|Why Consider a Retirement Compensation Arrangement?
A Retirement Compensation Arrangement (RCA) is a supplemental pension plan whereby the business makes tax-deductible contributions for the benefit of the business owner or key executive.
Lower tax rates on distribution (potentially)
Decline in marginal tax rates; Change in residence of province within Canada; Become a non-resident of Canada
Funds in the RCA are held outside the company and are not yet in the hands of the business owner or key executive.
No statutory cap on contributions or restrictions on investments
An RCA is not a registered plan and as a result there is no restrictions on the amount of contributions, or amount of payout from an RCA, or on allowable investments.
As to plan design, contributions and receipt of income.
No affect on RRSP contribution limits
RCA contributions made on your behalf do not affect the contribution that an individual can make to their own RRSP
How It Works
- The contributions to the plan can be a single deposit or a series of deposits. They can be a fixed amount or a flexible amount and are placed in trust for the personal benefit of the business owner or key executive.
- The annual contribution is placed in trust for the plan member’s personal benefit.
- A simple trust document is executed setting out the provisions.
- 50% of any contributions made to the plan would be remitted to Revenue Canada as a refundable tax.
- 50% of any taxable income in the plan would be remitted to Revenue Canada as a refundable tax. This income would include realized capital gains and dividends.
- Contributions made to the plan by the company are tax deductible to the company.
- When payments are made to the member the plan recovers $1 of refundable tax for every $2 paid to the member.
- When received by the member, the payments are taxable as Income. If paid to a non-resident, tax rate is generally 25%.
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- There are no restrictions on the type of allowable investments an RCA is able to hold. Most often the investment is a financial vehicle, including guaranteed investment certificates, segregated funds, life insurance plans and investment funds.
- Individual and joint life insurance plans are often used to shelter the investment returns inside the contract from refundable tax which would othewise be payable if the investment produced income, realized capital gains or paid dividends. In addition, the life insurance proceeds payable on death can be structured so they are paid outside the RCA Trust directly to a named beneficiary of the insured(s) and thus tax-free.