What is a Pension Adjustment?

When it comes to pensions, there are a few things that people often get confused about. One of them being pension adjustment.

What is a pension adjustment? How does it work? And why is it important?

In this article, we’ll answer all those questions and more.

What is a Pension Adjustment?

The pension adjustment definition is pretty straightforward. We can define it as an estimate of the worth of a person’s pension and the value allocated by the Canada Revenue Agency to each pension every year.

For example, the members of Registered Pension Plans (RPP) or Deferred Profit Sharing Plans (DPSP) locate their yearly amount in line 52 pension adjustment of their T-4 slip.

Furthermore, you should know that the pension adjustment calculation equals an individual’s entitlements under the Canada Pension Plan (CPP). It is based on the individual’s employment earnings and whether or not they have a good retirement pension.

The pension adjustment is included in an individual’s total annual taxable income. And it is intended to equalize the CPP benefits between those who are retired and those who are still working. Meaning, all workers contribute to the CPP during their working years, and all retirees receive benefits from it.

Therefore, the higher an individual’s employment earnings, the greater their pension adjustment will be.


How To Calculate Pension Adjustment?

To dive deeper into the matter, let us first say that RPPs are classified into three types:

  • Defined Contribution plan
  • Defined Benefit plan
  • Deferred Profit Sharing plan

Why is this important? Simply because the calculation of PA depends higihly on the type of your RPP.

Let’s have a closer look at it.

PA Calculation for a Defined Contribution Plan

In a Defined Contribution (DC) pension plan, the employer and employee frequently contribute a specified amount. Additionally, their payment is based on the value of account assets at the point the person retires.

Therefore, participants in DC plans often have an easier time determining their PA each year since the PA is the sum of the employer and employee payments to the plan.

Look at this example to understand better how to calculate pension adjustment.

Imagine an employee earning $50.000 a year. This employee contributes 2% of what it makes to the plan and has an employer that matches their contributions. So, the employee’s PA for that particular year will be $2.000.

Note: DC plans contributions vary from one year to another. Therefore, one can’t be sure how much it’ll get upon retiring.

PA Calculation for a Defined Benefit Plan

A Defined Benefit plan works entirely differently from a Defined Contribution plan.

That said, in a Defined Benefit pension plan, the amount of money you get when you retire isn’t based on how much money you contributed to the plan.

This is because the terms of a Defined Benefit plan or provision ensure that a plan member will receive a set pension income once they retire. And this is easily achievable because they use a formula in the plan.

To calculate the benefit, we multiply the plan’s lifetime retirement formula by the individual’s money earned during the year from their job. Whereas, in the event of a Flat Benefit plan, the benefit earned would be the flat amount for the year.

With that in mind, here’s the standard pension adjustment formula for calculating a DB pension:

(9 x annual accrued benefit) – $600

According to the CRA pension adjustment guide, a Defined Benefit plan comes in various forms:

  • Final or Best average – benefits based on a member’s average earnings over a limited period, like the last few years of employment.
  • Career average – calculated benefits based on the member’s pay during each year of coverage under the plan.
  • Flat benefit – the benefits are X amount of dollars per month or year depending on the duration of service.

Deferred Profit Sharing Plan

Also known as a DPSP, it is a form of retirement plan. In fact, this is a Canadian profit sharing plan that is employer-sponsored and registered with the Canadian Revenue Agency.

The way a Deferred Profit Sharing plan works is pretty simple. The employer shares the profits made from the business with all employees or a designated group of employees through the DPSP (periodically).

Additionally, employees who receive money from their employer as part of a profit-sharing plan aren’t obliged to pay federal taxes on the money until it is later withdrawn. That said, the person, i.e., the employer who’s willing to undertake this step (decides to be part of a DPSP plan) is known as the sponsor’s plan.

What’s more, the people that are given a share of these profits benefit from tax-free growth in their contributions, which can result in greater investment earnings over time due to the compounding effect.

Unlike the previous pension plans we mentioned, with this one, you have the freedom to withdraw funds before retirement; they may take out a portion or the entire amount within the first two years of membership.

How To Report Pension Adjustment?

There are three different types of pension adjustment that an individual may have to report on their tax return, depending on the type of pension plan they are receiving benefits from.

The first type is an RRSP, the second is an RPP, and the third is a DPSP.

For instance, if you’re receiving benefits from an RRSP pension adjustment, you must report the number of benefits as income on your tax return. Furthermore, the amount you report will be based on the information provided by your financial institution on your RRSPS benefit statement.

The employer reports a PA on box 52 of the user’s T4 slip (Statement of Remuneration Paid), or, on box 32 of the T4A slip. However, it’s crucial that contributions and reallocation of forfeited monies must be made following the conditions of the plan and mustn’t exceed the restrictions outlined in the Income Tax Act.

According to section 147(5.1) of the Act mentioned above, an individual’s pension credit is limited to the lesser of half of the money purchase limit for the year, or, 18% of the individual’s remuneration.

Note: Remember to submit the PA report on the T4 latest by 28th February. However, there are exceptions to this rule regarding the deadline, so it’d be best to visit section 11.5 for more info.


What Is a Pension Adjustment Reversal?

Following the pension adjustment CRA guide, a pension adjustment reversal (PAR) is a sum that’s applied to one’s pension adjustment (RRSP) and Pooled Registered pension plan (PRPP) contribution room.

This happens when an individual no longer belongs to a DPSP or an RPP.

So, who’s qualified for a PAR? Let’s get this straight: You don’t need to quit your job to be eligible for a PAR.

In fact, employees can start a pension adjustment reversal by leaving the pension plan and moving benefits to an RRSP.

Plan members are no longer eligible for a PAR once they have vested or received concrete benefits, like employer matching money. Furthermore, the same goes for an employee who leaves a firm but remains a pension plan member. And that’s not all. Specified multi-employer plans (SMEPs) also aren’t eligible for PARs.

Here’s an example to clarify things.

Assume that a younger employee quits their Defined Benefit pension and receives a $30.000 commuted value.

This means they would get a $10.500 PAR if they received pension adjustments of $13.500 each year for the past 3 years.

Therefore, this example presents the difference between the money they’ve received (the $30.000) and the pension adjustments, which is $40.500 all in all.

Bottom Line

What pension adjustment is won’t be a confusing subject anymore. And, from the mentioned above, it’s clear that a PA can be seen as a positive change for Canada’s economy. That said, the new system should help stabilize pensions and ensure retirees receive the money owed.On the plus side, this gives employers a clearer picture of their pension expenditures.


What causes a pension adjustment?

Pension adjustments account for the value of benefits received through your employer’s RPP or DPSP.

Furthermore, your employer calculates your pension adjustment based on its contributions to your retirement funds, forfeited sums, and your net profits.

Is pension adjustment the same as RRSP contribution?

No, it isn’t. Briefly, a PA is the value of your pension plan for tax purposes calculated each year under an RRSP or DPSP.

Whereas, an RRSP contribution represents the Retirement Savings plan you set up and contribute to — the Canada Revenue Agency registers the same.

Does pension adjustment reduce taxable income?

When you are a pension plan member, your contributions are deducted from your pay each month. This means that your employer will take out your pension contributions from your salary payments before income tax is deducted.

How does pension adjustment affect RRSP contribution?

The CRA will reduce the amount you can contribute to an RRSP by what’s known as “the adjustment amount.” This is because you are already paying into a Registered Pension plan. So, the pension adjustment amount is the value of the pension benefits you earned in the previous year.

How does a pension adjustment affect your tax return?

The pension adjustment is included in the income tax and benefit return, and it’s used to calculate the taxes owed for the year. Therefore, it’s important to note that the PA doesn’t affect your tax return. It’s simply an amount used to calculate your taxes.


When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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