Deferred Profit Sharing Plan

A Deferred Profit Sharing Plan (DPSP) is a registered investment vehicle set up by the employer for the benefit of the employees. The plan encourages employers to share the business’s profits with employees by contributing into the DPSP on a periodic basis. Employee contributions are not permitted. Contributions into DPSPs affect your RRSP contribution room and have vesting requirements which are discussed below.

Contributing into a Deferred Profit Sharing Plan

Contributions into a Deferred Profit Sharing Plan are only permitted by employers. Employees cannot contribute. The contributions which are voluntarily allows employers to reward their employees and encourage productivity by sharing part of the company’s profits.

The contributions are tax deductible by the employer and tax-deferred for the employee. There is no minimum contribution amount but there is a limit on max contributions.

Insiders who own 10% or more of the company’s shares are not allowed to participate in a DPSP. Related and connected individuals to these insiders are not allowed to participate as well.

Contribution Limits

Employer contributions are limited to the lesser of

• 18% of the employees compensation for the year
• 1/2 of the money purchase limit for the year

Pension Adjustment

Employer contributions into a Deferred Profit Sharing Plan lower the RRSP room of the employee the following year. This is known as the pension adjustment. You will be able to see this on your T4 tax slip.

Vesting Period

Deferred Profit Sharing Plan contributions have a maximum vesting period of up to two years or 24 months. Vesting period could be less, depending on the plan policy. The vesting period was created in order to encourage employee tenure. Once the vesting period has passed, funds in the DPSP can be withdrawn, discussed below.

Pension Adjustment Reversal

If the employee leaves the plan before the vesting period has passed, they will forfeit the employer’s contributions and a pension adjustment reversal (PAR) will be triggered. A pension adjustment reversal is the opposite of a pension adjustment. The employee’s RRSP contribution room will increase by the amount that they forfeited. PAR will be reported on a T10 slip.

Withdrawing from a Deferred Profit Sharing Plan

Upon maturity of the vesting period, the employee can leave the funds in plan to stay invested or they may withdraw it.

Withdrawal Options

• Lump Sum Withdrawal – the employee can choose to receive the funds in the DPSP in cash but the cash received is considered taxable income
• Transfer to an RPP, RRSP RRIF – DPSP funds can be transferred tax free to the aforementioned registered accounts. Your RRSP contribution room is not affected as when you deposited the funds, a pension adjustment was triggered. This is the most popular option that employees choose.
• Purchase an annuity – The employee can choose to purchase an life annuity or term annuity not exceeding 15 years
• Transfer to another DPSP – Funds can be transferred to another DPSP if that particular plan has at least 5 beneficiaries
• Annual Payments – The employee can choose to receive equal annual payments over a course of 10 years.

Termination/Death of Employee

If the employee participating in the Deferred Profit Sharing Plan is terminated from employment, becomes deceased or turns age 71, the vested amounts must be paid to them or their estate, no later than 90 days.

Upon death of the employee, funds accumulated in the DPSP can be transferred into an RPP, RRSP or RRIF if the beneficiary is the spouse or common law partner.

For more information regarding deferred profit sharing plans, contact your employee or human resources department. Keep in mind the vesting period and the time needed to join the program.