September 26, 2007
To: Heads of Human Resources
SUBJECT: Improvement to the three major public sector pension plans – Tax implications
An amendment to the coordination formula contained in the Public Service (PS), the Canadian Forces (CF) and the Royal Canadian Mounted Police (RCMP) pension plans was approved in June 2006. This amendment will improve benefits for those reaching age 65 in 2008 or later and may have implications on the amount plan members can contribute to an Registered Retirement Savings Plan (RRSP). The purpose of this notice is to inform you in advance of these possible implications.
Improvement of the coordination formula
The three federal public sector pension plan benefits are coordinated with the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). Under coordination, plan member benefits are reduced by a standard formula once the retired member reaches age 65 (when plan members normally qualify for unreduced CPP/QPP benefits) or immediately if he or she is entitled to a CPP/QPP disability pension.
The reduction factor used in calculating the pension benefits at age 65 will be adjusted for plan members reaching age 65 in 2008 or later. The pension reduction at age 65 (or in case of disability) will be smaller commencing in 2008, as the reduction factor will be lowered from the current 0.7% to 0.625 % by 2012.
Tax Implications – Past Service Pension Adjustment (PSPA)
This improvement of benefits will affect the amount a plan member can contribute to registered retirement savings plan (RRSP). Under income tax rules, the amount plan members can contribute to their RRSP is affected by the benefit they earned under their pension plan.
Because the reduction factor under coordination will be lowered for plan members reaching age 65 in 2008 or later, the pension reduction at age 65 will be smaller. This is a change in the way previously accrued benefits were calculated and this will result in a higher benefit accrual rate for members reaching age 65 in 2008 or later.
Under Income Tax Act rules for registered pension plans, a Past Service Pension Adjustment (PSPA) has to be calculated by the plan administrator when benefits relating to a previous period of pensionable service are improved.
In 2008, Public Works and Government Services Canada (PWGSC), the plan administrator, will file the necessary PSPA forms with the Canada Revenue Agency and send a copy of the PSPA form (T215) to plan members. This PSPA will reduce plan member’s RRSP deduction limit for 2009.
We are informing you in advance of these implications to the RRSP deduction limit because in some cases, when a member has made his or her 2009 RRSP contribution, he will not be able to deduct it due to the impact of the PSPA. Some plan members may have to withdraw excess contributions to an RRSP and may be taxed on this income.
We have put in place a Call Centre to answer enquiries related to this issue. For more information, please see the following documents on the Treasury Board Secretariat Web site:
Phil Charko
Assistant Secretary
Pensions and Benefits Sector
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