DPSP Advantage

A Deferred Profit Sharing Plan allows employees to participate in the profits of their company, while extending tax benefits to both employee and employer.

A 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.

Employer contributions into a DPSP are limited to the lesser of 18% of the employee’s compensation for the year or a dollar limit equal to one half of the defined contribution pension plan limit as follows:

1998 through 2002 - $6,750, 2003 - $7,250, 2004 - $7,750, 2005 - indexed.

Features of a DPSP include:

• All contributions and expenses are tax-deductible by the employer. Contributions are not added to members’ earnings and are not subject to payroll taxes. Employees earning in excess $39,000 will pay EI & CPP on contributions.
• Contributions accumulate for the plan members on a tax-sheltered basis.
• DPSP contribution reduces the employee’s RRSP room for the following year (allows full RRSP contribution for current year). The reduction shows up as a Pension Adjustment (PA) amount on the employer’s T4.
• Incentive opportunities. The employer has flexibility to reward according to member performance. Members may be motivated to improve their performance since their benefits are tied directly to company profit.
• Flexibility of cost control. DPSP contributions are related to corporate profitability and can be omitted in unprofitable years.
• Contributions vest in members after two years (at most) of plan participation and are not locked-in. Usually a member has the right to withdraw vested benefits from the plan at any time. Contributions can be cashed out or used to purchase an annuity.
• Access to funds. Depending on the plan, DPSP members may withdraw their holdings while still employed. Terminated employees can withdraw the full vested amount subject to taxation.
• Preferred group rates. Members enjoy higher interest rates due to group purchasing power. Retiring members enjoy preferred rates for annuity purchases so their accumulated funds buy more pension benefits.

THE NEXT STEP IS YOURS. TAKE THE FIRST STEP ON THE RIGHT PATH.

CALL US TODAY!