Section 1 Tax treatment of private retirement savings plans in Canada

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The first legislation in Canada aimed at encouraging the establishment of pension plans was the Pension Funds Societies Act of 1887¹.  At that time, employer-sponsored pension plans (EPPs) were offered to certain employees of the federal public service, the railways and some commercial banks.  In 1919, an amendment to the Income War Tax Act allowed employee contributions to EPPs to be claimed as a tax deduction.  Registered Retirement Savings Plans (RRSPs) were introduced in 1957 with the primary objective of providing self-employed tax filers and employees without an EPP with a means to save for retirement.  Between 1965 and 1970, legislation regulating EPPs came into effect in many provinces and at the federal level.  Since 1970, all provinces except Prince Edward Island have implemented legislation to regulate the operation of employer-sponsored pension plans.

The Canada Revenue Agency (formerly the Canada Customs Revenue Agency) established a set of rules governing pension plans registration and fiscal treatment that have been effective from 1972 to 1990².  Major changes were introduced in 1990 and shaped the fiscal treatment of retirement savings as we currently know it.  Changes included implementing a comprehensive annual retirement savings limit of 18% of compensation, whether tax filers saved in an EPP³,  a RRSP or a combination of those plans.  Those changes aimed to eliminate a significant advantage for those saving in a defined benefit registered pension plan versus those saving in a defined contribution registered pension plans or in RRSPs.  To establish such a comprehensive limit, a pension adjustment amount (PA) is calculated for tax filers participating in an EPP.  The individual's accrued retirement savings limit for a given year is reduced by the individual's previous year's PA.  PAs were first calculated and reported for 1990, affecting 1991 RRSP contribution limits.  Calculations of the PA for a Registered Pension Plan (RPP) depend on the type of benefits it provides.  In the case of defined-contribution RPPs, the PA equals employee contributions plus employer contributions.  In the case of defined-benefits RPP, the PA represents the amount of benefits accrued by the employee in the plan⁴.  It is determined by a formula calculated by the employer, following guidelines from the Canada Revenue Agency.

The 18% comprenhensive savings limit minus the pension adjustment amount gives the individual's RRSP contribution limit.  In 2008, tax filers could contribute up to 18% of their earned income from 2007 in a RRSP, with a maximum contribution of $20,000⁵.  The contribution ceiling for 1997 was $13,500.  These maximum RRSP contribution limits would be reduced by any pension adjustment amount applicable.

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1. Source:  Maser and Anderson (2006).
2. Source:  Morneau Sobeco (2006).
3. Employer-sponsored pension plans include Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs).  A DPSP is an employer-sponsored savings plan in which an employer makes contributions for the employees (who cannot contribute) based on profits.  The amount accumulated in these plans can be paid out as a lump sum at retirement or termination of employment, transferred to a RRSP, received in installments over a period not to exceed ten years or used to purchase an annuity.
4. Benefits accrued by the employee in a defined benefit plan in a given year are not necessarely equal to the sum of employer and employee contributions for that given year.  Those accrued benefits  represent a liability for the pension plan.
5. Source:  Canada Revenue Agency.