Value in your Plan: tax effective contributions

One of the most cost effective advantages of belonging to a defined benefit pension plan is often one of the most overlooked. Under the Income Tax Act, the federal government provides several forms of tax relief to Canadians who make contributions to registered pension plans like ours.

First, you receive immediate tax savings when you contribute to the Plan. Your pension contributions are deducted from your gross income, which reduces your taxable income - the amount on which your taxes are deducted. By the end of the year, the income on which you pay taxes has been reduced by the amount of your pension contributions. This has the same effect as an RRSP contribution - but your employer reduces your tax right away, so that you don't have to wait until you file your tax return.

Secondly, your contributions are 100% matched, or doubled, by your employer. These contributions are not a taxable benefit to you - you do not count this as income.

Finally, like your RRSP savings, the contributions you and your employer make are allowed to accumulate in the pension fund tax-free. Once you retire and begin collecting your pension from the Plan, income tax will be applied to your payments. However, in most cases, it will be at a lower marginal tax rate than when you were employed.

Also, keep in mind that you may have the option, when filing your tax return, to split pension income with your spouse for tax reporting purposes. If income is eligible, you can split up to 50% of pension income from the spouse in the higher tax bracket to the spouse in a lower tax bracket, thus reducing the tax payable. Pensioners are responsible for determining the optimal amount of income to split - the CAAT Plan and CIBC Mellon, our payroll pension agent, are not part of the income splitting process.

Your combined contributions are a tax-effective way to save, which will one day provide you with a pension for life and a more secure financial future.