Purchase of Service Considerations?

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Quebec
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Re: Purchase of Service Considerations?

Post by Quebec »

Well, CARRA was taking phone calls today. They confirmed that PSPAs can make the RRSP contribution room go negative, and that the CRA should allow negative room of up to $8k. PAs, in contrast, do not make the contribution room go negative. The CARRA agent reckons that future contribution room will not be reduced because of PAs, as opposed to what the OTPP document says (quote above), but I think he was confused: PAs aren't calculated just for fun... They must have an impact... And fortunately, according to the OTPP document, this impact is on future contribution room.

CONCLUSION: even though my wife has zero RRSP contribution room at present, she can still purchase past service using cash, which is great. The trade-off is that her contribution room will be negative by $1.6k due to the PSPA, and "virtually negative" by $6.7k due to the PAs. So it will take a few years before she can make RRSP contributions again, but at least she's not touching her existing RRSP investments to purchase past service.
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Added: I find it ridiculous that this information was so difficult to find. It's not on CARRA's website or in the letter they send (which just says "consult an adviser"). I had to call them to get explanations, and they initially did not know: they called me back 5 hours later. It's a lack of clear communication on their part, but also due to the fact the Canadian tax system is way too complicated...
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Re: Purchase of Service Considerations?

Post by Benchwarmer »

I attended a presentation last week, and the instructor said that buying back services that occurred prior to 1989 could receive less favorable tax treatment (vs after 1989). Does anyone know what he may have meant? I thought buy-back just comes out of existing available RRSP room?
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Re: Purchase of Service Considerations?

Post by brucecohen »

Benchwarmer wrote:I attended a presentation last week, and the instructor said that buying back services that occurred prior to 1989 could receive less favorable tax treatment (vs after 1989). Does anyone know what he may have meant? I thought buy-back just comes out of existing available RRSP room?
A post-1989 buy-back is fully deductible for the year in which the money is paid. But it triggers a PSPA that reduces RRSP room.

There is no PSPA on a pre-1990 buy-back but the deduction is capped at $3,500 x number of buy-back years. The deduction claim is also limited to $3,500/year so it will likely have to be spread over several tax returns.
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Re: Purchase of Service Considerations?

Post by Benchwarmer »

brucecohen wrote:A post-1989 buy-back is fully deductible for the year in which the money is paid. But it triggers a PSPA that reduces RRSP room.

There is no PSPA on a pre-1990 buy-back but the deduction is capped at $3,500 x number of buy-back years. The deduction claim is also limited to $3,500/year so it will likely have to be spread over several tax returns.
Thanks Bruce. So if someone is only buying back 3 months at a cost of $4K, then only $1K of that can be claimed on the tax return ($4K * 3 / 12). It is probably still a good deal because it is funded 50/50, just not attractive as if the service was post-1989 where the entire $4K can be claimed.
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Re: Purchase of Service Considerations?

Post by Benchwarmer »

I was surprised to find that for PSSA, buying back prior service requires a medical exam. I can understand the requirement if it is spread out over many years (there would be insurance needed), but it is needed even for a lump-sum. Can anyone rationalize why it would be required?

Apparently this is recent. I have talked to co-workers that brought back about 10 years ago, and the medical wasn't needed.
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Re: Purchase of Service Considerations?

Post by Benchwarmer »

Benchwarmer wrote:I was surprised to find that for PSSA, buying back prior service requires a medical exam. I can understand the requirement if it is spread out over many years (there would be insurance needed), but it is needed even for a lump-sum. Can anyone rationalize why it would be required?
I found this rationalization on the Pension Administrator's web-site:
When you buy back prior service, you increase your pensionable service, which increases your pension benefit. Once you make the decision to buy back, the pension plan assumes the obligation to provide an increased pension benefit to you and to your survivor and children. And, the plan is responsible for the larger portion of the cost of the increased benefit.

The requirement to pass this exam protects the government – and other pension plan members – against a substantial financial burden in the event that members who are not physically and/or mentally fit may die prematurely and increase the plan's financial obligations.
Financially speaking, it is illogical that the pension plan prefers that I live for a long time, rather than dying quickly. This justification for a medical exam does not make sense to me.
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Re: Purchase of Service Considerations?

Post by brucecohen »

Benchwarmer wrote: Financially speaking, it is illogical that the pension plan prefers that I live for a long time, rather than dying quickly.
That's true for a retiree, but it might not be true for someone still working. I know nothing about this, but guess that the buy-back would increase the pre-retirement death benefit by more than the buy-back price.
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Re: Purchase of Service Considerations?

Post by Benchwarmer »

brucecohen wrote:
Benchwarmer wrote: Financially speaking, it is illogical that the pension plan prefers that I live for a long time, rather than dying quickly.
That's true for a retiree, but it might not be true for someone still working. I know nothing about this, but guess that the buy-back would increase the pre-retirement death benefit by more than the buy-back price.
Thanks Bruce, I did not think of that. If that is the case, then those buying back service using their severance (thus technically would no longer be working) should not require a medical. I will ask the pension administrator.
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