24.4.1 Registered Pension Plans

Overview

A registered pension plan (RPP) is a trust registered with the Canada Revenue Agency (CRA) or the relevant provincial agency. These plans are set up by employers to provide pension benefits to their employees upon retirement. Both employer and employee contributions to the plan are tax-deductible.

Contribution Limits and Tax Implications

Contribution Limits

Tax-assisted retirement savings plans use a uniform contribution level of 18% of earned income, with a maximum dollar amount per year determined by the type of plan. This rule applies regardless of how contributions are timed and whether they are made by the employer or employee.

Formulas:

• Maximum Contribution (per year):

Pension Adjustment (PA)

Individual taxpayers must evaluate the value of their contributions or benefits from RPPs, known as the Pension Adjustment (PA). The PA decreases the amount an individual can contribute to a Registered Retirement Savings Plan (RRSP). Employers report the PA on an employee’s T4 tax form.

Past Service Pension Adjustment (PSPA)

Employers can make additional contributions to enhance the pension plans, termed as Past Service Pension Adjustment (PSPA), calculated as the difference between the old and new PA. The PSPA also reduces the RRSP contribution limit.

RRSP Carry-Forward Room

Investors need not contribute the maximum allowable in any given year; any unused amount is recognized as RRSP carry-forward room, allowing for deficit contributions in future years.

Types of Registered Pension Plans

There are two primary types of RPPs:

1. Money Purchase Plans (MPP)
2. Defined Benefit Plans (DBP)

Money Purchase Plans

In MPPs, also called defined contribution plans, the contributions are predetermined. The retirement benefit depends on how these contributions are invested.

Contribution Limits for MPP

Combined employer and employee contributions can never exceed the lesser of:

• **18% of the employee’s current year compensation, or
• **The MPP contribution limit (indexed annually to inflation)

Defined Benefit Plans

In DBPs, the retirement benefit is calculated based on a formula that includes factors like years of service and income level. Contributions must be sufficient to fund the preset benefits.

Benefits and Contribution Limits for DBP

Current DBP aims to provide employees with a maximum pension of 2% of pre-retirement earnings per year of service, indexed to inflation.

Contribution limits must meet the lesser of:

• **9% of the employee’s current year compensation, or
• **$1,000 plus 70% of their PA for the year

Key Term Definitions

• Registered Pension Plan (RPP): A pension trust registered with CRA or a provincial agency.
• Pension Adjustment (PA): The value of pension contributions that reduces RRSP contribution limits.
• RRSP Carry-Forward Room: Unused RRSP contribution limits that can be carried forward to future years.
• Money Purchase Plan (MPP): A pension plan where contributions are fixed and resulting benefits depend on investment performance.
• Defined Benefit Plan (DBP): A pension plan where benefits are pre-determined by a set formula.

Key Takeaways

• RPPs are tax-deferred retirement savings plans regulated by the CRA.
• There are distinct types of RPPs, including Money Purchase Plans and Defined Benefit Plans, each with unique contribution limits and benefit structures.
• Understanding Pension Adjustments is crucial as they impact overall RRSP contribution limits.
• RRSP carry-forward provisions allow individuals to make up for deficient contributions in future years.
• Keeping informed of annual limits and adjustments is vital for both employees and employers to maximize retirement savings.

Frequently Asked Questions

1. What is a Registered Pension Plan (RPP)? A RPP is a pension plan registered with the Canada Revenue Agency or a provincial agency intended to provide retirement benefits to employees.

2. How is the Pension Adjustment (PA) calculated? The PA represents the total value of the pension contributions and benefits, reducing the individual’s RRSP contribution room.

3. What happens if I don’t contribute the maximum to my retirement plans each year? Any unused contribution amount is carried forward as RRSP carry-forward room to future years.

4. What is the difference between an MPP and DBP? An MPP has fixed contributions and varying benefits based on investment performance. A DBP has a defined benefit, with contributions necessary to fund the benefits.

Glossary

• Registered Pension Plan (RPP): A trust registered to manage retirement savings for employees, including tax benefits.
• Pension Adjustment (PA): An attribute that determines how much of the annual RRSP limit is used by RPP contributions.
• Past Service Pension Adjustment (PSPA): Additional pension adjustment reported on enhancing an existing pension plan.
• RRSP carry-forward room: Any unused RRSP contribution limits that can be utilized in subsequent years.

Diagrams and Charts

    pie 
	 title Contribution Split
	    "Employee Contribution": 45
	    "Employer Contribution": 55 

Note: Above chart is an illustrative representation; Split rates can vary based on plan rules.