Quick Links
- Retirement Compensation Arrangement
Download the Retirement Compensation Arrangement (RCA) Quotation Request questionnaire (PDF)
Retirement Compensation Arrangements
Defined in section 248.1 of the income tax act. The Retirement Compensation Arrangement (RCA) is a plan or arrangement under which an employer, former employer or in some cases an employee, makes contributions to a custodian. The custodian holds the funds in trust with intent of eventually distributing them to the employee (beneficiary) on, after or in view of retirement.
The RCA is for the high income earner (generally $150,000 +) who wishes to continue their standard of living into retirement. It is best for business owners, executives and professional corporations.
The strategy also appeals to the business owner who can take advantage of its flexibility and can adapt it to their tax strategies.
Benefits
- Defer tax to a time and place of your choosing.
- The possibility to withdraw at reduced tax rates. If the owner retires outside Ontario there is the applicable taxation rate upon withdrawal. If they reside outside Canada the tax treaty is in effect. *See chart nextpage.
- Can use income splitting with a joint RCA to effectively reduce tax without changing residency. See Dr. and Pat Smith example
- Allowable contributions are substantially higher than an Individual Pension Plan
- Can replace bonus down strategy plus add the golden handcuffs feature for key executives
- Leverage up to 90% of the capital in an RCA to invest in the growth of the business
- Contribution to an RCA can enable a company to get down to the small business tax level
- Purify a company prior to selling to qualify for the capital gains exemption.
- Creditor Proofed
- Not regulated like a Pension Plan therefore, money can be withdrawn at the time and place according of the owner’s choosing.
Disadvantages
- Half of the contribution is remitted to a non-interest earning Tax Account held by CCRA. This disadvantage is offset by the obvious tax shelter and flexibility at withdrawal to lower taxes below the top marginal tax rates. See Below
HOW DOES IT WORK?
The company owner(s) sets up an RCA to provide retirement benefits for its employees. Deductible contributions are made from the company into the RCA and are held in trust for the beneficiaries.
What happens to the contributions?
Each year the company will make contribution on behalf of the employees named in the plan. 50% of all these contributions are made to an investment account (IA). The other 50% is remitted to a refundable tax account (RTA) with CRA. The investment account(IA) is self directed and is subject to yearly remittance to or from the RTA. RCA flow chart:
Important Details
Make sure your RCA is deemed reasonable. As addressed in Section 248(1) of the Income Tax Act as long as the contributions are reasonable, large tax-deductible contributions may be put into an RCA tax deductible to the company.
To ensure reasonableness you should certify every RCA with an actuarial certificate from a qualified actuary whom we will supply. This calculation is based upon the member's best three years T4 earnings and period of service.
The RCA calculation consists of a lump sum Unfunded Liability (a.k.a. past service) and current service contribution schedule going forward to the date of retirement. In the first year the Company can contribute 100% of the Unfunded Liability portion as well as the current service contributions. In some cases this amount is in the hundreds of thousands and up.
The RCA is more than a retirement tool. It is flexible enough to offer some real business tax planning solutions while meeting retirement needs.
Investment account
The investment account is managed by the trustees of the plan and directed by the company or the principal Plan member. There are no investment rules or restrictions. However, it is recommended that the investments be of a non-distributing nature as 50% of all dividends, realized capital gains, and interest income less expenses must be remitted by the trustees to the RTA annually.
Withdrawals
Upon retirement or a change in job status the beneficiary can draw from the assets of both the RTA and the RCA Trust. Withdrawals are flexible and not subject to any restrictions on maximum or minimums. They are however, subject to tax at the applicable marginal income tax rate in your place of residence.
Another benefit at withdrawal is that money contributed at today's tax rates may be withdrawn in the future at lower rates. This will be dependant on current rates having decreased or the beneficiary moving to a lower tax jurisdiction in Canada or outside Canada such as the U.S., Great Britain, Australia, Ireland where tax treaties result in lower withholding rates.
Government rules and penalties
When making contributions to the Investment Account (IA) the Refundable Tax Account (RTA) portion must be remitted no later than the 15th day of the following month. Late submissions to CRA are subject to penalty. For more details see the CRA’s Retirement Compensation Arrangements Guide, CRA.
Case Study
| Name | Dr. Smith | Pat Smith |
| Best 3 Years Salary | $300,000.00 | $60,000 |
| Age | 42 years old | 40 years old |
| Total Amount of allowable contributions to an RCA | $2,216,300.00 | $520,500 |
Dr. Smith can put a total of $2,216,300.00 and spouse Pat Smith can put a total of $520,000 into their joint RCA over the next two years or longer as is needed for his strategic tax planning or additional retirement income.
Used effectively Dr. Smith can make most if not all the contributions to the RCA over time using only top marginal tax rate dollars (currently 46.4%) but each spouse could withdraw equal amounts at retirement for example $95,000 each which would have an average tax rate of 30%. Instead of having paid 46.4% ($88,000) on $190,000 of household income. They paid only 30% ($57,000) which saves them $31,000 tax each year. That puts the Refundable Tax Account into perspective. Remember even though the government sits on 50% of the RCA money with no interest. It was going to take 46.4% permanently plus the new health tax. The client only loses out on the growth of 2-3.6%, which is only a few hundred dollars per $million in the RTA per yr. Based on a 5% return which in turn would be taxable.
*Some withholding rates as set out in Tax Treaties with Canada as of
Jan. 2003. Please confirm current tax treaty status with your accountant.
| United States | 10-25% |
| Ireland | 15-25% |
| Hong Kong/PRC | 10-15% |
| England | 15-25% |
| Australia | 15% |
| France | 25% |
| Italy | 15% |