What are the tax implications of buying back service?
Your buyback quote package will contain 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:
Benefit limits
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:
- Only registered funds can be used to purchase a period of HOOPP service that occurred prior to 1992 for which you received a payment of the commuted value.
- You can only purchase a period of pre-1992 service while you were a member of another pension plan with funds directly from that pension plan.
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 with cash usually results in a past service pension adjustment (PSPA). A PSPA reflects the value of the pension you purchased.
HOOPP is required to calculate and report PSPAs to the Canada Revenue Agency (CRA) for approval to ensure that the tax limits on contributions for retirement savings are not exceeded. The CRA will reduce your available RRSP contribution room by the amount of the PSPA.
If you don’t have enough RRSP contribution room, you may have to withdraw funds from your RRSP to complete the buyback. You may want to consider using registered funds from an RRSP or a LIRA to pay for your buyback to reduce the PSPA or eliminate it entirely.
HOOPP cannot finalize a buyback until the PSPA has been certified by the CRA.
Tax deductibility
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 may be 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 before 1990, different tax rules apply. The amount that you can deduct will depend on whether you were a contributing member of a registered pension plan during the calendar year(s) being purchased. HOOPP will provide you with more detailed information in your buyback quote package.
Interest paid on money borrowed to purchase past service is not tax-deductible.
We recommend that members seek professional tax advice for information regarding tax implications when purchasing past service.