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Deferred Profit Sharing Plan (DPSP) |
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DPSP is an employer-sponsored Canadian profit sharing plan that is registered with the Canadian Revenue Agency. On a periodic basis, the employer shares the profits made from the business with all employees or a designated group of employees. Employees receiving a share of the profits paid out by the employer do not have to pay federal taxes on the money received from the DPSP until it is withdrawn.
An employer that chooses to participate in a DPSP with some or all of its employees is referred to as the sponsor of the plan. Employees who are granted a share of the profits are the trustees of the plan. DPSPs are a type of pension 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 of that specific year. 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. |
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| Few Advantages of a DPSP are as below: |
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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. |
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It does not involve a permanent financial commitment since the employer does not have to contribute during a financial year in which the business suffers a loss. This provides a Flexibility of cost control. |
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Contributions accumulate for the plan members on a tax-sheltered basis. |
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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. |
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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. |
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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. |
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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. |
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A DPSP is an excellent choice for employers who want to provide their employees with an incentive to work towards the goals and the success of the company. Contributions are directly linked to company profits.
If you do not have Group benefits plan in your company yet. Please feel free to get in touch with me for further details. I am sure you understand that, every plan can not be good plan for everyone. Being a Independent Broker, I do not need to force one single product on you. My solution will be based on best options available in the market based on your situation and needs. |
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