A DPSP is an arrangement where the employer contributes tax deductible contributions to the plan. As with an RRSP, the contributions along with the investment income accrue on behalf of the plan member on a tax sheltered basis.

The contributions may be based on a formula such as a fixed dollar amount per employee, a percentage of the employee’s salary or a variable amount such as a percentage of profits. If the formula is a percentage of profits, then in years where there are no profits, no contributions have to be made.

The maximum that the employer may contribute is 9% of the plan member’s current earnings subject to a maximum as prescribed by the Canada Revenue Agency. The maximum for 2009 is $11,000.

These contributions are paid to a trustee who holds and invests the contributions for employees. The trustee is usually a Canadian trust company, which will charge fees to the employer for the administration of the plan.

One of the major differences between DPSPs and registered pension plans is that lump-sum distributions from DPSPs are allowed upon retirement. Some people consider this flexibility to be an important advantage of DPSPs.