# Any good way to deal with DB Pension MTV?



## jmarks (Feb 14, 2012)

Looking at my DB pension statement and it tells me the commuted value is currently $700k and the MTV to a tax sheltered acct. is $470k meaning I'd have to pay tax on $230k! 
Because I don't work for the government one of my concerns is the health of the overall plan which is currently underfunded by ~20%.The company I work for is currently solid and making big payments to address the shortfall, but obviously that could change.

Does anyone know of a way to get around having to pay taxes on on the $230k, or at least reduce the tax implications?

TIA


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## MorningCoffee (May 8, 2013)

I'm certainly no expert, but a few thoughts...

How soon are you retiring? Do you have any unused RRSP room? Any unclaimed capital losses?

Timing could help a bit, such as pulling it out in a year you have no other income. If you retire January 1st for example, you could get your payout in a new tax year.


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## sags (May 15, 2010)

It should also be pointed out.......that if your pension fund is underfunded by 20%........your commuted value will be adjusted downward accordingly.


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## jmarks (Feb 14, 2012)

sags said:


> It should also be pointed out.......that if your pension fund is underfunded by 20%........your commuted value will be adjusted downward accordingly.


Thanks for that tid bit, I'll have to find out if the commuted value indicated on the statement takes that into account.

MC, Was planning on retiring this year at age 55. Don't have any RRSP room and my spouse doesn't have much room either, only a few $k in capital losses.


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## fraser (May 15, 2010)

At what point in time was your DB pension underfunded by 20 percent? And on what basis-wind up or ongoing? I believe most DB plans have to be valued every three years.

DB plans have made very significant gains over the past 24 months. If your plan was valued at the 80 percent level two or three years ago there is a very high probability that it is currently funded at well over 90 percent as at the end of it's next fiscal year-assuming your employer has been making the normal contributions to the plan.


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## Eclectic12 (Oct 20, 2010)

jmarks said:


> Looking at my DB pension statement and it tells me the commuted value is currently $700k and the MTV to a tax sheltered acct. is $470k meaning I'd have to pay tax on $230k! ...


This makes no sense to me ... the commuted value is $700K so it is already tax sheltered in the DB pension. Likely the $470K *could* be withdrawn as income, which means taxes.

However, if you can withdraw as income, usually you can either transfer to an LIRA or RRSP - without taxes.


For example - one of my pensions had the amount that had to be transferred to a LIRA and a second amount that I chose to transfer to my RRSP without any taxes for the transfer.


If you choose to withdraw as income and then contribute to a TFSA - then there would be taxes.


Cheers


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## fraser (May 15, 2010)

It is correct. I had the same issue with my pension statement last fall. I was told that it happens because of CRA rules on DB pensions. These rules set forth maximums based on years of service and CRA maximums. You can find the numbers on the CRA website.


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## Eclectic12 (Oct 20, 2010)

Weird ... a private DB pension that is *under* funded and is yet exceeding the CRA maximums.

I'm not wrapping my head around how an under funded pension could end up with so much to transfer that it has to be taken as income.



Returning to the original question of how to reduce tax implications - it's all the standard tax return deductions/credits such as RRSP contributions (assuming there is room and it makes sense), charitable donations, political party donations etc.

Once the income tax is paid (and assuming there is TFSA contribution room available), some of the money could be moved into the TFSA to make it tax free. Also - the income is likely to generate some fresh RRSP contribution room (again, assuming it makes sense to use it).


Cheers


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## Eclectic12 (Oct 20, 2010)

MorningCoffee said:


> I'm certainly no expert, but a few thoughts... Any unclaimed capital losses? ...


My understanding is capital losses can only be used against capital gains so there won't be any help direct help for the $230K income.
If there are capital gains in the same year, the CL will help by removing the capital gains taxes that would otherwise increase the tax burden.


Cheers


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## Eclectic12 (Oct 20, 2010)

... I noticed that the original question refers to the pension statement's MTV and this link talks about how to calculate it:
http://www.milliondollarjourney.com/how-to-calculate-pension-maximum-transfer-value-mtv.htm

... I also noticed that the article says:


> ... If you’re over the MTV, you should find out if your employer allows you to transfer your excess amount to your RRSP ...


So it would appear that being over the MTV does not always remove the option of transferring to an RRSP and forces taking it as income.


Cheers


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## fraser (May 15, 2010)

My understanding is that you can transfer some money into an RSP-either employer or at a finaicial institution-but only to the extent that you have RSP room available. 

In my case I had 0 room left. I would have lost 39 percent of the amount simply because of my incremental tax rate. My SERP was treated in the same manner.


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## Eclectic12 (Oct 20, 2010)

fraser said:


> My understanding is that you can transfer some money into an RSP-either employer or at a finaicial institution-but only to the extent that you have RSP room available ....


Hmmm ... anytime I've transferred in the past (including from the a part of CV of my DB pension), the RRSP contribution room was not affected. This is because when it was contributed to the pension, the earned RRSP contribution room was reduced by the pension adjustment (PA). This is why the pension withdrawals have to be reported as income as no income tax was paid on it. 

Since your RRSP contribution limit was a consideration - I suspect that a transfer the RRSP, in the usual sense, was not allowed at all.
The "transfer" was likely really a withdrawal from the pension followed by making new contributions to the RRSP to reduce the amount the income would rise.


Without the "transfer" being a pension withdrawal and reported as income - one would be taking a double hit against the RRSP contribution room. The first hit would be at the time the pension contributions were made and the second would be when the RRSP "transfer" was made.


... unless this was some sort of special pension that did not have a PA?

Cheers


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## fraser (May 15, 2010)

Dunno. I just know that at the time the pension folks said that IF if I took the commuted value, the portion of that value that was taxable could only be moved into my company RSP to the extend that I had room which was essentially 0. Had the same confirmed by an outside person as well. It took the shine away from considering taking the commuted value-especially since I had one third of the SERP value to take into income the same (last) year. I am fairly certain that I would not have had a Pension Adjustment-very few people have today.


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## billiam (Aug 24, 2009)

I think you might be forgetting the PAR calculation on termination from Plan membership.


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## Eclectic12 (Oct 20, 2010)

fraser said:


> Dunno. I just know that at the time the pension folks said that IF if I took the commuted value, the portion of that value that was taxable could only be moved into my company RSP to the extend that I had room which was essentially 0. Had the same confirmed by an outside person as well.


 ... since RRSP room was required, that likely means there was no option to roll the money over into the RRSP. As I understand, this would be new RRSP contributions.




fraser said:


> ... I am fairly certain that I would not have had a Pension Adjustment-very few people have today.


If there was no PA, then you weren't in a company sponsored registered pension plan (either a defined contribution nor a defined benefit pension) nor a deferred profit sharing plan (DPSP) as CRA says:


> The pension adjustment (PA) amount is the value of the benefits you earned in 2013 under your employer's registered pension plans (RPP) and deferred profit sharing plans (DPSP), and possibly, some unregistered retirement plans or arrangements.


http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/206/menu-eng.html

Some other links:
http://www.milliondollarjourney.com/what-is-the-pension-adjustment-pa.htm
http://www.retirementadvisor.ca/retadv/apps/articles/primer6.jsp?learningMenu=primer


As for few people have them - this does not appear to be true. 

Bear in mind that a DC pension also has a PA plus the DPSP so that while DB pensions are dwindling, if the company shifts to a DC plan, the number of people with a PA will stay constant.

Checking Stats Can - the number of people with a RPP & a PA has grown, though the percentage of the workforce with an RPP has dropped at most 4%, as of 2011. It's not clear to me if this includes the DPSP (I suspect so) but it won't include the likely few number of unregistered plans/arrangements that also have a PA.
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/labor26a-eng.htm


Cheers


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## Eclectic12 (Oct 20, 2010)

billiam said:


> I think you might be forgetting the PAR calculation on termination from Plan membership.


This is a good point but I believe it would only apply to a DB pension as the DC pensions are treated the same way as the RRSP.

If it was a DB pension, there should have been a pension adjustment reversal (PAR) that would grant back RRSP room as the OP is now assuming the risks compared to a company making up for any shortfalls to pay the defined benefit.

Of course there might have been a delay before the plan administrator & the gov't finished the calculations to send the notice out. In my case, it was so long ago that it took a year for them to work out the details of this new item and then the ice storm in Ottawa added another delay so that it was two years before I had the numbers. As I recall, I could adjust my returns back to the tax year I left the DB pension (or the one after).


Cheers


*edit*
Apparently there can be a PAR with a DC pension or DPSP.
http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/par-fer/menu-eng.html

Though the link also says that the PAR is the difference between what's earned & the commuted value of the benefits so I'm thinking this particular pension/commuted value is going to wipe out the PAR. 

With such a high payout being forced to be taken as income, it's a richer pension than I've participated in. :biggrin:


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## fraser (May 15, 2010)

I was confusing PA with PAR. I had very little RSP room during the last 10 or so years- $3300. per year. I was fortunate. In each of the last six years of employment, my DB pensionable income was significantly increased by performance bonus' tied to revenue and profit. I think this is what may have resulted in about 25 percent of my commuted value being taxable w/ no rollover. Same treatment with the SERP.


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