Pension adjustment correction (PAC)

The 2021 federal budget proposed to provide more flexibility to plan administrators of money purchase (MP) registered pension plans (RPPs) to correct for pension adjustments (PAs) reported for overcontributions to MP RPPs that were returned to the payer under subsection 147.1(19) of the Income Tax Act or subparagraph 8502(d)(iii) of the Income Tax Regulations. This will ensure that an individual’s registered retirement savings plan (RRSP) deduction limit is restored where overcontributions have been returned and included in income.

Under the legislation, a pension adjustment correction (PAC) is calculated and reported any time that contributions are returned to the payer under subsection 147.1(19) of the Act, (reasonable errors that do not put the plan in a revocable position) or subparagraph 8502(d)(iii) of the Regulations, (in order to avoid revocation of the plan’s registered status).

Overcontributions that could affect an MP RPPs registered status would be contributions that resulted in a PA which exceeded the limits under subsections 147.1(8) or (9) of the Act, or that were not made in accordance with the plan terms as registered.

A PAC is only calculated and reported for amounts returned to the payer that were made in the 10 immediately preceding years, and it is calculated based on the formula:

A - B - C

Where:

A is the total of all amounts each of which was included in the individual’s pension credit with respect to an employer for the retroactive year under the provision

B is the total amount that ought to have been contributed to the provision under the terms of the plan as registered with respect to the individual for the retroactive year

C is the amount, if any, by which the total of all amounts, each of which is the individual’s PA for the retroactive year in respect of a participating employer, exceeds the lesser of the money purchase limit for the retroactive year and 18% of the individual’s compensation (as defined in subsection 147.1(1) of the Act) from participating employers for the retroactive year.

The effect of the above calculation is to limit the amount of the PAC to the amount of unused RRSP deduction room that was actually reduced by the reported PAs. For example, the C variable will ensure that additional RRSP room is not generated for an individual whose required contributions were at the lesser of the 18% compensation and MP limit, since no RRSP room would have been generated for the year if the correct contributions had been paid.

The PAC is included in the definition of total pension adjustment reversal under subsection 8304.1(1) of the Regulations and has the effect of immediately restoring an individual’s RRSP deduction limit.

A PAC must be reported on a T10, Pension Adjustment Reversal (PAR) or Pension Adjustment Correction (PAC), slip by the plan’s administrator by the following deadlines:

• if the payment of over-contributions occurs in the first, second or third quarter of a calendar year: no later than 60 days after the last day of the quarter in which the distribution occurs
• if the payment of over-contributions occurs in the fourth quarter of a calendar year: no later than 31 days after the end of December.