Company pension plans

In general, if you’re a member of a company pension plan, your RRSP contribution room is reduced by your pension adjustment (PA). As noted in topic 56, this adjustment is intended to represent the present value of the pension benefits you earned for the previous year in your registered pension plan (RPP) or deferred profit sharing plan (DPSP).

There are two main types of RPPs: defined benefit plans, in which pension benefits are specified in the plan, and money purchase (or defined contribution) plans, in which pension benefits are based on combined employer and employee contributions, plus earnings in the plan. The benefits you earn in your defined benefit pension plan, or total contributions to a money purchase plan, determine how much you can also contribute to your RRSP (see topic 56).

Defined benefit plans

As a member of a defined benefit plan, you’re entitled to deduct 100% of all required contributions for current or post-1989 past service. You’re also entitled to deduct a maximum of $3,500 per year for past service contributions for service prior to 1990 while you were not a contributor to a pension plan. This deduction is subject to an overall limit of $3,500 multiplied by the number of years of pre-1990 service bought back. This is in addition to any deduction for post-1989 or current service.

For years of pre-1990 service during which you were a contributor to the plan, the annual deduction is limited to $3,500 less the amount of other contributions deducted in the current year. This includes amounts for the current year, post-1989 past service, and pre-1990 past service while you were not a contributor. The $3,500 annual limit for deductibility of pre-1990 service contributions is disregarded in the year of death. You should consult your tax adviser if you are subject to these complicated rules.

Example: Assume you make a $4,000 contribution to your defined benefit plan in 2016 with respect to two years of service prior to 1990 while you were not a contributor to a pension plan. Your maximum deduction is $3,500 in 2016. The remaining $500 can be deducted in 2017.

Money purchase plans

You’re entitled to deduct the amount you contributed to a money purchase plan14 during the year, subject to certain maximum amounts that parallel the RRSP rules. Money purchase plans14 do not allow for past service contributions.

Money purchase plans can pay pension benefits in the form of a Life Income Fund (LIF), which provides an income stream similar to that currently permitted under a RRIF. However, while a RRIF only has minimum withdrawal limits, LIFs also limit the maximum amount that may be withdrawn on a yearly basis. Therefore, with a LIF you have to withdraw between a minimum and maximum amount from your money purchase account each year, beginning no later than the year in which you reach age 72.

LIF contracts entered into after May 8, 2008 include the option of permitting funds in the LIF to be transferred into a new type of locked-in retirement account—a Restricted Life Income Fund (RLIF). In the year you turn 55, or in any subsequent year, you’ll be allowed to transfer up to 50% of the RLIF’s value into a tax-deferred savings vehicle (i.e., RRSP or RRIF) with no maximum withdrawal limit, as long as this transfer happens within 60 days of the creation of the RLIF. This is a one-time 50% unlocking provision.

The rules also provide for an increase in the maximum amount that certain individuals facing financial hardship can withdraw from their LIF.

14 Also commonly called “defined contribution” plans.

Deferred profit sharing plans (DPSPs)

An alternative to the RPP is a deferred profit sharing plan (DPSP). Under this type of arrangement, your employer makes payments to a trustee, who holds and invests the contributions for your benefit. Unlike RPPs, however, employee contributions are not allowed.

The maximum contribution your employer can make on your behalf in 2015 is, in general, equal to 18% of your earned income or $12,685, whichever is less. Similar to an RPP, employer contributions to a DPSP on your behalf reduce your RRSP contribution room. The contribution your employer makes to your DPSP in 2015 will have an impact on your 2015 RRSP contribution room.