We know taxes aren’t the most exciting topic. But it’s important to understand the connection between paying for your leave, your RRSP contribution room and your taxable income.
You have until April 30 of the year following the end of your leave to tell us you want to pay for it, and five years to pay for it. But if you wait until after April 30 to tell us, your tax situation gets a bit more complicated.
If you tell us you intend to pay for your leave before the deadline, you won’t need approval from the Canada Revenue Agency (CRA).
We’ll calculate a pension adjustment (PA) for each calendar year of your leave. This will reduce your RRSP contribution room, whether you pay for all, some or none of your leave. If the amount of your PA is greater than your RRSP contribution room, your contribution room will go to zero the following calendar year.
Because the expected improvement to the future value of your pension is greater than the actual cost of your leave.
If you’re like many full-time teachers with a salary of about $85,000 and your leave costs about $10,000, your PA will be about $15,000.
The bottom line
When you’re working and contributing to the plan, the T4 you receive from your employer every year includes a PA.
Once you tell us you plan to pay for your leave (or you make a payment), we’ll send you an additional PA for each calendar year of your leave. We’ll issue this as a T4A within 30 to 60 days.
If you missed the deadline and still want to pay for your leave:
You’ll need to call us at 1-800-668-0105 to tell us you’d like to pay.
We’ll prepare what’s called a past service pension adjustment (PSPA) and submit it to the CRA for approval. The CRA will compare the amount of this PSPA to your available RRSP contribution room.
If your RRSP contribution room is greater than the value of your PSPA, they’ll likely approve the PSPA. We’ll send you a letter to let you know.
If your RRSP contribution room is less than the value of your PSPA, they likely won’t approve the PSPA and will send you a letter to let you know. You’ll need to call us at 1-800-668-0105 so we can talk about your options (make sure to have your letter from the CRA with you when you call). We may need to refund payments you’ve made for your leave.
The bottom line
If your PSPA is less than your RRSP contribution room:
You’ll have enough contribution room to pay for your leave.
The CRA will reduce your contribution room by the size of your PSPA and you can go ahead and pay.
If your PSPA is greater than your RRSP contribution room:
You may have still some wiggle room. You can generally go over your RRSP contribution room by up to $8,000 before the CRA will deny your PSPA.
If the CRA doesn’t approve your PSPA and you want to pay for at least a portion of your leave, consult a professional financial advisor to discuss your options.
It depends on how you pay.
Paying in cash (online or by cheque)
When you pay with personal, non-registered funds – whether online or by cheque – you’re eligible for a tax deduction. This deduction can potentially reduce your taxable income.
You’ll receive a tax receipt in February for payments you made in the previous calendar year. You can use the information on this receipt to apply the deduction when you file your taxes. Keep in mind, you can only apply it to the year in which you made your payments.
NOTE: Your ability to deduct the full cost of your leave will depend on your taxable income in the year you make your payments. If the cost is greater than your taxable income, for example, you won’t be able to deduct the full amount.
Paying with RRSPs
When you pay with RRSPs, you’re moving funds from one kind of tax-sheltered retirement plan to another. As a result, you aren’t eligible for the same tax deduction had you paid in cash.
The bottom line
If you pay in cash:
You’ll receive a tax receipt to claim a deduction when you file your taxes.
You can’t carry forward non-deducted amounts to the following tax year.
There may be a greater tax benefit by paying in cash once you’ve returned to work and your taxable income is possibly higher.
It’s a good idea to consult a professional financial advisor about the optimal timing of cash payments.
If you pay with RRSPs:
There's no tax deduction.
You don't regain RRSP contribution room.
Your financial institution may charge your administrative fees.
You can't withdraw the funds from your pension later. Once you transfer RRSP funds, you won't see them again until you retire.
Contributions to another pension plan during your leave can have an impact on your taxes. Call us at 1-800-668-0105 if you worked, or are planning to work, during your leave.