Many Canadians participate in workplace pension plans. These plans help employees build retirement income while receiving tax advantages.
When you belong to a pension plan at work, the Canada Revenue Agency tracks the value of the benefits you earn each year. This value is called the Pension Adjustment (PA).
A pension adjustment affects how much you can contribute to your Registered Retirement Savings Plan in the future.
The amount appears on your tax slip and is used by the Canada Revenue Agency when calculating your RRSP deduction limit.
What is a pension adjustment in Canada?
A pension adjustment is the total value of pension benefits you earned during the year in an employer pension plan. It reflects the retirement savings that were accumulated on your behalf in that tax year.
The Canada Revenue Agency explains that a PA is the total pension credits for the year under registered pension plans (RPPs) or deferred profit sharing plans (DPSPs).
The purpose of the pension adjustment is to keep the Canadian retirement savings system balanced. Canadians who have workplace pensions should not receive more tax-assisted retirement savings than those who rely mainly on RRSPs.
The tax system therefore uses a shared limit across all retirement savings plans. The limit is based on 18 percent of earned income up to a yearly maximum under the Income Tax Act.
If you accumulate retirement savings through a pension plan, the PA reduces the amount you can contribute to an RRSP in the following year.
Where can you find your pension adjustment?
Most employees do not calculate the pension adjustment themselves. The amount is calculated by the employer or the pension plan administrator.
You can find the PA on your tax information slips:
- Box 52 of the T4 slip
- Box 034 of the T4A slip
The amount must be reported on Line 20600 of your income tax and benefit return.
Importantly, the pension adjustment is not income and not a deduction. It is only used by the CRA to determine your RRSP contribution limit for the next year.
After you file your tax return, the CRA calculates your available RRSP room and displays it on your Notice of Assessment or in your CRA My Account.
How does a pension adjustment affect RRSP contribution room?
Your RRSP contribution room is calculated each year based on your earned income and previous retirement savings.
The general formula used by the CRA is:
18 percent of previous year’s earned income (up to the annual maximum)
minus your pension adjustment for that year
This system ensures that retirement savings through employer pensions and RRSPs share the same tax-assisted limit.
For example:
- You earn employment income during the year
- The CRA calculates your RRSP room based on 18 percent of that income
- Your pension adjustment from your workplace pension is subtracted
- The result becomes your RRSP deduction limit for the following year
This limit appears on your Notice of Assessment.
How is a pension adjustment calculated?
The calculation depends on the type of pension plan.
There are two main types of workplace pension plans in Canada:
- Defined contribution pension plans
- Defined benefit pension plans
Each uses a different formula for the pension adjustment.
Defined contribution pension plan
In a defined contribution plan, the pension adjustment is generally equal to the total contributions made to the plan during the year.
This usually includes:
- Employee contributions
- Employer contributions
The total contributions represent the retirement savings accumulated during the year.
Defined benefit pension plan
Defined benefit plans calculate the PA using a formula set by the CRA. The formula estimates the value of the pension benefits earned during the year rather than using contribution amounts.
The simplified formula used by administrators is commonly:
(9 × annual pension benefit accrued) − 600
The pension administrator performs this calculation and reports the result to the CRA.
Employees usually do not need to calculate this amount themselves.
What plans generate a pension adjustment?
A pension adjustment is reported when you participate in certain employer retirement plans.
These include:
- Registered Pension Plans (RPPs)
- Deferred Profit Sharing Plans (DPSPs)
RRSP contributions themselves do not generate a pension adjustment. They reduce your RRSP room directly when you claim the deduction on your tax return.
Some other arrangements may also require a pension adjustment depending on the plan structure and reporting requirements.
What happens if your pension benefits change?
Sometimes your pension adjustment may change after it is reported.
This can happen when:
- Service is transferred between pension plans
- Pension benefits are recalculated
- An employer corrects information about service or contributions
In these cases the plan administrator may report:
- Amended Pension Adjustment
- Past Service Pension Adjustment
- Pension Adjustment Reversal
These adjustments may increase or restore RRSP contribution room depending on the situation.
Do you need to calculate your own pension adjustment?
Most employees do not need to perform any calculations.
Employers or pension administrators calculate the PA and report it to the CRA each year. The amount then appears on your tax slips.
If you have questions about how your pension adjustment was calculated, the CRA advises contacting your employer or pension plan administrator because they are responsible for the calculation.
Is a pension adjustment always positive?
A pension adjustment can be zero but never negative.
If no pension benefits were accumulated during the year, the PA may be zero. Otherwise it represents the value of retirement savings earned under the pension plan.
Does a pension adjustment apply to foreign pension plans?
In some cases it can.
If a Canadian resident participates in a foreign pension plan, they may still need to report a prescribed amount on their tax return so that the CRA can adjust RRSP contribution room correctly.
Why does Canada use the pension adjustment system?
Canada’s retirement savings system uses a combined limit for all tax-assisted retirement plans. This ensures fairness between workers who have employer pensions and those who rely on RRSPs.
The pension adjustment measures the retirement savings accumulated through workplace plans each year.
The CRA then adjusts RRSP limits so that Canadians at similar income levels have access to comparable tax-assisted retirement savings.