REGISTERED PENSION PLANS Registered Pension Plans are among the fastest growing segments of the retirement plan market in Canada today. Their low cost and great flexibility make them especially suited to today's businesses.
TYPE OF PLAN
DEFINED BENEFIT
MONEY PURCHASE
Contribution Amount Employer
Unknown - Determined by Actuarial Valuation
Determined by Formula
Employee
Determined by Formula
Determined by Formula
Benefit Amount
Determined by Formula
Determined by Formula
Tax Treatment
Contributions and Investment Earnings sheltered from tax until retirement
Contributions and Investment Earnings sheltered from tax until retirement
Administration Costs
Generally higher due to greater legislative and accounting complexity, need for actuarial support
Generally lower due to ease of administration
Understandability
Difficult to understand
Easier to understand
DEFERRED PROFIT SHARING PLANS
A profit sharing plan can be defined as an arrangement under which amounts are paid to or for the benefit of the employees based on some reference to the profits of the company.
Since profit sharing plans provide benefits related to a company's financial results, the amount of benefit provided can vary greatly from year to year. This factor should be reflected in the plan design to minimize the effects of a "bad year" on lower income employees.
There are several reasons for implementing Profit Sharing Plans
To promote a sense of partnership between the employees and the employer by providing the employees with a direct interest in the financial results of their employer.
To provide a financial buffer in bad times by linking the employer's expenses with profitability.
To provide employees with additional income for retirement.
To compensate employees in a tax effective manner.
One of the most common types of Profit Sharing Plans in Canada is the Deferred Profit Sharing Plan. A deferred profit sharing plan is one which is accepted for registration under the Income Tax Act. Although DPSPs are subject to more legislative constraints than other types of profit sharing plans, they offer significant tax advantages to employees and more planning options for the employer.
Specifically, contributions made by the employer under the plan are, subject to certain limits, deductible to the employer as an expense, and do not result in an immediate taxable benefit to employees.
RPP/RRSP/DPSP COMPARISON
DESCRIPTION
RPP
RRSP
DPSP
Income Splitting
No
Yes
No
Eligibility
Proprietors
Partners excluded
Any Taxpayer
Proprietors
(Partners/Shareholders excl.)
Payout Options at Retirement
Life Annuity
Life Income Fund
Life Annuity
Cash Term, Certain RRIF
Life Annuity
Cash 10 year payout RRSP/RRIF
Payment Flexibility
During Calendar Year, Payroll Deducted, Employer Contributions within 120 days of fiscal year end
Life Annuity
Life Annuity
Locking-In
Yes
No
No
Death Benefit
Transfer by spouse
Transfer by spouse
Transfer by spouse
Past Service
Employer Only
Carry Forward
None
Employer Contributions
Minimum 1% of earnings
Not officially recognized
Out of profits.
No minimum
Tax Reduction at Source
Yes
Yes - if payroll deduction but prior approval required
