As a member of a registered pension plan, the benefits a member earns under MEPP are regulated by the Income Tax Act. For every year that a member is active in MEPP, the member’s employer will report a Pension Adjustment (PA), which represents the value allocated by the Canada Revenue Agency (CRA) to increase the member’s MEPP benefit entitlement. This PA reduces the member’s Registered Retirement Savings Plan (RRSP) contribution room for the following year.
Additionally, if a member buys prior service that occurred after 1989, a Past Service Pension Adjustment (PSPA) will be associated with the prior service they are buying. This PSPA represents the value of the additional pension the member purchased and will reduce their RRSP contribution room.
How is RRSP Contribution Room Affected?
A PSPA has the same effect on a member’s RRSP contribution room as making their own RRSP contributions. CRA will only certify the PSPA if it is less than a member’s total available RRSP contribution room, although there is an $8,000 over-limit amount available if needed.
If the PSPA cannot be certified by CRA, a member will not be able to proceed with buying the prior service unless they are able to make a qualifying transfer or a qualifying withdrawal. Members can also choose to purchase only as much service as they have RRSP room for.
How Much is A PSPA
Members will receive a Buyback Proposal once their employer has confirmed with us that their leave of absence can be purchased. To help members decide whether to buy a period of service, we will provide an estimate of a member’s PSPA in the proposal.
What is a Qualifying Transfer?
A qualifying transfer is a type of transaction under which prior service can be bought using funds from an existing tax-sheltered vehicle, such as an RRSP or Locked-In Retirement Account (LIRA).
This transaction will reduce a PSPA by the value of the funds transferred from an RRSP or LIRA, which means a member can reduce or even eliminate the amount of RRSP contribution used by buying prior service. If members wish to make a qualifying transfer, they need to indicate the amount they will be transferring from their RRSP or LIRA on their Buyback Election.
Timing is Important
MEPP must receive the funds from a qualifying transfer before any other payment, and before the payment due date shown on the Buyback Proposal. MEPP will adjust the PSPA before sending it to CRA, which will help maximize RRSP contribution room. If any other payment is received by MEPP before the transfer of those registered funds, the full PSPA will be reported to CRA.
It can take time to complete a qualifying transfer. Members should speak to their financial institution as soon as possible.
Will a PSPA Be Certified By CRA?
If a member’s existing RRSP contribution room is higher than the PSPA (less any qualifying transfers), CRA will certify the PSPA and reduce the member’s RRSP contribution room accordingly. We will notify members once their PSPA has been certified.
What if a Member Doesn't Have Enough RRSP Contribution Room?
If the PSPA cannot be certified because it is higher than a member’s RRSP contribution room and they have chosen not to do a qualifying transfer, CRA will contact the member and supply them with the information they need to complete a qualifying withdrawal. This means the member would remove the required amount from their RRSPs and pay tax on the withdrawal.
If a member cannot (or does not wish to) complete a qualifying withdrawal, they will not be able to proceed with buying the service. For more information about qualifying withdrawals, please contact CRA.
What if a Member Decides Not to Make a Full Payment?
If a member receives their Buyback Proposal and decides not to buy the full period of service, they will need to contact Member Services as soon as possible for more information on how to buy a portion of their service.
Reducing the amount of service a member plans to buy before they start to make payments may result in a smaller PSPA. If a member makes payments on prior service and then decides to buy only a portion of the service covered in their Buyback Proposal, the PSPA will not be prorated. MEPP reports members’ PSPA to CRA after the member’s first payment is received, and is not able to amend the PSPA once it has been issued.
If, at any point in the future, a member decides to purchase the full period, the PSPA calculated at that time will be reduced by the PSPA that has already been filed.