Title: Deferred Profit Sharing Plan (DPSP) — A practical guide for employers and employees
Key takeaways
– A DPSP is a Canadian employer‑sponsored, registered profit‑sharing plan that lets employers share company profits with employees on a tax‑deferred basis.
– Employer contributions (not employee contributions) are tax‑deferred for the employee until withdrawal and generally reduce the employee’s RRSP room through a pension adjustment (PA).
– 2024 maximum employer contribution to a DPSP: the lesser of 18% of the employee’s remuneration or $16,245.
– Vesting, plan design, investment choices and rollover/withdrawal rules vary by plan — check your plan documentation or plan administrator for specifics.
What is a Deferred Profit Sharing Plan (DPSP)?
A DPSP is a registered pension arrangement under Canadian tax rules that allows an employer to make discretionary contributions to employees’ accounts based on company profits. Contributions made by the employer are not taxed to the employee when made; instead the funds grow tax‑deferred and are taxed when withdrawn. Trustees or a plan administrator manage the assets and the plan must be registered with the Canada Revenue Agency (CRA).
In‑depth look at how DPSPs work
– Contributions: Only employers contribute to DPSPs. Employer contributions may be discretionary or formula‑based (for example, a percentage of profit or salary) as set out in the plan text.
– Registration: A DPSP must be registered with CRA to receive the tax treatment provided by the Income Tax Act.
– Investment choice: Many DPSPs allow employees to choose investments from a menu; some plans may have default options or require company‑stock purchases.
– Growth and taxation: Investment earnings accumulate tax‑deferred. Employees pay tax on amounts when withdrawn (or transferred to a taxable account) unless the funds are rolled into other registered plans that preserve tax deferral.
– Transfers and rollovers: Vested DPSP balances can typically be transferred (rolled over) to an RRSP, RRIF, or a locked‑in registered pension arrangement in ways that preserve tax deferral. Rules vary by plan.
– Vesting: Vesting rules vary — some plans vest immediately; others have a vesting period. Unvested contributions may be forfeited on termination per the plan rules.
Fast fact
Employer DPSP contributions generate a pension adjustment (PA), which reduces the employee’s RRSP contribution room for the year. See the CRA Pension Adjustment Guide for details.
Key requirements for Deferred Profit Sharing Plans (DPSPs)
– Plan must be registered with CRA.
– Only employer contributions are allowed; employee contributions are not permitted.
– The plan document must specify eligibility, contribution formula, vesting rules, investment rules, and transfer/withdrawal provisions.
– Employer contributions and plan operations must follow CRA limits and reporting rules (including PA reporting on T4 slips).
Benefits of DPSPs for employers
– Flexible contributions: Employers can link contributions to profitability and vary contributions year to year within plan rules.
– Recruitment/retention tool: Employers can use DPSPs to reward employees and encourage retention (especially if a vesting schedule is used).
– Administrative alternative: When paired with a group retirement savings plan, a DPSP can be a lower‑cost option compared with a traditional defined‑benefit pension plan.
– Potential tax treatment: Employer contributions are generally deductible as a business expense (subject to tax rules); contact a tax advisor or CRA guidance for details.
Benefits for employees
– Tax deferral: Contributions and investment earnings are tax‑deferred until withdrawal.
– Growth potential: Compounded tax‑deferred growth can materially increase retirement savings over time.
– Portability: Vested balances can often be moved to RRSPs or other registered plans on leaving employment or at retirement.
– Early access: Some plans permit withdrawals before retirement subject to plan and tax rules.
What are the contribution limits for DPSPs?
– For 2024 the maximum employer contribution to a DPSP for an employee is the lesser of:
– 18% of the employee’s remuneration for the year, and
– $16,245 (the dollar limit for 2024).
– Note: Contributions to a DPSP generate a pension adjustment (PA). The PA is reported on the employee’s T4 and reduces the employee’s RRSP contribution room for the year. See CRA guidance for how PAs are calculated and reported.
What is a Registered Retirement Savings Plan (RRSP) and how it interacts with a DPSP
– An RRSP is an individual registered defined‑contribution retirement vehicle (similar in role to a U.S. 401(k) for some purposes).
– Vested DPSP funds can usually be rolled into an RRSP (or RRIF) to preserve tax deferral.
– Employer DPSP contributions reduce RRSP contribution room through the PA mechanism — employees should monitor their RRSP room to avoid overcontribution.
What happens if an employee with a DPSP dies?
– Surviving spouse/common‑law partner: A vested DPSP balance can generally be transferred to the spouse’s registered retirement plan (for example, an RRSP or RRIF) on a tax‑deferred basis.
– Other beneficiaries: Amounts paid to non‑spouse beneficiaries are generally taxable to the estate or beneficiary in the year of death unless other specific plan rules allow a rollover. Consult the plan document and CRA guidance for particulars.
Practical steps — for employees
1. Get the plan text: Ask HR or the plan administrator for the DPSP booklet or summary, including vesting rules and investment options.
2. Confirm eligibility and vesting: Know when you become eligible and when employer contributions become vested — this affects what you keep if you leave.
3. Monitor your pension adjustment (PA): Check your T4 and CRA MyAccount to see the PA and updated RRSP contribution room.
4. Choose investments: If the plan permits, select an investment mix that matches your risk tolerance and time horizon.
5. Plan withdrawals and rollovers: When leaving the employer or at retirement, evaluate rollover options (RRSP, RRIF, locked‑in plan) to preserve tax deferral, or plan for taxation on withdrawals.
6. Estate planning: Name beneficiaries correctly and review how your DPSP interacts with your will, spousal plans, and tax planning.
7. Seek advice: For complex situations (large balances, death, cross‑border tax issues) consult a financial advisor or tax professional.
Practical steps — for employers (setting up or managing a DPSP)
1. Decide plan design: Determine eligibility rules, contribution formula (discretionary vs. formula), vesting schedule, and whether to pair with other plans.
2. Register the plan: Register the DPSP with CRA and obtain necessary documentation.
3. Appoint trustees/administrator: Assign fiduciary responsibilities for investments and plan operation.
4. Draft plan documents: Prepare plan text, enrolment forms, communications and member booklets.
5. Integrate payroll and reporting: Ensure payroll systems report PAs and handle required remittances and tax reporting to CRA.
6. Communicate to staff: Explain how the plan works, vesting, investment options, and tax implications.
7. Monitor contribution limits: Ensure annual contributions comply with 18%/dollar limits and CRA rules.
8. Review periodically: Reassess plan competitiveness, administrative processes and regulatory changes.
Example — simple contribution illustration (2024)
– If an employee’s annual remuneration is $60,000:
– 18% × $60,000 = $10,800, which is less than the $16,245 2024 dollar limit.
– Employer could contribute up to $10,800 for that employee in 2024 (subject to plan rules and profitability).
Common questions (brief)
– Can employees contribute to DPSPs? No — contributions come from the employer only.
– Can I withdraw DPSP money before retirement? Typically yes for vested amounts, but taxable on withdrawal; check plan rules and potential withholding taxes.
– Will DPSP contributions reduce my RRSP room? Yes — they generate a pension adjustment (PA) that reduces RRSP room for the year.
The bottom line
A DPSP is a flexible, employer‑sponsored way to share company profits with employees while providing tax‑deferred retirement savings. For employees it offers tax‑deferred growth and portability; for employers it provides a cost‑effective profit‑sharing tool. Because plan details (vesting, investment choices, transfer rules) and tax interactions (pension adjustments, rollover rules) vary, review your actual plan documents and consult CRA guidance or a qualified advisor for personal or company decisions.
Sources and further reading
– Government of Canada — Register a Deferred Profit Sharing Plan — Overview
– Government of Canada — Contributing to a Deferred Profit Sharing Plan
– Government of Canada — Payments from a Deferred Profit Sharing Plan
– Government of Canada — Pension Adjustment Guide
– Government of Canada — MP, DB, RRSP, DPSP, ALDA, TFSA limits, YMPE and the YAMPE
– Investopedia — Deferred Profit Sharing Plan (DPSP)
– RBC Wealth Management — Pensions Part 3 — Deferred Profit Sharing Plans
(If you’d like, I can: 1) draft an employee checklist tailored to your plan, 2) prepare sample communications for HR to explain a DPSP to staff, or 3) run a contribution example for specific salary figures.)
(Continuing the article — additional sections, examples, practical steps, and a concluding summary.)
Additional Important Sections
Vesting, Leaving Employment, and Withdrawals
– Vesting: Whether employer contributions are “vested” (i.e., belong to the employee) immediately or after a waiting period depends on the plan’s terms. Some DPSPs vest immediately; others include a vesting schedule. Always review your plan documents or ask the plan administrator for the plan’s vesting rules.
– Leaving employment before vesting: Unvested amounts may be forfeited or returned to the employer according to the plan’s rules.
– Withdrawals and transfers: Vested DPSP amounts can generally be:
– Transferred on a tax-deferred basis to an RRSP (or a registered retirement income fund — RRIF) or another eligible registered plan; or
– Withdrawn in cash (subject to income tax on withdrawal and potentially withholding at source), with the full amount included in the employee’s taxable income for the year.
– Reporting: Employer contributions to a DPSP are reported on the employee’s T4 and generate a Pension Adjustment (PA) that reduces that employee’s RRSP deduction limit for the year.
Tax Treatment and Interaction with RRSPs
– Tax-deferral while invested: Employer contributions and investment growth inside a DPSP are not taxed while they remain in the plan.
– Tax on withdrawal: When funds are withdrawn in cash, they are taxed as income in the year of withdrawal. If transferred to an RRSP or RRIF, taxation is deferred until future withdrawal from those plans.
– Pension Adjustment (PA): DPSP contributions generate a PA that reduces the employee’s available RRSP contribution room for that tax year. Typically, the PA reflects the pension value earned in the year (for defined contribution–type plans this equals employer contributions allocated in the year). Check your T4 for the PA amount and consult the CRA’s Pension Adjustment Guide for details.
– Employer tax treatment: Employer contributions to a DPSP are generally tax deductible for the employer when made, subject to plan and CRA rules.
Contribution Limits — Rules and Examples
– Annual limit (2024): The total employer contribution to a DPSP for an employee in 2024 cannot exceed the lesser of:
– 18% of the employee’s earned compensation for the year, or
– $16,245 (the dollar limit for 2024).
– Example 1 — below the dollar cap:
– Employee compensation: $80,000
– 18% of compensation = 0.18 × $80,000 = $14,400
– Allowed DPSP contribution (2024) = $14,400 (since it’s less than $16,245)
– Example 2 — hitting the dollar cap:
– Employee compensation: $100,000
– 18% of compensation = $18,000
– Allowed DPSP contribution (2024) = $16,245 (capped at the dollar limit)
– Note: These are employer contributions only; employees cannot contribute directly to a DPSP. Also note that DPSP contributions reduce RRSP room via the PA — plan participants should consult their Notice of Assessment and T4 to monitor RRSP room.
What Happens If an Employee with a DPSP Dies
– Surviving spouse/common-law partner: The vested DPSP balance can typically be transferred tax-deferred to the spouse’s registered plan (e.g., RRSP or RRIF), maintaining tax deferral.
– Other beneficiaries: If funds are paid out in cash to other types of beneficiaries, the amounts generally become taxable in the beneficiary’s hands (subject to plan and CRA rules).
– Practical action: Ensure beneficiaries are properly designated in the plan documents and that the plan administrator is aware of them. In the event of a death, contact the plan administrator promptly for required forms and options.
Comparisons: DPSP vs RRSP vs Group RRSP vs Pension Plans
– DPSP vs RRSP:
– DPSP is employer-funded; employees do not contribute directly.
– RRSP is typically individual (though there are group RRSPs) with employee and/or employer contributions.
– Both offer tax-deferred growth; withdrawals are taxable.
– DPSP contributions generate a Pension Adjustment that reduces RRSP room.
– DPSP vs Group RRSP:
– Group RRSPs often allow employee contributions and may include employer matching; DPSPs are employer contributions only.
– Transfers between plans can be executed, but tax and PA implications differ.
– DPSP vs Registered Pension Plan (RPP):
– DPSPs are often simpler and less costly for employers than defined benefit pension plans.
– RPPs (especially defined benefit plans) have stricter funding, regulatory and solvency requirements.
– DPSPs provide employer-sponsored retirement savings without requiring the employer to guarantee a specific retirement benefit level.
Practical Steps — For Employers (Setting Up and Managing a DPSP)
1. Decide plan design: Eligibility (which employees), allocation method (pro rata, flat percent), vesting schedule (if any), and whether to pair with a group RRSP.
2. Register the plan: Follow CRA rules for registering a DPSP and maintain required documentation.
3. Select trustees/custodians: Appoint a trustee or financial institution to hold and invest plan assets.
4. Choose investments: Offer investment choices consistent with fiduciary duties and employee needs.
5. Communicate: Provide plan documents, employee booklets, and ongoing statements. Explain vesting, portability and tax implications.
6. Reporting and compliance: Calculate and report Pension Adjustments on T4 slips, make required filings, and ensure contributions comply with limits.
7. Seek professional guidance: Work with legal/tax advisors and plan administrators to ensure compliance and appropriate plan design.
Practical Steps — For Employees (Managing Your DPSP)
1. Read the plan documents: Understand eligibility, vesting, investment options, and withdrawal/transfer rules.
2. Track the pension adjustment: Check your T4 and Notice of Assessment to monitor RRSP room and avoid overcontribution.
3. Choose investments: If allowed, pick investments that fit your risk tolerance and retirement timeline.
4. Coordinate with other retirement savings: Consider how DPSP contributions affect your RRSP strategy and TFSA planning.
5. Upon leaving or retirement: Decide whether to transfer the DPSP balance to an RRSP/RRIF (to defer tax) or withdraw (and pay tax).
6. Designate beneficiaries: Ensure the plan’s beneficiary designations are up to date.
7. Get advice: Consult a financial advisor or tax professional for complex situations (e.g., large lump sums, estate planning, or cross-border tax issues).
Sample Scenarios (Illustrative)
– Scenario A — Mid-career employee:
– Salary = $75,000. Employer contributes 10% of salary to DPSP ($7,500).
– The employee’s RRSP room is reduced by the Pension Adjustment (reporting reflects the PA amount).
– The employee leaves company after 5 years and transfers vested DPSP funds into their RRSP to continue tax deferral.
– Scenario B — High earner hitting cap:
– Salary = $120,000. 18% = $21,600 but capped at $16,245 for 2024.
– Employer contributes the cap ($16,245). The employee’s RRSP room is reduced by the PA equal to the contribution amount as reported.
Common FAQs
– Can an employee contribute to a DPSP? No — DPSPs are employer-funded. Employees may still have individual RRSPs or participate in group RRSPs if offered.
– Are employer contributions taxable to the employee immediately? No — they are tax-deferred while inside the DPSP. They become taxable when withdrawn or when transferred to a non-registered account.
– Do DPSP contributions reduce RRSP room? Yes — via the Pension Adjustment reported on your T4.
– Can I transfer DPSP funds to an RRSP? Yes — eligible transfers to RRSPs usually preserve tax-deferred status.
Where to Get Official Information and Help
– Government of Canada — Register a Deferred Profit Sharing Plan, Payments from a DPSP, Pension Adjustment Guide, and contribution limits are authoritative resources.
– Your employer’s human resources department or the plan administrator can provide plan-specific details.
– Financial advisors and tax professionals can help with complex planning and large balances.
Concluding Summary
A Deferred Profit Sharing Plan (DPSP) is a valuable employer-sponsored retirement vehicle in Canada that lets employers share profits with employees in a tax-deferred manner. Contributions grow tax-free inside the plan until withdrawn, but they do reduce an employee’s RRSP room through the Pension Adjustment. Employees should understand vesting rules, transfer options, and how DPSP allocations integrate with overall retirement planning. Employers benefit from a flexible, generally less costly alternative to traditional pension plans, while still providing retirement benefits that can help attract and retain staff. For plan-specific rules, tax consequences, and the latest limits, consult the plan documentation, CRA guidance, and a qualified advisor.
Sources
– Investopedia: “Deferred Profit Sharing Plan (DPSP)” (Investopedia / FluxFactory)
– Government of Canada: Register a Deferred Profit Sharing Plan — Overview; Payments from a Deferred Profit Sharing Plan; Pension Adjustment Guide; Contributing to a Deferred Profit Sharing Plan; MP, DB, RRSP, DPSP limits, YMPE and the YAMPE; What’s New.
– RBC Wealth Management: “Pensions Part 3—Deferred Profit Sharing Plans.”
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