Retirement planning is one of the most important components of your household’s financial landscape. To accommodate that, many employers have instituted pension plans. Both the employee and the business pay into the fund, accelerating its growth.
One particularly important factor to understand is a pension adjustment (PA). Not only does it apply directly to your long-term retirement plan, but it also plays a part in your annual tax filing. By learning how pension adjustments work, and how they apply to you specifically, you can make the best plan for your future.
Key Points
- A Pension Adjustment (PA) is a value that reflects the benefits accrued in an employer’s pension plan.
- The PA reduces your RRSP contribution room for the following year.
- The purpose of the PA is to ensure fairness in Canada’s retirement savings system and maintain a level playing field for everyone.
What Is A Pension Adjustment?
A pension adjustment (PA) refers to the value of benefits earned in a year from a registered pension plan (RPP) or deferred profit sharing plan (DPSP). It reduces your Registered Retirement Savings Plan (RRSP) contribution room for the subsequent year.
The PA is essentially used to ensure that Canadians don’t over-contribute to their retirement savings and balances the tax perks between employer pension plans and individual RRSPs.
When planning for your annual RRSP contributions, the pension adjustment is an important factor to consider.
How Does A Pension Adjustment Work?
The Canada Revenue Agency (CRA) calculates pension adjustments each year to estimate the value of a person’s pension. This helps ensure fairness between those with and without employer-matching pension plans.
A member participating in any kind of registered pension plan can locate the annual pension adjustment value in Box 52 of their T4. The same is true if you are a member of a deferred profit sharing plan.
It accounts for the fact that those with employer-based pensions can save by contributing funds through gross earnings, not getting taxed on that amount. Those governing their own pensions don’t have that benefit. An adjustment is meant to correct that difference.
How To Calculate Your Pension Adjustment
The formula for calculating a pension adjustment is usually straightforward, but the exact method depends on your type of pension plan.
Defined Contribution Plan
Also called a defined contribution plan, this is when pension participants invest a pre-set amount. Typically, this comes with an employer-matching program.
The value of your pension depends on the performance of the investments in the account, determined at the time of the participant’s retirement.
In terms of pension adjustment, it is the cumulative value of both the employer’s and the participant’s contributions.
The formula in this case is as follows:
Defined Contribution Plan PA = Employee Contributions + Employer Contributions
| Example: Salary: $100,000 Employee Contribution: 2% Employer Matching: 2% Total Contributions: 4% Pension Adjustment: $100,000 x 4% = $4,000 |
Defined Benefit Plan
Referred to as a defined benefit plan, in these situations, you are guaranteed either a predetermined income or a large, one-time payment. The amount is determined by the duration of employment, salary, and age of worker at the time of retirement.
The approach to calculating the pension adjustment differs between three main methods:
- Set Benefit: Also called a flat benefit, this is when the benefits are stated as a financial figure; a dollar amount representing each period (year or month) that the employee worked. An example is the pensioner receiving $50 a month per year of employment at the company.
- Average Over Career: In this case, the pension benefit is determined based on what the participant earned each year they worked. For instance, if you contribute 2% and your employer matches it, the benefit is calculated at 4% for each year you worked.
- Best Average: Also called the final average, this is determined based on the yearly earnings as averaged over a set period. This is usually calculated based on the best three years of service or the most recent set of years. For example, a pension adjustment can be calculated by taking a percentage of your average pensionable salary over the last three years and multiplying it by your years of service.
The Defined Benefit Plan PA is equal to nine times the annual accrued benefit amount, minus $600. So, the formula in this case is as follows:
Defined Benefit Plan PA = (9 x annual accrued benefit) – $600
| Example: Defined plan pension adjustment = (9 x annual benefit) – $600 Pension Adjustment: 9 x ($100,000 x 4%) – $600 = $35,400 |
Learn more: Defined Benefits vs Defined Contribution Pension Plans: A Guide For Canadian Beginners
How Does Pension Adjustment Affect RRSP Contribution Room?
There are limits to how much you can contribute to your RRSP every year. For 2025, the maximum contribution limit for an RRSP is 18% of your earned income from the previous year, up to $32,490.
The amount of contribution room you have depends on not only your income, but also any pension benefits you accrue throughout the year. Your RRSP contribution room is reduced to account for pension plan contributions made through your employer.
| Example: Total RRSP contribution limit for the year: $10,000 PA: $3,000 Available RRSP room: $10,000 – $3,000 = $7,000 |
Learn more: Pension Income Splitting
How Do You Report A Pension Adjustment?
The number you report for your pension adjustment is meant to detail the value of your earnings under your pension plan. Whether it is a Deferred Profit Sharing Plan or a Registered Pension Plan, with each passing year and added contribution, it gains value.
The adjustment refers to the difference with each passing tax year. An as an equalizer, it ensures that an accurate figure is represented each year, factoring things like interest and employer matching.
Here is how to report a pension adjustment:
Step 1: Find Your PA Amount
Though your employer will report the amount in Box 52 on your T4, you are still required to take action. The amount the employer reports accounts for contributions. The employer takes into account the contributions to your retirement accounts from both you and the company, considering your current income and any forfeited amounts.
Step 2: Fill Out Your Tax Return
Despite your employer noting the amount, you still must declare it separately on your return. While it will not impact your income as either a deduction or earnings, it can impact your contribution eligibility for the following year. Accurate reporting ensures that your pension is above board, reducing the chance of issues down the road.
Enter the PA amount displayed on your slips on line 20600 of your income tax return.
Step 3: Adjustments Are Made To Your RRSP Contribution Room
As mentioned, the PA reduces your RRSP contribution room for the next year.
How Can I Avoid The Pension Adjustment?
The pension adjustment is required for all employer-sponsored pension plans. As such, you can’t avoid it. It’s part of the tax system in Canada as a means of balancing the tax advantages of RRSPs and pension plans.
That said, you won’t have a pension adjustment if you’re not part of an employer pension plan. In this case, the full RRSP contribution room will be available.
Final Notes
When it comes to retirement, a large portion of financial planning relies on you keeping track of all aspects of your pension. The annual PA may not seem like a massive figure, but it does play a large role in avoiding penalties. The goal is to grow your investments, defer taxes on the funds you save until retirement, and avoid penalties resulting from overpayments.
