to accommodate your PSPA, the CRA will certify your PSPA and we'll approve your buyback. You'll receive a copy of the CRA statement of approval and in the following February, we'll provide you with a tax receipt reflecting the payments you completed. If you don't have enough room, you'll be asked whether you want to make a qualifying withdrawal from your RRSP funds.
A PSPA can make your RRSP room negative by up to $8,000. This is because a purchase of credit can trigger a significant PSPA. For example, a teacher earning $65,000 a year, who purchases one year of credit, will receive a PSPA of more than $11,000.
If your RRSP room isn't negative by more than $8,000, the CRA will certify your PSPA and we'll approve your purchase. If your RRSP room is negative by more than $8,000, the CRA will ask if you want to withdraw RRSP funds to make room. If you choose not to withdraw the necessary funds, your PSPA will be denied and we'll reverse your buyback. If you choose to withdraw the funds, you'll need to complete the form Designating an RRSP withdrawal as a qualifying withdrawal (T1006) and submit it to the CRA within 30 days. The CRA will send you this form and it's also available in the forms and publications section of CRA's website.
Keep in mind that any time you withdraw funds from your RRSP, your withdrawal will be taxed as income in the year it is withdrawn. Another option to consider is to reduce the size of your PSPA by paying for some or all of your credit with an RRSP transfer. Note that there's no tax deduction for credit purchased with transferred RRSP funds.
Negative RRSP room
If your RRSP contribution room is negative but by less than $8,000 you'll not be able to contribute to your RRSP again until you generate enough new room to eliminate the negative balance. A teacher earning $65,000 a year generates only about $1,600 in new RRSP contribution room each year. This means it may be several years before you can make RRSP contributions again.
Unused RRSP contributions
Your unused RRSP contributions appear on line (B) of the RRSP Deduction Limit Statement section of your latest notice of assessment or notice of reassessment.
If your PSPA is denied
If your PSPA is denied by the CRA, we'll contact you to determine whether you want to:
- buy back as much credit as the CRA will approve based on your available RRSP room; or
- not buy back at all.
In either case, we'll refund payments you've made, with interest less applicable taxes, for credit you aren't able to purchase. You'll likely not be able to buy back this credit within five years of the end of your leave unless you build up additional RRSP room.
Transferring RRSPs can reduce your PSPA
If you think your PSPA will exceed your available RRSP room, you may want to pay for some or all or your purchase with funds transferred from your RRSP. To transfer RRSP funds, complete a Direct Transfer (T2033) form. Using RRSP funds will result in a corresponding reduction in your PSPA. There is no tax deduction for credit purchased with transferred RRSP funds.