# Pension adjustment/contribution questions



## joncnca (Jul 12, 2009)

i'm new to pensions, so the 2013 (next year) tax year will be the first time i will need to deal with it. right now, i deduct my RRSP contribution from total income to get net income, which is equal to my taxable income. simple enough. subtract taxes owing from taxes paid and get my tax refund.

i started getting pay stubs from the new job and there is a deduction for the pension, and an equivalent employer paid benefit also to the union. pension adjustment has nothing to do with this, right? PA is the theoretical benefit that i gain from my pension, or something like that? pension contribution is the sum of my deductions, right? PA doesn't seem clear to me right now.

regardless: 

1. does the deduction from my pension contribution, pension adjustment, union dues (i.e. going from total to net income) all reduce my RRSP contribution limit?

2. does the pension contribution include both deductions from my pay AND employer paid benefit, or only my contributions? employer matches 100% of my contribution, so this could potentially double the amount of my deduction and impact the amount of taxes payable.

3. this may be specific to individual employers, but i don't understand why it appears that relatively little income tax is deducted from my pay. consequently, i'm more likely to have taxes owing come tax time. my previous employment deducted much more tax, which decreased my 'monthly take-home pay' but also (with some clever rrsp contributions) increased the likelihood of a tax refund. is there a purpose or benefit to this course of action? this seems to put too much responsibility on employees to set aside money to pay for taxes, when it should just be deducted beforehand...cause we all know how good people are at saving for future expenses (rolls eyes). kinda deceptive, no? i'll be prepared for any taxes owing, but....seems like the employer should just deduct more taxes to begin with.


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## Spudd (Oct 11, 2011)

Pension adjustment is calculated using some obscure formula, and I don't think it's possible to calculate it on your own. However, it will be on your T4. This reduces your RRSP contribution room for the following year (e.g. PA from 2012 means less contribution room for 2013). 

I don't know the answers to any of the rest.


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## stardancer (Apr 26, 2009)

joncnca said:


> i'm new to pensions, so the 2013 (next year) tax year will be the first time i will need to deal with it. right now, i deduct my RRSP contribution from total income to get net income, which is equal to my taxable income. simple enough. subtract taxes owing from taxes paid and get my tax refund.
> 
> i started getting pay stubs from the new job and there is a deduction for the pension, and an equivalent employer paid benefit also to the union. pension adjustment has nothing to do with this, right? PA is the theoretical benefit that i gain from my pension, or something like that? pension contribution is the sum of my deductions, right? PA doesn't seem clear to me right now.
> 
> ...


See above


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## Eclectic12 (Oct 20, 2010)

Spudd said:


> Pension adjustment is calculated using some obscure formula, and I don't think it's possible to calculate it on your own. However, it will be on your T4...


Actually, as long as one has one's annual salary & what the db pension benefit earned is - it's a simple calculation. 

_For 1997 and later: [(9 x benefit entitlement) - $600]_


It is the variation in benefit from db pension to a different db pension that could cause confusion and change the formula.


So the simple case is where the db pension pays 2% of final average earnings as the benefit. 
In this case, the PA = [( 9 x 2% x annual salary ) - $600 ]

Now most DB pensions I have been a member of have a blended formula where as an example the benefit might be 1.3% to the Year's Maximum Pensionable Earnings (YMPE) and 2% for anything above YMPE, which adds a second factor to the calculation but it's still relatively simple.

Let's assume the db pension has a YMPE of $40K.

For someone making $35K in such a plan:
PA = [ { 9 x (1.3% x YMPE) + (2% x above YMPE) } - $600 ] = [ { 9 x (1.3% x $35K) + (2% x 0) } - $600 ]

For someone making $65K at the same company, in the same db pension:
PA = [ { 9 x (1.3% x YMPE) + (2% x above YMPE) } - $600 ] = [ { 9 x (1.3% x $40K) + (2% x $15K) } - $600 ]

http://blog.taxresource.ca/calculating-the-pension-adjustment/
http://www.cra-arc.gc.ca/E/pub/tg/t4084/t4084-08e.pdf


Cheers


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> [ ... without a db pension ... ] i deduct my RRSP contribution from total income to get net income, which is equal to my taxable income. simple enough. subtract taxes owing from taxes paid and get my tax refund.


Technically - you are subtracting the taxes paid from the taxes owed. The refund simply means that more taxes were withheld than needed - which is likely due to the RRSP contributions.

It's good to bear in mind that other items that don't have taxes withheld from them, say a large capital gain from a stock sale, have the potential to increase the taxes owing more than the RRSP contribution will reduce it.




joncnca said:


> ... i started getting pay stubs from the new job and there is a deduction for the pension, and an equivalent employer paid benefit also to the union. pension adjustment has nothing to do with this, right? PA is the theoretical benefit that i gain from my pension, or something like that? pension contribution is the sum of my deductions, right? PA doesn't seem clear to me right now.


I'm not really sure what the employee paid benefit to the union is.

Regardless - the PA is the adjusting factor to reduce your RRSP contribution room to reflect that you will be receiving a pension in the future and be fair to those who only have an RRSP. It is related to your benefit but is *not* your benefit. 
http://blog.taxresource.ca/what-is-the-pension-adjustment-pa/

As you earn your salary, you earn RRSP contribution room. At the same time, you and your employer are putting aside tax deferred money into the pension. The PA is calculated based on benefit (see my other post for the details) and reduces the earned RRSP contribution room to reflect this.

So if one earned $15K of RRSP contribution room and was a member of a pension that based on the benefit has a PA of $8K, in that tax year - the final earned RRSP contribution room will be what was earned - what was put aside in the pension = earned - PA, which in this example is $15K - $8K = $7K. 

In essence, you just have less RRSP room available as the pension has used some up already during the year.




joncnca said:


> 1. does the deduction from my pension contribution, pension adjustment, union dues (i.e. going from total to net income) all reduce my RRSP contribution limit?
> 
> 
> joncnca said:
> ...


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> ... 3. this may be specific to individual employers, but i don't understand why it appears that relatively little income tax is deducted from my pay. consequently, i'm more likely to have taxes owing come tax time...


One reason less tax being withheld because the employee pension contributions are tax deferred (i.e. no taxes now but the pension payments will be taxed as income in the future). 

If one made $30K, where 1.3% was taken for pension contributions (or $390). The taxable income is going to be $30K - pension contributions = $30K - $390 = $29,610. This reduced amount is what the withholding taxes should be based on. This is also why the PA reduces the RRSP contribution room earned.

It's similar to asking the company to withhold less taxes because one is putting $390 into one's RRSP by filing a T1231 Request to reduce taxes at source. Instead of paying an artificially high amount of withholding taxes then getting a refund, one (hopefully) pays a more accurate withholding tax amount (barring human, software or other errors).




joncnca said:


> ... my previous employment deducted much more tax ... ...


If your previous employer either didn't have a pension plan or the pension paid a substantially less benefit - this makes sense (assuming the same annual salary). 

Another possibility is that if the previous employment had no union dues where the salary was the same, since union dues reduce income - the union dues reduce income which in turn will reduce the taxable income and the taxes withheld.

Without the details, it is difficult to identify where and why but unless your fellow employees are complaining - it's likely not a problem. The only complaint I've heard over the years is for an Ottawa company where the employee lived in Quebec but the company insisted on withholding only the Ontario tax rates, which he said that for him meant a $5K tax owing situation.


Cheers


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## joncnca (Jul 12, 2009)

wow, thank you for those very thorough thoughts!

ok, so it seems to me that PA will reduce RRSP contribution room. fair enough, it's like using contribution room for an RRSP, fairness for people who don't have pensions. otherwise, PA is theoretical and has no bearing on net income (it does indirectly through pension contribution). I assume that because PA can be higher than pension contribution, it is assumed that there is a greater benefit in the pension than simply your contribution....i guess this is because there's (assuming a DB pension) a greater expected benefit from the DB than the contribution alone.....(aside: this worries me a smidge, what if the pension doesn't have enough money by the time i retire! haha)

it sounds to me like you're saying that i'm getting paid what i get paid every 2 weeks, then at the end of the year, the employer pension contribution is added to my full income (box 14), but the amount of contribution is also itemized in a separate box (40?). so that means that the full income in box 14 may be higher than my biweekly pay x 26? then does this mean that my taxes payable will be calculated based on this higher number in box 14? even though both employee/employer pension contributions will serve as tax deductions (i.e. total income to net income)?

my old company withheld noticeably more tax, it was a small company and our accountant did that to make sure we didn't overspend and be left without enough money come tax time. i believe the employer RRSP contribution match was itemized in box 40, and i think added to the total income in box 14. but because they withheld a lot more, it was easier to end up with a refund (i also contributed outside of company RRSP). now it seems like the taxes witheld is much less (as a percentage), and i'm concerned that i'll get hit with a big tax bill come tax time. i've heard that they calculate it so that everything works out balanced...but i'm finicky and i like to see the math and not rely on hearsay. i would agree that the employer should calculate the right amount of withholding tax (accounting for pension contributions) so that we should have had taxes withheld equal to taxes payable (Assuming no other income), but i can't see the math working out at the moment. certainly, i can request to have more taxes withheld. but i'm interested in WHY they would not withold more, because right now i'm calculating a lot in taxes owing (i hope i'm accidentally missing something in my calculation in a manner that will later work out in my favour).


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> wow, thank you for those very thorough thoughts!).


When answering questions piece meal, I sometime wonder if the big picture is being lost.




joncnca said:


> ok, so it seems to me that PA will reduce RRSP contribution room.


When I did not have a pension, the 18% x previous year earned income exactly matched what CRA reported to me as the new RRSP contribution room. As soon as I was in a db pension, this number was lower by exactly the PA reported on my T4 slip.




joncnca said:


> I assume that because PA can be higher than pension contribution, it is assumed that there is a greater benefit in the pension than simply your contribution.....


Not assumed - it's known. 

If the employee contributions were anywhere close to paying for an unknown number of years of pension, there wouldn't be so many db pensions reporting such large funding deficits. Don't forget - at retirement, no more employee contributions are made, regardless of whether the employee lives to collect the pension for ten years or thirty years.




joncnca said:


> (aside: this worries me a smidge, what if the pension doesn't have enough money by the time i retire! haha)


That's where the health of the company and how they deal with the deficits is important. If they bury their heads in the sand and hope for better days to "catch up" instead of planning for it, there's trouble ahead.




joncnca said:


> ... then does this mean that my taxes payable will be calculated based on this higher number in box 14? even though both employee/employer pension contributions will serve as tax deductions (i.e. total income to net income)?


I'm saying the income (i.e. before the deductions such as pension contributions, EI, CPP, benefits, taxes withheld) seen on each bi-weekly pay stub should add up to the amount reported on your T4 box 14. It is your employment income.

*Edit:* Plus any taxable benefits reported in box 40.

This is what your taxes payable is calculated on - so yes. 

The key here is that the company knows that your pension contributions will be a deduction so the income tax withheld will reflect this. So the taxes deducted bi-weekly should be based on the bi-weekly income minus the db pension contributions and should add up to box 22, Income Tax Deducted. This is what deferrs the income tax that without the pension, would be paid.

The amounts deducted for your db pension reported bi-weekly should add up to box 20, RPP contributions. 

When you file your tax return, the RPP deductions will reduce the income on form T1, page 2, line 207.


The employer contributions are from the employer's income and won't become your income until the pension is being paid out. So the employer deduction is for the company tax return, not yours and has no impact on your income at this point.




joncnca said:


> my old company withheld noticeably more tax, it was a small company and our accountant did that to make sure we didn't overspend and be left without enough money come tax time.


The other question is whether you had a pension or not. If not, this is one reason the old company withheld more taxes.




joncnca said:


> i believe the employer RRSP contribution match was itemized in box 40, and i think added to the total income in box 14.


That seems correct as box 40 is for taxable benefits.




joncnca said:


> i like to see the math and not rely on hearsay ... but i'm interested in WHY they would not withold more, because right now i'm calculating a lot in taxes owing.


One option is to use tax software or download a tax spreadsheet to see how the numbers work out as each pay is paid.
http://www.peeltech.ca/mytax/register2012.html


Cheers


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## joncnca (Jul 12, 2009)

thanks again, eclectic12.

i went into last year's tax forms and plugged in some numbers, and checked with my trusty calculator (was actually less confusing to me in the moment than learning to use the spreadsheet, though i may try it later).

basically, after calculating taxes deducted (based on paystub), and taxes payable to government, it said i owed some amount that I think it really high. i hope i'm calculating wrong, and adding the wrong numbers for pension, cause it's my first time.

my question is this:

let's say, hypothetically, i get paid $2000 gross per pay x 26 = $52,000. for simplicity, let's say taxes payable (25%) is $13,000. then let's say $400 gets deducted every pay period, so $400 x 26 = $10,400.

this means i owe $13,000 - $10,400 = $2,600. so RRSP contributions/pension will decrease my net income and reduce the amount of taxes payable.

anyway, let's say i make a pension contribution of $100 per pay x 26 = $2,600, and the employer matches 100% for another $2,600.

in the past, the employer match to RRSP was a taxable benefit in box 40, and i _think_ this $2,600 was added to the $52,000 in total pay, so box 14 indicated $52,000 + $2,600 = $54,600. *is this correct?*

if so, if an employer matches a contribution to a *pension*, does this amount also show up in box 40 as a taxable benefit, and is it also added to the total income in box 14?


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> let's say ... this means i owe $13,000 - $10,400 = $2,600. so RRSP contributions/pension will decrease my net income and reduce the amount of taxes payable.


I haven't worked for any employers what would leave me owing that much in income taxes but I understand the numbers.




joncnca said:


> anyway, let's say i make a pension contribution of $100 per pay x 26 = $2,600, and the employer matches 100% for another $2,600.


So my understanding is that the combined $5200 db pension contribution will reduce your income by that amount so the net income on the tax return filed is going to be $52000 - $5200 = $46,800 which is an income tax bill of $11,700 at 25%. Assuming no other factors (RRSP, charitable donations, etc.).




joncnca said:


> in the past, the employer match to RRSP was a taxable benefit in box 40, and i _think_ this $2,600 was added to the $52,000 in total pay, so box 14 indicated $52,000 + $2,600 = $54,600. *is this correct?*


Yes ... because:



> _Contributions you make to an employee's RRSP and RRSP administration fees that you pay for your employee are considered to be a taxable benefit for the employee. However, this does not include an amount you withheld from the employee's remuneration and contributed for the employee._


See the "Registered retirement savings plan (RRSP) contributions – in cash " in the Benefits Chart.
http://www.cra-arc.gc.ca/E/pub/tg/t4130/t4130-e.html#P1334_178946




joncnca said:


> if so, if an employer matches a contribution to a *pension*, does this amount also show up in box 40 as a taxable benefit, and is it also added to the total income in box 14?


My understanding is no ... because:



> _ The employer's contributions are a tax deductible expense and are not a taxable benefit to the plan member._


I haven't found the CRA link I've seen before that says this but this web site says the same thing.
http://www.groupbenefits.ca/defined_benefit.aspx


Cheers


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