How RPP Contributions Affect Your Taxes and RRSP Room

A Registered Pension Plan (RPP) is a retirement savings plan established by an employer or union to provide income to employees after they retire. Contributions are made to the plan by both the employee and the employer, creating a pool of funds that is invested on behalf of the employee. These plans are registered with the Canada Revenue Agency (CRA), which provides tax advantages for the contributions and the investment earnings they generate. An employer initiates the RPP, selecting the financial institution to administer it and determining the plan’s rules, including contribution requirements and investment strategies.

Types of RPP Contributions

The way money accumulates in an RPP depends on whether it is a Defined Contribution or a Defined Benefit plan. A Defined Contribution (DC) plan is characterized by its known contribution amounts. In this arrangement, the amount deposited by both the employee and employer is a specific figure, often calculated as a percentage of the employee’s salary. The final pension amount you receive in retirement is not guaranteed and depends on the investment performance of the funds in your account.

Conversely, a Defined Benefit (DB) plan focuses on the end result, where the retirement benefit is a known, pre-calculated amount. This benefit is determined by a formula that considers factors like your years of service and earnings history. The contributions required to fund this promised future income are variable and are calculated by an actuary to ensure the plan has sufficient assets.

Contribution Limits and Tax Deductions

The Income Tax Act governs the amount that can be contributed to an RPP and provides a direct tax benefit for those contributions. Your employee contributions are tax-deductible, which lowers your overall taxable income for the year.

To claim this deduction, you must report the total amount of your RPP contributions on your annual tax return. This figure is provided by your employer in Box 20 of your T4 slip, and you will enter this amount on Line 20700 of your T1 General income tax return.

Over-contributions are not allowed. If an over-contribution occurs, it must be refunded to the contributor to avoid the risk of the plan’s registration being revoked by the CRA. The refunded amount must then be included in the recipient’s income for the tax year in which it is received, and any tax deductions claimed on the excess amount may be disallowed.

Impact on RRSP Contribution Room

Participation in an RPP has a direct impact on the amount you can contribute to your personal Registered Retirement Savings Plan (RRSP). This is managed through the Pension Adjustment (PA). The PA is not a contribution itself, but a calculated value that represents the benefit you earned within your RPP in a given year. This figure is calculated by your employer and is designed to equalize the tax-assisted retirement savings opportunities between those with a workplace pension and those without.

You can find your PA amount for the previous year reported in Box 52 of your T4 slip. This PA value is then used by the Canada Revenue Agency to reduce your RRSP deduction limit for the following year. For instance, the PA generated from your pension participation in 2024 will be used to lower your available RRSP contribution room for the 2025 tax year. This ensures that the total value of tax-sheltered retirement savings remains equitable for all taxpayers.

Consider this example: your RRSP deduction limit is calculated as 18% of your prior year’s earned income, up to a specified maximum. If you earned $80,000 in 2024, your potential 2025 RRSP room would be $14,400. However, if your 2024 T4 shows a Pension Adjustment of $8,000 in Box 52, your 2025 RRSP deduction limit would be reduced by that amount, leaving you with $6,400 of contribution room.

Two other, less common adjustments can also affect your RRSP room. A Past Service Pension Adjustment (PSPA) arises if your pension benefits are upgraded for service in prior years, which further reduces your RRSP room. Conversely, a Pension Adjustment Reversal (PAR) can restore RRSP room if you leave a pension plan before your benefits are fully vested, and the value of what you receive is less than the PAs previously reported.