WHAT IS A REGISTERED RETIREMENT SAVINGS PLAN (RRSP)?
An RRSP is a type of Defined Contribution Pension Plan (DC Plan) which allows the owner to accumulate assets for retirement income on a tax-deferred basis. An RRSP must conform to the ITA, the ITR and CRA requirements. Some of these rules and regulations are:
- The owner can contribute up to 18% of previous year’s earned income, up to a specified dollar maximum limit for the year
- The owner is taxed when receiving benefits out of the RRSP.
HOW ARE DB PLAN BENEFITS RELATED TO DC PLAN CONTRIBUTIONS?
The Federal Government has created the magic factor of 9 whereby $9 of contributions is deemed equivalent to $1 of annual pension payable from age 65. This magic factor ‘equalizes’ the tax-assisted savings between DC Plans and DB Plans. This equalization is reported administratively on the plan member’s T4 Slip Box 52 – Pension Adjustment (PA).
IMPORANT:
The magic factor of 9 represents an average over a plan member’s entire working career. Because of the power of compound interest, the ‘true’ relationship is $2 – $3 at younger ages and $13 – $14 at older ages for each $1 of annual pension payable from age 65.
HOW IS A PENSION ADJUSTMENT (PA) CALCULATED?
The PA reduces the member’s RRSP contribution room in the following calendar year.
DC Plans can provide a maximum tax-sheltered contribution of 18% of earnings up to $20,000 in 2007, $21,000 in 2008, $22,000 in 2009, and indexed to the increase in the average industrial wage after 2009. The maximum dollar contribution limit for RRSP is always one year behind the maximum dollar contribution limit for DC Plans to allow for the lag in the reduction of RRSP deduction limit resulting from the reporting of the PA.
For a DC Plan, the PA equals the actual contributions made to the member’s credit during a calendar year, up to a dollar maximum.
DB Plans can provide a maximum annual pension equal to 2% of earnings up to a dollar limit of $2,222.22 in 2007, $2,333.33 in 2008, $2,444.44 in 2009, and indexed to the increase in the average industrial wage after 2009.
For a DB Plan, the PA equals 9 times the member’s pension accrual during a calendar year less $600, up to a dollar maximum.
The IPP provides an annual pension equal to 2% of the member’s Indexed Earnings for the year for Connected Persons subject to the maximum pension limit for DB Plans. The annual pension for a non-connected individual can be based on best 3-year average earnings basis rather than on indexed earnings each year. Our IPP Pension Adjustment Calculator (contact us for more information about this service) determines the PA for a maximum benefit IPP.
WHEN CAN THE IPP TAX-SHELTER LARGER CONTRIBUTIONS THAN THE MAXIMUM RRSP?
Because of the magic factor of 9, older plan members can gain an advantage by being in an IPP instead of being in a DC Plan.
To maximize the tax-effectiveness of an IPP, the plan member should be age 40 or older and have Pensionable Earnings equal to the maximum pension limit divided by 2.0% (e.g., $111,111 for a member retiring in 2007, $116,667 for a member retiring in 2008, and $122,222 for a member retiring in 2009) or more. For a plan member with these age / earnings characteristics, the IPP will be able to tax-shelter larger contributions than the maximum RRSP contributions from plan inception to retirement age.
IMPORTANT:
For a plan member age 40 or older with Pensionable Earnings of less than the maximums shown above, the IPP will provide a proportional contribution advantage over the RRSP. In other words, for members at least age 40, the IPP will generate a Current Service contribution greater than 18% of T4 earnings as follows:
HOW IS THE IPP MEMBER’S PAST SERVICE PENSION ADJUSTMENT (PSPA) DETERMINED?
The maximum PSPA for the period January 1, 1991 to December 31, 2008 is calculated as follows:
WHAT IS MY RRSP DEDUCTION LIMIT IF I JOIN AN IPP IN THE CURRENT YEAR?
If you are not a Connected Person, your RRSP deduction limit is not impacted for the year you join an IPP.
If you are a Connected Person and your 1990 Pension Adjustment (PA) was $0, your RRSP deduction limit for the year you join an IPP is reduced by a special amount prescribed by ITR 8308(2). This reduction is 18% of your earned income for RRSP purposes for the year 1990, up to a maximum of $11,500.
A T1007 Form (Connected Person Information Return) will be filed with CRA. CRA reduces the RRSP deduction limit for the year the Connected Person joins a pension plan by the prescribed amount as calculated in the previous paragraph.
IMPORTANT:
If the member has already made full RRSP contributions for the year; the member should use a T3012 (Tax Deduction Waiver On The Refund Of Your Unused RRSP Contributions Made) Form to withdraw the excess on a tax-free basis and claim only the allowable RRSP deduction limit for the calendar year.
WHAT ARE ELIGIBLE PERIODS OF IPP PAST SERVICE?
The granting of Past Service is optional.
Past Service commences at the later of:
the member’s date of hire, the Company’s date of incorporation, or January 1, 1991.
Past Service ends the day prior to the effective date of the IPP. For example, if the IPP is effective on January 1, 2009 then Past Service could be from January 1, 1991 to December 31, 2008.
IMPORTANT:
The entire period of Past Service need not be granted at Plan implementation.
IMPORTANT:
The granting of Past Service requires satisfaction of the PSPA through a Qualifying Transfer, certification of a provisional PSPA, or a combination of both.
HOW CAN I DETERMINE MY CURRENT RRSP DEDUCTION LIMIT?
Go to the CRA website and access their My Account online service or phone the Tax Information Phone Service at 1-800-267-6999.
IMPORTANT:
The information CRA has available will only be correct if they know you are a member of an IPP, and if a Pension Adjustment has been entered on your T4 slip for every year that you have been an IPP member.
