If you’re a member of an RPP or DPSP, your RRSP contribution limit will be reduced by an amount called the pension adjustment (PA). This adjustment represents the present value of the pension benefits you earned for the previous year in your RPP or DPSP. PA reporting is required as part of the T4 reporting process in February of each year.
There is another adjustment if your pension benefits are enhanced for post-1989 service. This particular adjustment—the past service pension adjustment (PSPA)—reduces your RRSP contribution limit for any given year.
One other adjustment—the pension adjustment reversal (PAR)—can increase your contribution room. You may receive a PAR if you leave your pension plan before retirement. This adjustment is intended to increase your RRSP contribution room where the PAs previously reported on your behalf exceed your termination benefit under the pension plan.
Example: Suppose you were laid off by your employer in 2013 and, based on your earned income for 2012, your 2013 RRSP contribution room was $14,500. If your former employer reports a PAR of $5,000 with respect to your participation in its pension plan, your revised 2013 RRSP deduction room will be increased to $19,500.
Based on the above, your maximum deduction for any one year will be calculated as follows: RRSP contribution room carried forward, plus 18% of your prior year’s earned income (to a stated maximum), plus any pension adjustment reversal (PAR), less your PA for the prior year, less any PSPA for the current year.