Income tax considerations
The Income Tax Act governs the service you can buy, the methods of payment, whether a maximum purchase limit applies, and whether your purchase lowers your taxable income.
CRA benefit limits
Canada Revenue Agency (CRA) has some limits on the amount of the benefit you receive for the service you buy back.
When did the service occur? |
CRA benefit limit |
|
Service in 1992 and after |
|
|
Service in 1990 and 1991 |
No limit |
|
Service before 1990
|
No limit |
|
Service before 1990
|
$1,662.96 of pension per year of service |
Service purchases and tax-deductibility
The cost of buying service may be tax-deductible and may affect your RRSP room, depending on the type of service, when it occurred, and how you pay for it. The tax deduction applies in the year the payment is made, or can be carried forward to apply in subsequent years.
Transfer from RRSP or registered pension plan
Funds transferred into OMERS from an RRSP or registered pension plan are already tax-sheltered. You cannot claim them again as a tax deduction for a service purchase.
Cash payment
- If you pay for the service purchase in cash (i.e., by personal cheque or through OMERS monthly payment plan), all or some of the amount may be tax-deductible, depending when the service occurred and if you were a member of a registered pension plan.
- The annual interest rate and administration fee for the OMERS monthly payment plan are tax-deductible.
- If you borrow money from a financial institution to purchase service, the interest is not tax-deductible.
- OMERS will issue a tax receipt for the amount received in each tax year.
Service before 1990: if you were a member of a registered pension plan (other than CPP)
The cost of the service purchase is fully tax-deductible, with an annual deduction limit. In any one calendar year, you may deduct the lesser of:
- the amount you paid (or carried forward) or $3,500 minus OMERS current service contributions and any past service contributions you made during the year.
ExampleBrad bought back 3 years of service at a cost of $13,420. Brad was an OMERS member during that time, so his entire purchase cost is tax-deductible. In 2008, Brad contributed $2,250 to OMERS for his current service. He can deduct $1,250 ($3,500 – $2,250 = $1,250). He carries forward the balance of his purchase cost ($13,420 – $1,250 = $12,170). In 2009, Brad contributed $4,000 to OMERS for his current service. He cannot deduct any of his purchase cost ($3,500 – $4,000 = N/A). He continues to carry forward the balance of $12,170. In 2010, Brad retires. He contributes only $1,000 to OMERS for his current service. He can deduct $2,500 ($3,500 – $1,000 = $2,500). He carries forward a balance of $9,670 ($12,170 – $2,500 = $9,670). Now that Brad is retired, he is not making current service contributions to OMERS. From 2011 on, he can deduct $3,500 per year until the balance of $9,670 is fully used up. |
Service before 1990: if you were not a member of a registered pension plan (other than CPP)
The total amount you can deduct is the lesser of:
- the total cost of the service purchase or $3,500 times the number of years and part-years purchased.
In any one calendar year, you can deduct the lesser of:
- the amount you paid (or carried forward) or $3,500.
If you exceed the maximum deductible amount in a calendar year, you may carry forward the balance to subsequent years until you use up your total allowable deduction.
ExampleDebra bought back 5.5 years of service at a cost of $30,600. Debra did not contribute to a pension plan during the 6 calendar years (1984 to 1989).Debra’s total tax-deductible limit is $3,500 x 6 years = $21,000. The lump-sum amount she paid ($30,600) is over the limit by $9,600; this portion is not tax-deductible. In any one calendar year from the date of her purchase, Debra may deduct $3,500 and carry forward the balance until the $21,000 is fully used up. Another option Debra may consider is buying less of the service, and not exceed her $21,000 tax-deductible limit, so instead of buying 5.5 years, she could buy 3.75 years. |
Service after 1989
The amount paid in cash is fully tax-deductible in the calendar year it is paid, but you must have approval from CRA for a past service pension adjustment (PSPA), if applicable. Whether you can use the full deduction depends on your taxable income in that year.
ExampleChris purchased 3 years of service in 2009 at a cost of $6,000. Chris paid for the service by personal cheque payable to OMERS. Chris may claim and deduct the entire $6,000 of the service cost in the year it was paid. |
Service after 1989 and PSPAs
Each year since 1990, your employer calculates a pension adjustment (PA) and reports it on your T4. The PA is the estimated value of the OMERS pension you earned in the year, and is deducted from your available RRSP room.
For service after 1989, OMERS will calculate a past service pension adjustment (PSPA) and report it to CRA. If the PSPA is approved, CRA will deduct it from your available RRSP room. CRA will not allow the purchase if you don’t have enough RRSP room.
However, CRA may let you exceed your available RRSP room by up to $8,000 leaving you with a negative RRSP deduction limit. You could not make RRSP contributions until this limit becomes positive again.
If you pay for post-1989 service by RRSP transfer, the PSPA is reduced by the amount of your payment. (A PSPA under $50 does not need CRA approval.)
If the PSPA is approved: CRA will subtract the PSPA from your available RRSP room.
If the PSPA is not approved: CRA will contact you. You may be able to withdraw or transfer funds from your RRSP to create more room for the PSPA. Or you could opt to buy less of the service.
ExampleIn 2008, David bought 4 years of service (Jan. 1, 1990 to Dec. 31, 1993) for $45,000. David paid for the service using funds from his RRSP. Since these funds are already tax-sheltered, they will be applied toward reducing the PSPA amount. The PSPA amount was $9,000, which is reduced to $0; PSPA approval is not required from CRA. |
Important! Please notify us immediately if CRA does not approve your PSPA. If you do not wish to make room in your RRSP for the purchase, we will refund any payment received and remove the credited service from your OMERS record (though it may still count as eligible service).
Tax-deduction summary
|
When the service occurred |
Portion of the cost that is tax- deductible |
Deduction limit per year |
Carry-over |
|
Service period after 1989 |
Total cost |
No limit for the year of purchase |
No carry-over |
|
Service period before 1990
|
Total cost |
The lesser of:
|
|
|
Service period before 1990
|
The lesser of:
|
The lesser of:
|
Carry-over the deduction until the balance = $0 |