Taxpayer’s RRSP deduction denied due to pension adjustment

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To help save for retirement, Canadians are encouraged to contribute to a registered retirement savings plan (RRSP) each year. The amount you can contribute is based on 18 per cent of the prior year’s earned income, up to an annual maximum. For 2024, that annual maximum is $31,560. Earned income includes employment earnings, self-employment earnings, and rental income.

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Taxpayers who participate in their employer’s registered pension plan (RPP), whether it be a defined benefit or defined contribution (DC) plan, may find their RRSP contributions limited by something called a “pension adjustment,” or PA. The PA represents the value of the pension credits you’ve earned as a result of your employer making contributions on your behalf to a pension plan. The purpose of the PA is to prevent double-dipping of tax deductible pension contributions; as your employer contributes to a pension plan on your behalf, the amount you can then contribute to an RRSP is reduced accordingly.

The PA is reported on your T4 slip each year, and will reduce your RRSP contribution limit for the following year. For example, the 2023 T4 slip you received from your employer in February 2024 would have reported your 2023 employment income, along with your PA from 2023, which reduces your 2024 RRSP contribution room. You can see the PA taken into account on your RRSP deduction limit and available contribution statement that forms part of your annual notice of assessment.

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The calculation of the PA, which is done by the employer, and the one-year lag, can sometimes cause confusion for taxpayers and lead to RRSP contribution errors.

Take the recent case of an Ontario taxpayer, decided in late October, who went to Tax Court earlier this year to challenge an assessment he received from the Canada Revenue Agency which disallowed the deduction of $25,362 that he contributed to his RRSP for the 2021 taxation year. The CRA only allowed a deduction of $12,175.

Throughout the 2020 taxation year, the taxpayer worked for TSX Inc. He had been employed there since 2001, and was a member of its registered pension plan, which was a defined contribution plan. In March 2021, the taxpayer left the TSX, terminating his membership in the employer’s pension plan.

The issue on trial was how much the taxpayer was entitled to deduct for 2021. The judge, before rendering his decision on the matter, reviewed the purpose of an RPP, which is for an employer to provide periodic payments to individuals after retirement for their service as employees. In simple terms, a defined contribution pension plan, such as the plan at the TSX, is one in which contributions made by the employer are credited to each member.

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As a result, TSX employees who were members of the plan have a pension credit reported to them each year, the credit being the benefit the member earned under the RPP during the calendar year. A member’s PA is simply the total of their pension credits from an RPP of which they were a member during the year, and that PA reduces that member’s RRSP contribution limit in the following year.

For the 2020 tax year, the taxpayer earned pension credits of $16,692, which was the amount reflected on his 2020 T4 slip as his PA for that year. For 2021, his pension credits were $3,505, which were reported as a PA on his 2021 T4 slip.

The judge went on to explain that in certain situations, a taxpayer’s RRSP deduction limit can be increased, after having been reduced by an earlier PA that had reduced their deduction limit, by pension credits that were later forfeited. In such a situation, a pension adjustment reversal (“PAR”) would be issued to the taxpayer when they ceased to be a member of the pension plan. For a DC plan, the PAR is limited to the amount of employer contributions to which the individual is not entitled when their membership in the RPP ends. In other words, the PAR is the amount of employer contributions that remain unvested at the time their membership in the pension plan is terminated.

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In the present case, however, no PAR was issued to the taxpayer for the simple reason that all pension credits up to the date he terminated his membership in the TSX plan in March 2021 were fully vested.

The taxpayer tried to present a “novel” concept which he called a “previsioned” or “anticipated PA.” Under the taxpayer’s theory, the amount he should have been able to deduct as an RRSP contribution in 2021 begins with his 2021 RRSP deduction limit of $12,175 (his actual 2021 limit), but should then be supplemented by the difference between his “anticipated” 2021 PA of $16,692 (being equal to his PA in 2020) and his actual 2021 PA of $3,505, as reported on his 2021 T4 slip.

Unfortunately, this argument didn’t pass muster with the judge, who nonetheless called the taxpayer’s theory “remarkably creative,” but found that it had no basis in the law. The closest thing the judge could find to the taxpayer’s position was the PAR, but since the taxpayer was fully vested when he terminated his membership in the TSX pension plan, he was not entitled to any PAR when he left the plan.

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As a result, the judge found that the taxpayer was only entitled to deduct $12,175 as an RRSP contribution for 2021, which was his 2021 RRSP limit, as originally assessed by the CRA. The taxpayer’s appeal was accordingly dismissed.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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