Skip to content

Pensions

Defined Contribution Pension Plans in Canada Explained

In a defined contribution (money purchase) pension plan, you and usually your employer put money into your own account, and your retirement income depends on how much goes in and how the investments perform. The pension amount isn't known until you retire, unlike a defined benefit plan, which promises a set formula.

Last verified How we check our facts

How it works

  • Each member has an individual account where contributions and investment earnings are credited.
  • Your benefit isn't set until it is paid out.
  • Employer contributions create a pension adjustment (T4 box 52) that reduces next year's RRSP room.

Defined contribution vs defined benefit

Defined contributionDefined benefit
What's fixedContributionsThe pension formula
Who carries investment riskYouThe plan
Typical formulasAccount balance at retirementFlat benefit, career average or final/best average earnings

Some plans combine both. A simplified pension plan is a money purchase plan with lighter administration for employers.

Related

Types of Pension Plans in Canada: Public, Workplace and Personal Canada's retirement system has three layers: public pensions (CPP or QPP and Old Age Security), workplace registered pension plans (defined benefit, defined contribution or a mix), and personal savings like RRSPs, TFSAs and pooled plans such as PRPPs and the Saskatchewan Pension Plan. Pension Adjustment (T4 Box 52) Explained The pension adjustment in box 52 of your T4 is the value of the pension benefits you earned that year in a registered pension plan or deferred profit-sharing plan. The CRA uses it to reduce your RRSP deduction limit for the next year. You don't enter it on your return. RRSP and Your Taxes: Deductions, Withdrawals and Withholding Tax RRSP contributions reduce your taxable income, up to your deduction limit shown on your notice of assessment. Withdrawals are taxable, and your bank withholds 10% (up to $5,000), 20% ($5,000 to $15,000) or 30% (over $15,000) outside Quebec. The Home Buyers' Plan and Lifelong Learning Plan let you withdraw without paying tax if you repay.

Sources

North Help Desk is an independent guide, not a government website. Rules, amounts and phone hours can change; always confirm on the official page before you act. Spotted something out of date? Tell us.