What are the tax implications of buying back service?
Your buyback quote package will contain detailed information regarding tax implications that you may need to consider with respect to completing a buyback. The following is a summary of some of the applicable tax rules:
The Income Tax Act limits the amount of pension benefits that you can accrue in a calendar year. HOOPP will notify you if your buyback brings these limits into play.
Source of funds
Most eligible periods of past service can be purchased with cash or with registered funds (for example, from a registered pension plan, an RRSP or a LIRA). However, there are some restrictions that apply to periods of former-vested service that occurred before 1992. For more details, please see our member booklet, You Can Have More: Buying Back Service or call HOOPP Client Services.
If there aren’t enough funds to transfer directly from your prior pension plan, or if you can’t transfer those funds to HOOPP, you may be able to make up the difference with cash or other registered funds. Please note that when buying back service HOOPP cannot accept funds that come directly from a spouse, parent, friend, or another third party on your behalf.
Past service pension adjustments (PSPA)
Paying for a buyback related to 1990 or later with cash usually results in a past service pension adjustment (PSPA). A PSPA reflects the value of the pension you purchased. For more information about a buyback related to this period, please see our member booklet, You Can Have More: Buying Back Service.
If you use registered funds to pay for your buyback, the purchase is not tax-deductible because you have already received a tax deduction for these funds.
If you use cash to purchase past service that occurred after 1989, the full amount is tax deductible. HOOPP will issue a tax receipt for the year the PSPA is certified by the CRA. If there is no PSPA, the tax receipt will be issued for the year in which the cash payment is received.
If you use cash to purchase past service that occurred prior to 1990, different tax rules apply.