A Retirement Compensation Arrangement (RCA) is a pension plan where a custodian holds funds contributed by an employer for the purpose of distributing it to the employee in retirement. RCAs are often catered to high net worth or high earners who are seeking retirement income in excess of what’s provided by a retirement pension plan such as defined benefit or defined contribution.
Contributing into a Retirement Compensation Arrangement (RCA)
The employer contributes funds to a custodian who proceeds to invest the assets to generate long term return. There are no limits on how much can be contributed but the amounts must be reasonable and based on actuarial assumptions and methods.
Employer contributions into an RCA are tax deductible and are not considered a taxable benefit to the employee. Contributions are split between two accounts – the RCA Investment Account and the Refundable Tax Account. Each account has unique characteristics.
RCA Investment Account vs Refundable Tax Account
When an employer contributes into an RCA on behalf of an employee, the funds get split between two accounts
- RCA Investment Account
- Refundable Tax Account
RCA Investment Account
RCA Investment account is managed by the employer or the employee. They’re responsible to invest the funds in a manner that is able to generate a return on behalf of the employee.
The account allows for no preferential tax treatments such as capital gains or gross up of dividends and 50% of investment income/growth generated must be forwarded to the Refundable Tax Account every year.
Refundable Tax Account
The Refundable Tax Account is registered with Canada Revenue Agency. The balance in the account earn no interest. When withdrawn, the RTA refunds $1 for every $2 paid to the employee.
Custodian
The custodian or the trustee is responsible to distribute the funds to the employee and withholds tax on the distributions. Canadians who are non residents are subject to 25% withholding tax.
Th employee would receive a T4A-RCA Statement of Distributions from a Retirement Compensation Arrangement.
