Fact Sheet - Buying Past Service

Originally posted on Jun 02, 2012
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Fact Sheet - Buying Past Service

One of the advantages of setting up a new pension plan is that it allows a plan member, with the consent of the employer, to create a pension entitlement for prior years. Such a member might have missed out on years of contributions when the plan was not yet established and can now purchase past service under the newly set up pension plan. These extra contributions are added to the plan and are tax deductible to the corporation.

 

A concrete example serves to illustrate this principle:

 

ABC Corporation has been employing Ms. X for 10 years. Ms. X is also a majority shareholder of ABC Corporation, and on the advice of her financial advisor decides to establish a PPP for herself.

 

The PPP is established effective January 1, 2014. Because Ms. X has been paid salary income  from  ABC  Corporation  over  the  period  2004-­‐2014,  the  newly  established PPP can provide her with a pension for these 10 years of past service. The actuary for the PPP will calculate the total cost of funding these 10 additional years of pension (the “Total Buy Back Cost”). The Total Buy Back Cost must be satisfied through 2 sources: a transfer of assets from Ms. X’s personal RRSPs (called the “Qualifying Transfer”) and a corporate contribution for the rest.

 

The Qualifying Transfer typically represents the lion’s share of the Total Buy Back Cost. It does not generate any tax deductions and is simply a transfer from one registered account (Ms. X’s RRSP) to another (the PPP). However, the corporate contribution to the Total Buy Back Cost is tax-­‐deductible to ABC Corporation.

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