Group Planning

The extra edge.

Among the many Canadians who have displayed the foresight to contribute to an RRSP, there is a growing segment of even more fortunate individuals: those who enjoy several additional valuable benefits because they have chosen to participate in a Group RRSP through their employer.

Group RRSP Basics

A Group RRSP is simply a collection of individual RRSPs where the employer arranges for employees to make contributions through regular payroll deductions on a pre-tax basis. After you complete the application and decide how much to contribute, your employer deducts that amount from your pay in pre-tax dollars. Funds are forwarded to the financial organization selected by your employer as investment manager and administrator for the group plan. Your contribution is then deposited into your RRSP and invested as you specify.

No matter how satisfying it may be to get a tax refund from CRA, getting one means you gave the government an interest-free loan. With a Group RRSP, contributions are made on a pre-tax basis by payroll deduction, so the amount of tax your employer is required to deduct at source is calculated after your Group RRSP contribution is removed — resulting in an instant tax saving. You will not overpay taxes during the year and then wait until your return is processed to get a refund.

Additional Group Benefits

• Payroll deduction offers the ultimate convenience — the easiest way to save.
• Avoid the last-minute RRSP rush at the end of February.
• It's easier to reach your RRSP limit than with a single lump-sum contribution.
• Contributing earlier maximizes the value of your savings by keeping them tax-sheltered longer.
• It eliminates the need to borrow money from a bank to make an RRSP contribution, saving interest costs.

Deferred Profit Sharing Plan

DPSPs can be used as a pension plan or supplement to a company's Group RRSP. Like a registered pension plan, a DPSP must be registered with CRA and must comply with the Income Tax Act.

The employer may contribute an amount "out of profits," or related to profits, into a trust fund that accumulates sheltered from income tax. Employer contributions are tax-deductible and are not taxable to the employee until paid out. Employee contributions are not permitted.

Employer contributions into a DPSP are limited to the lesser of 18% of the employee's compensation from the employer or a dollar limit equal to one half of the defined contribution pension plan limit.

Highlights

• No minimum employer contributions
• Employer contributions are not subject to payroll taxes
• Only employer contributions are permitted into the plan
• Vesting period of up to 2 years may be imposed
• Withdrawals can be restricted to termination, death, and retirement
• Owners or relatives of owners cannot participate in the plan
• Terminated employees can withdraw the total vested amount subject to taxation
• Creates a pension adjustment
• Can be used to share profits with employees or as a pension plan

Defined Contribution Registered Pension Plan

DCPPs are formal arrangements made by a sponsor to provide employees with a monthly income on retirement. Legislation requires the employer to contribute to the plan. If the employee is required to contribute, the plan is referred to as a contributory plan; otherwise it is non-contributory.

Highlights

• Vesting period of up to 2 years may be imposed
• The contribution formula is clearly defined (minimum employer contribution is 1% of YMPE)
• After contributions vest, all monies are locked in
• Employer contributions are not subject to payroll taxes
• Legislation allows voluntary contributions to be redeemed; however, employers have the option of locking in all contributions
• Plans are creditor-proof
• Low administrative costs
• The employer is responsible for the plan
• Creates a pension adjustment

Combination DPSP / Group RRSP

This arrangement allows you to take advantage of the features of both plans. Employer contributions are made to the DPSP while employee contributions are made into the Group RRSP. Employer contributions can be made contingent upon the employee contributing to the Group RRSP.

Highlights

• No minimum employer contributions
• Employer contributions to the DPSP are not subject to payroll taxes
• Vesting period of up to 2 years may be imposed on the DPSP only
• Withdrawals can be restricted to termination, death, and retirement on the DPSP
• Owners or relatives of owners cannot participate in the DPSP portion
• Terminated employees can withdraw the total vested amount subject to taxation
• The DPSP creates a pension adjustment
• Can be used to share profits with employees or as a pension plan
• Employer and employee contributions can be made in any combination but cannot exceed an individual's RRSP limit