Here’s an easy way to explain the Pension Adjustment Reversal or PAR to your clients.
Consider an employee who is a member of a Group RRSP at work. Under the terms of their group plan, they are contributing 2% of their salary and the company is matching.
Each year the group RRSP administrator will report to CRA the amount in total contributions to the employee’s group RRSP.
Let’s also suppose the employer’s contributions vest after two years.
For example:
Employee earns $50,000 per year
Employee contributions are $1,000
Employer contributions are $1,000
Each year a $2,000 RRSP contribution is reported to CRA
Now, after 5 years, the employee decides to resign.
Over the 5 years, $10,000 has been reported to CRA in total RRSP contributions
The employer’s contributions in years 4 and 5 have not vested
But the employer’s contributions for those years ($2,000) have been reported to CRA
This $2,000 will be added back to the employee’s total RRSP contribution room. And this is the Pension Adjustment Reversal or PAR.
The math gets a bit more complicated when it’s an RPP, DPSP or defined benefit pension plan, but the principal is the same.
So, if you have clients who are moving jobs, make sure to inquire about some additional RRSP room that may have been created for them via the PAR.
As always, we look forward to your comments.
PS The 2024 TFSA contribution limit has been raised to $7,000.
Scott Edgington
Director, Advanced Planning, Wealth
Qualified Financial Services
scott.edgington@qfscanada.com
Jim Lyons
Regional Vice President, Business Development - Wealth
Qualified Financial Services
jim.lyons@qfscanada.com
Kyle Gilbert
Inside Business Development Specialist - Wealth
Qualified Financial Services
kyle.gilbert@qfscanada.com
Gordon Baker
Director, Business Development, Wealth Atlantic Canada
Qualified Financial Services
gord.baker@qfscanada.com
This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.
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