As a member of a Registered Pension Plan, the benefits you earn under LAPP are subject to the Income Tax Act. For every year that you are active in LAPP, your employer will report a Pension Adjustment (PA) which represents the value allocated by the Canada Revenue Agency (CRA) to the increase in your LAPP benefit entitlement and will reduce your Registered Retirements Savings Plan (RRSP) contribution room. When the Canada Revenue Agency (CRA) reviews your tax return, they will consider this PA in determining the amount of RRSP contribution room that will be available to you for the following year.
Likewise, if you buy prior service that occurred after 1989, a Past Service Pension Adjustment (PSPA) will be associated with the prior service you are buying. This PSPA represents the value allocated by CRA to the increase in your LAPP benefit entitlement and will reduce your RRSP contribution room.
How is My RRSP Contribution Room Affected?
A PSPA has the same effect on your RRSP contribution room as making an RRSP contribution. CRA will only certify the PSPA if it is less than your total available RRSP contribution room. If the PSPA cannot be certified by CRA, you will not be able to proceed with buying the service unless you do a Qualifying Transfer (see below).
How Much is My PSPA?
To help you decide whether to buy a period of service we will provide you with an estimate of your PSPA in your Buyback Proposal.
What is a Qualifying Transfer?
Prior service can be bought using funds from an existing RRSP or Locked-In Retirement Account (LIRA). This type of transaction is called a Qualifying Transfer and will reduce your PSPA by the value of the funds transferred from the RRSP or LIRA. This means you can reduce or even eliminate the amount of RRSP contribution room taken up by buying prior service. If you wish to make a Qualifying Transfer, be sure to indicate on your Buyback Election the amount you will be transferring from your RRSP or LIRA.
Timing is Important
If the Qualifying Transfer is the only payment you will be making to buy the prior service, we must receive the funds before any other payment, and before the payment due date shown on the Buyback Proposal.
We will adjust the PSPA before sending it to CRA which will help you maximize your RRSP contribution room. If any other payment is received by us before the transfer of registered funds, the full PSPA will be reported to CRA.
Will My PSPA Be Certified By CRA?
If your existing RRSP contribution room is higher than the PSPA (less any Qualifying Transfers), CRA will certify the PSPA and reduce your RRSP contribution room accordingly. We will notify you once your PSPA has been certified by CRA.
What if I Don’t Have Enough RRSP Contribution Room?
If the PSPA cannot be certified because it is higher than your RRSP contribution room, CRA will contact you and supply you with the information you will need to complete a Qualifying Withdrawal. This means you would remove the required amount from your RRSPs and pay tax on the withdrawal. If you cannot complete a Qualifying Withdrawal, you will not be able to proceed with buying the service. For more information about Qualifying Withdrawals, please contact CRA.
What if I Decide Not To Make Full Payment?
If you know at the time your receive your Buyback Proposal that you will not be buying the full period of prior service, please contact LAPP as soon as possible for more information on how to buy a portion of your service. Reducing the amount of service you will be buying before you have started to make payments may result in a smaller PSPA.
If you have already started to make payments toward your prior service and decide to buy only a portion of the service covered in your Buyback Proposal, the PSPA will not be prorated. We will report your PSPA to CRA after your first payment is received and will not be able to amend the PSPA once it has been issued.