Group RRSPs
Profit Sharing Plans
Retirement Compensation Arrangements
Background
Retirement Compensation Arrangements (RCA's) evolved from programs previously known as Employee Benefit Plans (EBPs) They allow an employer to provide additional monies for an employee, on a prefunded basis, for use in supplementing the Registered Pension Plan or other Savings Plan that may be in place. They typically are provided for high income employees under the terms of their employment contract. Under the company's Registered Pension Plan these employees are often not able to be provided with the equivalent income replacement as other employees due to the Revenue Canada benefit maximums. (i.e., although the plan may provide for a benefit of 2% for each year of membership, the dollar maximums in the Revenue Canada maximum effectively reduces the 2% for high earnings employees.) Employee Benefit Plans achieved similar goals, but on a different basis for tax treatment.
Current Status
RCA's must be established through a trust, in order to maintain the arms'-length nature of the funding. An RCA normally is a plan or arrangement between an employer and an employee that requires the employer make a payment inrespect of the employee, to a custodian, on, after, or in anticipation of the employee's retirement, loss of office, or substantial change in services being rendered by the employee. The custodian of the RCA must remit a 'refundable tax' to Revenue Canada within 90 days of the end of the year. The refundable tax equals the sum of :
- 50% of the RCA contributions for the year and all preceding years, plus
- 50% of the net income of the RCA for the year and all preceding years, plus
- 50% of the capital gains, net of capital losses for the year and all preceding years, less
- 50% of the benefits paid out in the year and preceding year, including a return of contributions
- In any year the amount of the refundable tax is the amount at the end of the current year less the amount at the end of the immediately preceding year. The tax is refunded to the employer when funds are disbursed to the employee.
Income Tax Act (Section 248(l))
Revenue Canada 1989 Retirement Compensation Arrangement Guide.
