Employee Savings Plans
Volume No. 14-18
“A DPSP may be a better way to create a retirement savings plan for employees.”
Many employers set-up a group RRSP for their employees and make matching contributions against their employees’ contributions. A group RRSP has the advantage of permitting the employee to make contributions with pre-tax dollars because source deductions can be waived if the contribution is made directly to the RRSP.
However, in some cases, a Deferred Profit Sharing Plan (DPSP) can yield better tax results for both the employer and employees.
Employer contributions to a group RRSP are remuneration or “salary” to the employee for tax purposes and must be shown on the employee’s T4 slip. The increased income is offset by the employee’s deduction of the RRSP contribution but the result may not be entirely “tax neutral”. If the employee has not already paid the maximum CPP and/or EI amounts this additional remuneration will come at a cost to the employer and the employee. The employee will have additional CPP and EI withheld. The employer will have to pay the employer’s portion of CPP and EI and, where applicable, increased provincial payroll taxes.
In addition, the employer’s contribution to the employee’s RRSP will “soak up” more of the employee’s RRSP contribution room, meaning that there will be less RRSP contribution room going forward for the employee.
A DPSP may be a better way to create a retirement savings plan for employees. There are restrictions on participating in such a plan for owner managers who own 10% or more of the corporation or a related corporation (or for any person related to such shareholder). If this restriction does not apply, a DPSP is a great way to help your employees save for retirement because, unlike a group RRSP, the following will apply:
- The employer’s contribution to the DPSP is deductible to the employer and not taxable to the employee;
- The employer’s contributions are not considered to be remuneration for payroll purposes. This means that no additional CPP, EI or payroll tax need to be paid on such;
- DPSP contribution limits have similar dollar limits as an RRSP, being 18% of pensionable earnings, (subject to the restriction of one-half of the dollar limit for money – purchase plans).
A DPSP may be just the right kind of plan for your company and your employees. Be sure to consult a tax expert in the area before proceeding.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
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