Deferred Profit Sharing Plans
Reward good performance and create a sense of partnership with your employees.
A deferred profit sharing plan (DPSP) is a registered plan that allows you to share your company’s profits with employees. It is employer-sponsored and registered as a trust with the Canada Revenue Agency (CRA).
A DPSP provides tax incentives. It allows for vesting periods on employer contributions but does not allow employees to contribute. It is designed to reward good performance and create a sense of partnership between the company and members of the plan. Employers can contribute to a DPSP on a monthly or quarterly basis, as well as whenever they wish to reward their employees by sharing the profits of its business. Employee bonuses may also be paid into a DPSP.
Advantages for Employers
This plan is a cost effective option that can generate significant savings for employers since contributions to a DPSP are not only paid out of pre-tax business income but are also tax-deductible. Employers can also set a vesting period of up to two years. This means that if a member leaves the company during the vesting period, the contributions to a DPSP will be returned to the employer. A DPSP can motivate employees to stay with the company over the long-term, which will help increase retention and reduce turnover.
Advantages for Employees
Contributions to a DPSP made by the employer (on the plan member’s behalf) are non-taxable and tax-sheltered in an individual account. This means that plan members will not pay tax on earnings until funds are withdrawn. If plan members leave the company after the vesting period has ended, they can withdraw the funds (taxes are withheld at source), use them to purchase an annuity or transfer them tax-free into an RRSP or other DPSP. Unlike other plans, funds accumulated in a DPSP are not locked in for retirement and may be withdrawn partly or in their entirety, depending on the vesting period.
To learn more about Deferred Profit Sharing Plans, we invite you to reach out to us.