Retirement compensation arrangements
Attract & retain key employees
Executives and senior employees often struggle to find strategies to minimize income tax every year while ensuring sufficient cash flow for longer term retirement savings. A unique retirement savings program, called a Retirement Compensation Arrangement (RCA), is available in Canada which may be beneficial for these individuals. An RCA can assist in bridging the “savings gap” created by the inability of registered plans to provide adequate contribution room for high income earners.
Typical employee benefits plans only address the first $150,000 of employment income and may lack the desired flexibility to create meaningful long-term incentives. RCAs may be helpful solutions for enhancing retirement savings, employee benefits, creating incentives, and funding for employee severance for high income earners.
How an RCA works
To qualify for an RCA, one must receive T4 employment income from the sponsoring company. Therefore, those in receipt of only partnership, self-employed, or dividend income will not be eligible. There is no minimum or maximum age restrictions; individuals age 72 that ordinarily do not qualify for benefits under registered plans may participate. RCAs can be established for current and former employees, individuals or groups of employees.
RCAs are commonly established through a trust arrangement and settled by the sponsoring company (employer), although RCAs may be created through a life insurance policy, letter of credit or annuity. It is important to note that RCAs must be offered by the sponsoring company and cannot be established independently by the employee. Contributions are typically expressed through a defined benefit or defined contribution formula, and may be discretionary depending on the plan design. Employer contributions to an RCA are tax deductible, and in some instances, employee contributions to an RCA may be tax deductible to the employee.
It is important to speak to experienced tax and legal professionals before creating an RCA to ensure compliance.
The RCA as a solution
RCAs may be useful in a variety of planning scenarios:
- Integration with an existing employee retirement plan
- Funding for employee severance
- Retirement planning for professional athletes
- Retaining foreign workers in Canada
|Employee severance ||Employee severance as RCA |
|Employer: ||Employer: |
|Severance cost of $450,000 is tax-deductible ||RCA contribution of $450,000 is tax-deductible |
|Employee: ||Employee: |
|Severance of $450,000 is subject to personal income tax at 50% marginal rate1 ||Severance of $450,000 is paid to RCA Trust |
Employee receives $150,000/year over three years2
Average personal income tax rate is 30%1
|Net amount of severance is $225,000 ||Net RCA income is $315,000 |
For illustrative purposes only.
1 Actual individual tax rates will differ depending on the province and income amount.
2 Payment periods are subject to the provisions of plan, and may differ from those included in this example.
Interested in reading the full article?
Contact us for our Tax and Estate Planning education article: Retirement Compensation Arrangements. In it, we delve deeper into the inner workings of an RCA and provide more detail on how it can provide a solution for your business.
RCA advantages include:
- Tax deductible and tax deferred contributions
- Greater contribution room compared to registered plans (RRSP, RPP, DPSP)
- Past service funding available for prior years of employment
- Flexible investment options
- Member retains their RRSP room
- Creditor protection
- Taxation subject to jurisdiction
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