Many employers set-up a group RRSP for their employees and make matching contributions against their employees' contributions. A group RRSP has the advantage of permitting the employee to make contributions with pre-tax dollars because source deductions can be waived if the contribution is made directly to the RRSP.
However, in some cases, a Deferred Profit Sharing Plan (DPSP) can yield better tax results for both the employer and employees.
Employer contributions to a group RRSP are remuneration or “salary” to the employee for tax purposes and must be shown on the employee’s T4 slip. The increased income is offset by the employee's deduction of the RRSP contribution but the result may not be entirely “tax neutral”. If the employee has not already paid the maximum CPP and/or EI amounts this additional remuneration will come at a cost to the employer and the employee. The employee will have additional CPP and EI withheld. The employer will have to pay the employer's portion of CPP and EI and, where applicable, increased provincial payroll taxes.
In addition, the employer's contribution to the employee’s RRSP will “soak up” more of the employee’s RRSP contribution room, meaning that there will be less RRSP contribution room going forward for the employee.
A DPSP may be a better way to create a retirement savings plan for employees. There are restrictions on participating in such a plan for owner managers who own 10% or more of the corporation or a related corporation (or for any person related to such shareholder). If this restriction does not apply, a DPSP is a great way to help your employees save for retirement because, unlike a group RRSP, the following will apply:
- The employer's contribution to the DPSP is deductible to the employer and not taxable to the employee;
- The employer's contributions are not considered to be remuneration for payroll purposes. This means that no additional CPP, EI or payroll tax need to be paid on such;
- DPSP contribution limits have similar dollar limits as an RRSP, being 18% of pensionable earnings, (subject to the restriction of one-half of the dollar limit for money – purchase plans).
A DPSP may be just the right kind of plan for your company and your employees. Be sure to consult a tax expert in the area before proceeding.