Retirement Savings

Group RRSP: In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The employer also can elect to make contributions into the employees account. In some cases the employer will establish a matching program and have other stipulations that the employee must meet to continue receiving the company’s contribution. The Group RRSP is very flexible.

Instant Tax Savings: The primary difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year. With an individual RRSP contribution, the tax break comes as a refund after taxes are filed the following year. This means of course, the government gets to enjoy an interest free loan of the contributor’s money. On the other hand, Group RRSP contributions are made on a pre-tax basis, so the amount of tax withheld by the employer is calculated after the group RRSP contribution is deducted from taxable income.

Result – instant tax savings to the employee. With a group RRSP, you will not overpay your taxes during the year and then have to wait until your income tax return is processed to receive a refund.

A Group RRSP reduces taxes at source and therefore provides the difference as extra take-home pay to be spent or saved as the employee pleases.

Deferred Profit Sharing Plan: Involves an arrangement whereby an employer may share with either all or a designated group of employees the profits from the employer’s business. Large shareholders (i.e., individuals who own more than 10% of company stock) are excluded from plan membership. The employees themselves do not make contributes to the plan.

DPSP’s can be used as a supplement to a company’s Group RRSP or as a company pension plan. Like other registered pension plans, a DPSP must be registered with the CRA and comply with the terms of the Income Tax Act.

The amounts payable by the employer under a DPSP are normally calculated as a portion of profits (e.g., 5% of profits as defined in the plan), but can be a fixed dollar amount per plan member or fixed percentage of payroll. The payments accumulate tax-sheltered, in trust for the benefit of the employees or former employees, as provided under subsection 147(1) of the Act. The contributions are tax deductible by the employer and are not taxable until paid out to the employee.

Combination DPSP/ Group RRSP: This type of arrangement allows you to take advantage of the features of both plans.

The employer contributions are made to the DPSP while employee contributions are made into the Group RRSP. The employer contributions can be made contigent upon the employee contributing into the Group RRSP.

Highlights

  • No minimum employer contributions
  • Employer contributions to the DPSP are not subject to payroll taxes
  • The employer may impose a vesting period of up to 2 years on the DPSP only
  • Withdrawals can be restricted to termination, death, and retirement on the DPSP
  • Owners or relatives of owners cannot participate in the DPSP portion
  • Terminated employees can withdraw the full vested amount subject to taxation
  • The DPSP creates a Pension Adjustment
  • The DPSP can be used to share profits with employees or as a pension plan
  • Employer and employee contributions can be made in any combination but cannot exceed an individual’s personal RRSP limit

Pension Plan: A pension plan is a contractual arrangement in which the employer provides benefits to employees upon retirement. Many plans include disability and death benefits. A pension plan involves recognizing the employer’s cost and the funding of pension benefits. Pension expense is tax-deductible to the employer. The employee is taxed when the pension annuity is received from employer contributions or originally not-taxed employee contributions. The two most common types of plans are defined contribution pension plan and defined benefit pension plan. Pension plan provisions vary from company to company. For example, the pension plan may be contributory or noncontributory, meaning the employee may or may not also make payments to the pension plan.

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