Deferred Profit Sharing Plan (DPSP)
A Deferred Profit Sharing Plan (DPSP) is an arrangement similar to a Defined Contribution Pension Plan (DCPP) whereby an employer distributes a portion of pre-tax profits to selected employees. The pension amount is not known in advance and is determined by the amount of contributions, investment returns and annuity and interest rates at the plan member's retirement. In contrast to a DCPP, plan members cannot make contributions and the employer's contribution is dependent on company profits. Employers may contribute an amount no greater than 9% of the employee's earnings for the current calendar year to the maximum contribution limit (half of the Registered Pension Plan maximum). The employer's contributions are a tax-deductible expense and are not a taxable benefit to the plan member.
The investment choices are basically the same as for a Defined Contribution Pension Plan and typically include:
> Guaranteed investment funds
> Canadian bond funds
> Canadian balanced funds
> Canadian equity funds
> International and/or global equity funds
> Segregated Funds
At retirement, the plan member has the option of purchasing a life annuity or a Registered Retirement Income Fund (RRIF). The life annuity can be purchased with a guarantee period (e.g. payments for the life of the plan member with payments guaranteed for a minimum of 15 years) or on a joint and last survivor basis, which provides benefits for both the life of the plan member and his or her spouse. In the later case, the payments can be set to continue at the same level after the plan member's death or they can be reduced after the death.
Lower Your Company’s Taxes
Your company’s taxable earnings are calculated after you’ve made contributions to your employees’ DPSP accounts. Any contribution you make towards your employees’ DPSPs actually reduces your company’s taxable earnings.
Lower Your Payroll Taxes
Employer contributions to a DPSP are exempt from federal payroll taxes, including Canada Pension Plan, Employment Insurance and other applicable provincial payroll taxes. In addition, DPSP contributions are not a taxable benefit to your employees. This could mean additional savings.
Profit-sharing plans give your employees a direct stake in your company’s results. There’s no better way for a company to get top performance from their employees.
Retain Employees with Vesting
If you want to retain good employees, give them a reason to commit to your business. Your Deferred Profit Sharing Plan can be designed with a vesting schedule that encourages long-term thinking.
You decide how much and how often you’ll contribute.