Income Tax Considerations

The Income Tax Act (ITA) governs the service you can buy, the methods of payment, whether a maximum purchase limit applies and whether your purchase lowers your taxable income.

CRA benefit limits

Canada Revenue Agency (CRA) has some limits on the amount of the benefit you receive for the service you buy back.
When did the service occur? CRA benefit limit
Service in 1992 and after $2,944.44 of pension per year of service (limit for 2018)
Service in 1990 and 1991  No limit

Service before 1990

  • You were a member of a pension plan 
    (other than CPP)
  No limit

Service before 1990

  • You were not a member of a pension 
    plan (other than CPP)
  $1,962.96 of pension per year of service (limit for 2018)

Service purchases and tax-deductibility

The cost of buying service may be tax-deductible and may affect your RRSP room, depending on the type of service, when it occurred and how you pay for it. The tax deduction applies in the year the payment is made, or can be carried forward to apply in subsequent years.

Transfer from a registered retirement savings vehicle

Funds transferred into OMERS from an RRSP, locked-in retirement account (LIRA) or registered pension plan are already tax-sheltered. You cannot claim them again as a tax deduction for a service purchase.

Cash payment

  • If you pay for the service purchase in cash (i.e., by personal cheque or through OMERS monthly payment plan), all or some of the amount may be tax-deductible, depending when the service occurred and if you were a member of a registered pension plan.
  • The annual interest rate for the OMERS monthly payment plan are tax-deductible.
  • If you borrow money from a financial institution to purchase service, the interest is not tax-deductible.
  • OMERS will issue a tax receipt for the amount received in each tax year.

Service before 1990: If you were a member of a registered pension plan (other than CPP)

The cost of the service purchase is fully tax-deductible, with an annual deduction limit. In any one calendar year, you may deduct the lesser of:

  • the amount you paid (or carried forward) or $3,500 minus OMERS current service contributions and any past service contributions you made during the year.

Example

Brad bought back 3 years of pre-1990 service at a cost of $13,420. Brad was an OMERS member during that time, so his entire purchase cost is tax-deductible. 

In 2008, Brad contributed $2,250 to OMERS for his current service. He deducted $1,250 of his $13,420 purchase ($3,500 – $2,250 = $1,250). He carried forward the balance of his purchase cost ($13,420 – $1,250 = $12,170). 

In 2009, Brad contributed $4,000 to OMERS for his current service. He could not deduct any of his purchase cost because contributions for his current service exceeded the $3,500 limit. He continued to carry forward the balance of $12,170. 

In 2010, Brad retired. He contributed only $1,000 to OMERS for his current service. He deducted $2,500 ($3,500 – $1,000 = $2,500) of the balance of $12,170 of his purchase. He carried forward a balance of $9,670 ($12,170 – $2,500 = $9,670). 

Now that Brad is retired, he is not making current service contributions to OMERS. From 2011 on, he can deduct $3,500 per year until the balance of $9,670 is fully deducted.

Service before 1990: If you were not a member of a registered pension plan (other than CPP)

The total amount you can deduct is the lesser of:
  • the total cost of the service purchase or $3,500 times the number of years* to which the purchased service relates
In any one calendar year, you can deduct the lesser of:
  • the amount you paid (or carried forward) or $3,500.

If you exceed the maximum deductible amount in a calendar year, you may carry forward the balance to subsequent years until you use up your total allowable deduction.

*“Number of years” includes any portion of a calendar year, e.g., for service from June 2008 to February 2009, you would multiply 2 years x $3,500.

Example

Debra bought back 5.5 years of pre-1990 service at a cost of $30,600. Debra did not contribute to a pension plan during the 6 calendar years (1984 to 1989). 

Debra's total tax-deductible limit is $3,500 x 6 years* = $21,000. The lump-sum amount she paid ($30,600) is over the limit by $9,600; this portion is not tax-deductible. 

In any one calendar year from the date of her purchase, Debra may deduct $3,500 and carry forward the balance until the $21,000 is fully deducted. 

Another option Debra may consider is buying less of the service, and not exceed her $21,000 tax-deductible limit, so instead of buying 5.5 years, she could buy 3.75 years.

*Although 5.5 years were purchased, 6 years is used because partial years count as full years when determining the tax-deductible limit.

Service after 1989

The amount paid in cash is fully tax-deductible in the calendar year it is paid, but you must have approval from CRA for a past service pension adjustment (PSPA), if applicable. Whether you can use the full deduction depends on your taxable income in that year.

Example

Chris purchased 3 years of post-1989 service in 2009 at a cost of $6,000. Chris paid for the service by personal cheque payable to OMERS. Chris may claim and deduct the entire $6,000 of the service cost in the year it was paid.

Service after 1989 and PSPAs

If you are buying post-1989 service, OMERS will calculate a past service pension adjustment (PSPA) and report it to CRA. CRA uses the PSPA to determine if you have enough RRSP room for the purchase.

Notes:

  • If you pay by RRSP transfer, the PSPA is reduced by the amount of your payment.
  • PSPAs under $50 do not need CRA approval.

If the PSPA gets CRA approval, CRA will reduce your available RRSP room by the amount of the PSPA.

If the PSPA does NOT get CRA approval, CRA will contact you. Your options may include:

  • Withdraw or transfer funds from your RRSP to create more RRSP room for the PSPA.
  • Buy less of the service.
  • CRA may let you exceed your available RRSP room by up to $8,000, leaving you with a negative RRSP deduction limit. You could not make further RRSP contributions until this limit becomes positive again as you earn new RRSP room in the future.

Example

In 2008, David bought 4 years of service (January 1, 1990 to December 31, 1993) for $45,000. David paid for the service using funds from his RRSP. Since these funds were already tax-sheltered, they were applied toward reducing the PSPA amount. PSPA approval was not required from CRA.

Important! Please notify us immediately if CRA does not approve your PSPA. If you do not wish to make room in your RRSP for the purchase, we will refund any payment received and remove the credited service from your OMERS record (though it may still count as eligible service).
When the service occurred Portion of the cost that is tax-deductible Deduction limit per year Carry-over
Service period after 1989 Total cost No limit for the year of purchase No carry-over

 Service period before 1990

  • While you did contribute to a registered pension plan
  Total cost

 The lesser of:

  • The amount paid or carried forward; or
  • $3,500 minus all other OMERS contributions
 Carry-over the deduction until the balance = $0

 Service period before 1990

  • While you did not contribute to a registered pension plan

 lesser of:

  • total cost; or
  • $3,500 × years or part-years purchased

 lesser of:

  • The amount paid or carried forward; or
  • $3,500
 Carry-over the deduction until the balance = $0