5-910937
Re: Certified PSPA's
We are writing in reply to your request for an advance ruling dated March 7, 1991 concerning a past service pension adjustment ("PSPA") of 24(1)
You ask how you may minimize the tax _ payable in the circumstances where you will be making the maximum contribution to a RRSP in 1991, 1992 and 1993.
We are unable to provide an advance ruling since the Income Tax Act Regulations respecting PSPA's have not been passed yet. We can provide our opinion, however, based on the draft regulations which were released in December, 1989 and recently modified in November, 1990. Such an opinion, of course, is not binding on the Department but we trust it will assist you in understanding the proposed law.
An individual who is not a member of a registered pension plan may contribute to a RRSP a maximum of either $11,500 or 18% of "earned income" for 1991, whichever amount is the lesser. The dollar amount increases to $12,500 in 1992 and $13,500 in 1993 as you note in your request. "Earned income" is defined in paragraph 146(1)(c) of the income Tax Act (the "Act") and a general explanation of the term and what it includes is contained in the Pension and RRSP Tax Guide (copy enclosed) at page 20.
On February 28, 1992, if you have been in the continuous employment of your current employer, you will receive credited service from February 28, 1990. This will necessitate the calculation of a PSPA which you indicated will be 24(1)
The funding of past service benefits for 1990 and 1991 and, subsequently, the payment of these same past service benefits is prohibited by subsection 147.1(10) unless certain conditions are met. In particular, the PSPA must be certified by the Department in accordance with (draft) Regulation 8307.
In your specific situation the regulation will apply as follows. In order to be certified the PSPA may not exceed a certain amount, which is the sum of $8000 plus your "unused RRSP deduction room" (defined in paragraph 146(1)(L) of the Act) at the end of 1991, plus the amount of your "qualifying withdrawals" made for the purposes of the certification. As you have indicated that you will be making the maximum RRSP contribution in 1991, you will have no unused room and, thus the difference between $8000 and the 24(1) PSPA will have to be made up by making a qualifying withdrawal from your RRSP (draft Regulation 8307(8)). A discussion about qualifying withdrawals can be found on page 42 of the Pension and RRSP Tax Guide and basically involves withdrawing the particular amount required 24(1) from your RRSP and then designating that amount by filing form T1006 with the Department. The withdrawn amount must be included in your income for the year and must not be deducted from income for any taxation year.
Once the PSPA is certified, it will reduce your RRSP deduction limit to the extent that the PSPA exceeds the qualifying withdrawal. For example, if the PSPA is certified in 1992, you maximum contributions in 1992 will be limited to:
(The lesser of 18% of earned income and $12,500) minus pension adjustment ("PA") minus $8,000
If this calculation results in a negative amount you will be unable to contribute in 1992 and it will create a negative "unused RRSP deduction room" which will affect contributions in future years. Also, note that your contributions in 1992 and subsequent years will be refused by the amount of your PA.
The preceding is a general overview of the proposed law which we trust is of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch