# New to Canada - trying to understand how DB Company pension schemes work



## Grizzly (Jul 22, 2011)

Sorry if these are silly questions, these are very basic questions

1) Am I correct in assuming on retirment there is no such option as a tax free lump sum with a reduced pension? 

2) Is there a Tax limit to how much income I can contribute into pension arrangements in the year? does this limit increase with age?

3) If my spouse has not utilised fully (for tax purposes) her contributions to her pension arragements, under joint assessment can I utilise the remaining?

Thank you in advance


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## Square Root (Jan 30, 2010)

OK I'll take a stab at your questions, trying to address those I am more familiar with. Money Gal and others are more up on this topic so can correct or fill in my answer.
1)There is generally no option to take a tax free lump sum and reduce your pension. 
2)There is indeed a limit on how much you can contribute into pension arrangements. If you belong to a DB pension plan, a Pension Adjustment number will be calculated which will reduce your ability to contribute to your RSP. The RSP is like a private defined contribution pension plan that you control and is outside any employment arrangements you may have. The contribution limit is 18% of earned income to a maximum (($18k?) There are also limits as to how much you can deduct from your income re your company's plan. I've forgotten how much this is. These limits do not increase with age.
3)There isn't the concept of joint tax filing (For spouses) in Canada. However, you can contribute your regular RSP contribution into your spouse's plan. When the funds are withdrawn they will be taxed in her hands. Pension income can also be split with your spouse when received.
OK That was a stab. Can some others fill in some of the gaps?


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## MoneyGal (Apr 24, 2009)

If it is a company DB pension, the amount that can be contributed in your name - whether by you, your employer or both - is set by tax law. The amount does not increase with age, but with salary amount (to a maximum) - generally speaking, as your salary increases, the contributions in your name will also increase. 

And the amounts contributed in your name to your DB pension plan will affect how much *other* contribution room you have to shelter income and growth from taxation. 

SR answered your question about joint filing and spousal RRSPs. 

Circling back to question one - you can never get a tax-free lump sum. You could, however, get the commuted value of your pension and then buy an annuity on the open market with part of the value. This would provide a way to "unlock" some of the pension value as a lump sum. It would be better, however, to save the lump sum separately from your DB pension plan.


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## Grizzly (Jul 22, 2011)

Thanks MoneyGal and Square Root. You system seems very straightforward! That is an interesting concept regarding taking the value of your benefits out of yourDB Scheme, I imagine this is a value that is arrived at by an Actuary based on expected life and pensions receipts. Just a further question, if say I contribute 9k and my employer 9k into my DB Scheme then I cannot contribute to an RRSP as the 18k limit has been reached?


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## OhGreatGuru (May 24, 2009)

Grizzly said:


> ...
> 3) If my spouse has not utilised fully (for tax purposes) her contributions to her pension arrangements, under joint assessment can I utilise the remaining?
> 
> ...


No, Canada does not have truly joint assessments, or joint filing, as some countries do. Although there are now many provisons to transfer deductions and pension income between spouses' returns.

"RRSP (Registered Retirement Savings Plan) Contribution Room" is earned by, and belongs to, individuals, based on their earned income in the previous year. Your wife's contribution room will be reduced by her "Pension Adjustment Factor". You can try to guesstimate your RRSP room, but it is safest to wait until Canada Revenue Agency (CRA) tells you what it is in your Income tax Notice of Asessment (NOA) after they process your annual income tax return.

The only way in which you could "use" your spouse's RRSP room is if she opened a Spousal RRSP, to which she is contributor, and you are the annuitant. However, the contributions she makes are only deductible from her income, not yours.

If you are new to Canada I would suggest going to a library or bookstore and reading some basic references on pension plans and RRSPs.


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## Daniel A. (Mar 20, 2011)

Grizzly said:


> Thanks MoneyGal and Square Root. You system seems very straightforward! That is an interesting concept regarding taking the value of your benefits out of yourDB Scheme, I imagine this is a value that is arrived at by an Actuary based on expected life and pensions receipts. Just a further question, if say I contribute 9k and my employer 9k into my DB Scheme then I cannot contribute to an RRSP as the 18k limit has been reached?


Pension Adjustment For Defined Benefit Pension Plans

The calculation employer and employee required contributions to a defined benefit plan is not done in an employee by employee basis. Instead the calculation is done for a group of employees and the amount of employer contributions for an individual employee is not known.

The government has developed a formula to calculate the PA for members of a defined benefit pension plan as follows:

For 1997 and later: [(9 x benefit entitlement) - $600]
Before 1997: [(9 x benefit entitlement) - $1,000]

For example, Jack earned $75,000 last year and belongs to a 2% defined benefit pension plan. His PA will be (9 x (2% of $75,000) – $600] or $12,900.


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## Eclectic12 (Oct 20, 2010)

Square Root said:


> OK I'll take a stab at your questions, trying to address those I am more familiar with. Money Gal and others are more up on this topic so can correct or fill in my answer.
> 
> [...]
> 
> ...


This is good info on a Defined Benefit (DB) pension. To this I would add that the PA number which reduces the RRSP contribution limit has a multipler. To illustrate, the DB pension statement may show the employer put in $2K and the employee put in $2K, the PA will be something around $10K as it is tied to the future benefit - not the amount contributed.

I'd also suggest making sure what type of pension plan it is. The posting is vague so it is important to confirm whether the "pension arrangements" are DB or the more common Defined Contribution (DC) plan. 

In a DC plan, whatever the contributions grow to is what is available at retirement, regardless of how much is really needed. Another difference is were a DB plan has a large PA, the DC plan's PA will be exactly what was contributed. So re-using my example, where the DB plan had a PA something like $10K, the DC plan will have a PA of $4K.


So knowing which type of plan helps a lot.


Cheers


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## Karen (Jul 24, 2010)

> If you are new to Canada I would suggest going to a library or bookstore and reading some basic references on pension plans and RRSPs.


If you're from the US, and I suspect you are judging by your questions, this book will be very useful to you.

_The American in Canada - Real-Life Tax and Financial Insights into Moving to and Living in Canada_ by Brian D. Wruk and Terry F. Ritchie.

Also, if you're an American citizen, I'm sure that you're aware of your obligation to file both US and Canadian income tax returns, but a lesser known requirement is the need to file annual foreign bank account reports with the US Treasury Department (not the IRS). If you're already familiar with this obligation, just ignore the rest of my post, but I'm going to mention in case you're not. The penalties for not filing are extremely severe - between $10,000 and $100,000 for each bank account and up to a year in prison. And they have no mercy - the US/Canada tax expert who told my late American husband and I about it had a 105-year-old woman client who was fined $10,000 because she wasn't aware of the requirement so had never filed. The need to file the form applies if the total of all accounts that you are a signing authority for is $10,000 or more. The form is called TD F 90-22.1, a "Report of Foreign Bank and Financial Accounts" and you can find it online by googling TD F 90-22.1. I'm not sure if both spouses would be required to file the reports, but I would find out to avoid possible problems. I didn't have to because I'm Canadian and we lived in Canada.


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