Retirement Compensation Arrangements
Encyclopedia
Retirement Compensation Arrangements (RCAs) are defined under subsection 248(1) of the Canadian Income Tax Act, which allows 100 per cent tax
-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the "entitlement" under the Generally Accepted Guidelines for pensions, which are:
"a normal level of benefits would be the same benefit provided under a registered pension plan without regard to the Revenue Canada maximum. This would be 2% x years of service x final five-year average earnings or about 70% of pre-retirement income for an employee with 35 years of service." (CRA Roundtable discussion, 1998).
Failure to follow the Generally Accepted Guidelines increases the risk that CRA could deem the RCA not to be an RCA, but rather a Salary Deferral Arrangement (SDA) with substantial tax and penalties payable.
To ensure the RCA qualifies under CRA’s Generally Accepted Guidelines, an Integrated Final Earnings calculation determines the entitlement from the RCA and the resulting maximum level of funding. This entitlement calculation must be reviewed and recalculated periodically as circumstances change (e.g., salary, RRSP and RCA investment performance).
If you earn more than $125,000 annually, you can expect to experience ‘pension discrimination’ because of the cap on contributions in Registered Pensions Plans (RPP) such as Registered Retirement Saving Plans (RRSPs), Individual Pension Plans (IPPs) and Money Purchase Pension Plans (MPPPs). In other words, your pension benefits will be significantly lower than the acceptable standard of 70 per cent of pre-retirement income. Payments from the RCA combined with those from your RRSP, IPP, and/or Registered Pension Plan provide the total desired pension.
An RCA can be funded using various investments. One of the most effective is the specially designed tax-sheltered insurance policy underwritten by a major insurer. The funding amounts the same as a conventional non-insurance funded RCA, but insurance funded RCAs provided enhanced benefits such as pre-retirement death benefit and survivor benefits.
Since RCAs on average can run for 30 to 50 years, a Corporate Trustee is strongly recommended to protect the interests of the Plan Member, Spouse, and Children.
Up until 1998, RCAs were primarily established for employees of Public Corporation. In 1998 the CRA clarified its position, and allowed Private Corporations to establish RCAs to match their counterparts in public corporations. As such, RCAs have become more and more popular for owners and key executives of private corporations.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the "entitlement" under the Generally Accepted Guidelines for pensions, which are:
"a normal level of benefits would be the same benefit provided under a registered pension plan without regard to the Revenue Canada maximum. This would be 2% x years of service x final five-year average earnings or about 70% of pre-retirement income for an employee with 35 years of service." (CRA Roundtable discussion, 1998).
Failure to follow the Generally Accepted Guidelines increases the risk that CRA could deem the RCA not to be an RCA, but rather a Salary Deferral Arrangement (SDA) with substantial tax and penalties payable.
To ensure the RCA qualifies under CRA’s Generally Accepted Guidelines, an Integrated Final Earnings calculation determines the entitlement from the RCA and the resulting maximum level of funding. This entitlement calculation must be reviewed and recalculated periodically as circumstances change (e.g., salary, RRSP and RCA investment performance).
If you earn more than $125,000 annually, you can expect to experience ‘pension discrimination’ because of the cap on contributions in Registered Pensions Plans (RPP) such as Registered Retirement Saving Plans (RRSPs), Individual Pension Plans (IPPs) and Money Purchase Pension Plans (MPPPs). In other words, your pension benefits will be significantly lower than the acceptable standard of 70 per cent of pre-retirement income. Payments from the RCA combined with those from your RRSP, IPP, and/or Registered Pension Plan provide the total desired pension.
An RCA can be funded using various investments. One of the most effective is the specially designed tax-sheltered insurance policy underwritten by a major insurer. The funding amounts the same as a conventional non-insurance funded RCA, but insurance funded RCAs provided enhanced benefits such as pre-retirement death benefit and survivor benefits.
Since RCAs on average can run for 30 to 50 years, a Corporate Trustee is strongly recommended to protect the interests of the Plan Member, Spouse, and Children.
History
Originally, the RCA provisions were set up in 1986 by the CRA as part of the efforts to stem the tax drain from the use of unregistered (offside) deferred income plans such as Corporate Owned Life Insurance (COLI) policies.Up until 1998, RCAs were primarily established for employees of Public Corporation. In 1998 the CRA clarified its position, and allowed Private Corporations to establish RCAs to match their counterparts in public corporations. As such, RCAs have become more and more popular for owners and key executives of private corporations.
See also
- PensionPensionIn general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
- Registered Retirement Savings PlanRegistered Retirement Savings PlanA Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...
(RRSP) - Individual Pension PlanIndividual Pension PlanAn Individual Pension Plan or IPP is a Canadian retirement savings vehicle. An IPP is a one-person maximum Defined Benefit Pension Plan which allows the plan member to accrue retirement income on a tax-deferred basis...
(IPP)