What it means
In a DPSP, the employer decides how much to contribute from profits, and the contribution is placed in a trust account that invests on behalf of employees. The employer receives a tax deduction for the contribution, within limits set by tax rules.
Employees do not pay tax on the contributions until they receive money from the plan, which is why it is called deferred. Unlike a typical pension plan, the employer is not promising a specific benefit.
The amount depends on the profits the business chooses to share and on how the investments perform. Employees cannot contribute to a DPSP themselves, so it works alongside, not instead of, other savings such as registered retirement savings plans.
Contributions are normally allocated using a formula in the plan, for example in proportion to each employee's earnings or years of service. Contributions are capped each year by limits set by the tax authority, and these are linked to the pension limits, so firms need to check the current rules.
Employer contributions must vest, which means become the employee's property, within a maximum period set by law, which has historically been short. A DPSP can also be offered to some employees and not others, as long as the plan rules are fair and follow the tax authority's requirements, for example that owners and their close relatives are generally not allowed to participate.
Employers should take professional advice when choosing who is eligible. For employers, a DPSP aligns the interests of staff with the success of the business.
Because contributions depend on profits, the plan is flexible, and in a poor year the employer can contribute less. Many companies pair it with other benefits, and it is especially attractive to growing businesses that want to keep skilled employees.
Employees should understand the limits too. Employer contributions generally reduce the amount of room they have for their own registered retirement savings through an adjustment to their contribution limit, and withdrawals are taxed as income.
They should also check how their share is invested and what happens to their balance if they leave the company.
In practice
Real-world examples.
Example
A Canadian restaurant group has a strong year and contributes $40,000 into its DPSP. The money is allocated among 50 employees in proportion to their pay. Each employee sees a larger retirement balance without paying any tax yet.
Example
A software firm uses its plan to reward long-serving staff by allocating contributions on the basis of years of service. A developer with eight years of service receives a bigger share than a new hire. The firm believes this reduces turnover.
Example
An accountant helps a small business owner compare a DPSP with a cash bonus. A cash bonus is taxed immediately, whereas the plan contribution is deductible for the company and tax-deferred for the employee. The owner decides to use the plan for part of this year's profit sharing.
Formula
Calculation
Employee's allocation = Employer's total contribution x (Employee's eligible earnings / Total eligible earnings of all participants)
Worked example: a company decides to contribute $50,000 to its DPSP. Total eligible earnings of all participating employees are $2,500,000, and one employee earns $75,000.
Step 1: Employee's share of earnings = $75,000 / $2,500,000 = 3%
Step 2: Employee's allocation = 3% x $50,000 = $1,500
The employee receives a $1,500 allocation, which is placed in the trust and grows tax-deferred until it is withdrawn.Case study
Seen in the real world.
Maplewood Printing is an illustrative, fictional Canadian company with 20 employees and a profitable year. The owner wanted to share profits but was worried that cash bonuses would be spent quickly and taxed at the employees' full rates.
She set up a DPSP and contributed $60,000, allocated in proportion to earnings. A press operator who earned $50,000 out of total eligible earnings of $1,000,000 received 5%, or $3,000, in her account.
The company claimed a tax deduction for the contribution, the trustee invested the money in a balanced fund, and staff turnover fell over the following years as employees saw their balances grow. The illustrative lesson is that a DPSP can turn profit into long-term savings, though employees should still plan their own retirement contributions.
Watch out
Common mistakes.
- Thinking employees can contribute to a DPSP, when only the employer is allowed to pay in.
- Assuming the money is tax-free, when it is taxed as income when withdrawn.
- Treating it as a guaranteed pension, when the benefit depends on contributions and investment returns.
Questions
People also ask.
Who can set up a DPSP?
A Canadian employer, typically a corporation, can set one up for its employees, and the plan must follow the registration rules of the tax authority.
How is a DPSP different from a group RRSP?
In a DPSP only the employer contributes and contributions depend on profits, while in a group RRSP employees usually contribute and the employer may match.
What happens if I leave the company?
Your vested balance generally stays yours and can usually be transferred to another registered plan, but you should check the plan's terms.
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