If you work in a Canadian workplace that offers a pension plan, then come tax time when you receive your tax slips, you probably see a number greater than zero beside a field called “pension adjustment.” So what is this field, and why does it matter?

Your Pension Adjustment affects your RRSP contribution room.

At its core, the pension adjustment is a way for the government to make sure that workers with pension plans don’t get to contribute extra to their RRSPs, when compared to workers without pension plans.

If your employer contributes to a pension plan in any way, those funds are deducted from your RRSP contribution room in later years. Annoying, yes, but also fair. After all, that’s money that you’re getting, that you’re also not paying taxes on right now… kind of like an RRSP, right?

If that money didn’t get deducted from your RRSP contribution room, you’d have a massive leg up over people who don’t have access to a pension plan. The pension adjustment is the CRA’s way of levelling the playing field.

How to Calculate Your Pension Adjustment

If you have a defined contribution pension plan, the calculation is easy. Just take the total of all of your and your employer’s contributions to your pension plan for the tax year, and you’re done.

For example, say that you and your employer each contribute $5,000 to a defined contribution pension plan. What would your pension adjustment be at the end of the year?

If you guessed $10,000, DING DING DING, someone get this reader a prize!

If you have a defined benefit pension plan, things get a little messier. The stated formula for pension adjustments there is (9 x your annual accrued benefit) – $600. So if, for example, your accrued benefit was $1,000 in a given year, the formula would be (9 x $1,000) – $600, which equals $8,400.

Wrapping it Up

If you’ve been wondering why you don’t have more RRSP contribution room free at the start of the new tax year, your pension adjustment might just be the reason why. It’s not something that everyone needs to worry about, but it’s helpful to know what it is and how it affects your finances. I definitely didn’t know this when I started contributing to my workplace pension plan, and was surprised by how much it reduced my contribution room in later years!