Deferred Profit Sharing Plan FAQs

	There is flexibility with respect to “variable” terms of the plan such as eligibility requirements, vesting schedule, administrative fee schedules, retirement age and designated investment funds.
	Unless specifically stated otherwise in the variable terms of a plan, there is no minimum required employer contribution.
	The maximum contribution is limited to the lesser of:
		• 18% of the employee’s compensation for the year; and
		• a dollar limit equal to one-half of the money purchase limit (see the CCRA Pension Adjustment Guide) as follows:

Year	Money	Maximum for
	Purchase Limit	DPSP =1/2 of Limit
2002	$13,500	$6,750
2003	$14,500	$7,250
2004	$15,500	$7,750
2005	$16,500	$8,250
2006	$18,000	$9,000

Contributions are not added to members’ earnings and do not increase payroll taxes. All employer contributions and expenses are tax-deductible.

The employer may impose a vesting period of up to 2 years.

Employers may restrict withdrawals to termination of employment, retirement of the employee or death of the employee.

Terminated employees can withdraw the full vested amount, but that amount would be subject to tax unless the funds are transferred to another DPSP, a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), or a Registered Pension Plan.

Plan members may be encouraged to improve their performance since their efforts help generate company profit, which are then distributed through the DPSP.

What is the purpose of a Deferred Profit Sharing Plan?
DPSPs are designed to provide retirement income for employees, either on their own or in combination with a company's Group RRSP. DPSPsare subject to the same maximum foreign property content limits as Registered Retirement Savings Plans, and have the same requirements for “qualified investments.” Only the employer may make payments into the plan by contributing an amount “by reference to profits” or "out of profits" into a trust fund.

What do the terms “by reference to profits”and “out of profits” mean?
If contributions are made “by reference to profits,” they are expressed as a percentage of profits for the year. For example, the employer’s contribution may equal 5% of the annual profits.

The contributions may be based on the employer’s own profits for the year, or on the combined profits of the employer and any affiliated member companies of the plan. Where in any given year the employer has no profits, no contributions are required.

If contributions are made “out of profits,” the profits may be defined either as profits of the employer for the year or as accumulated undistributed profits of the year and prior years.

This allows employers to make contributions even in years in which no profit is made, provided there are accumulated profits from previous years. In such cases, the contribution may be expressed as:

What is vesting?
Vesting refers to the right of an employee to the employer's contributions. A vesting period is the amount of time an employee must be a member of a plan before earning this right.

A DPSP must provide for vesting of the plan sponsor's contributions once the member has completed 24 continuous months of membership (it can be earlier if the plan allows for it); however, theemployer can restrict or prohibit withdrawals while the plan member remains employed with the company.

Can vested benefits be withdrawn at any time?
It depends on the plan. DPSPs are not “locked-in” and, if the terms of the plan allow it, members may have the right to withdraw vested benefits from the plan at any time. In any case, a member's vested benefits must be paid no later than 90 days after the earliest of:

In terms of membership restrictions, the plan must provide that no individual can become a beneficiary under the plan if that individual is:

*Note: A “specified shareholder” generally means a taxpayer who owns, directly or indirectly, not less than 10% of the issued shares of any class of the capital stock of the sponsoring corporation or any other related corporation.

How does the plan work?
An amount of money is credited to an account in the plan member’s name. These contributions are invested and earn investment income over time. When the employee retires, the money to which he or she is entitled (vested) in the account can then be used to buy a retirement income.
If a plan member terminates employment and has met the vesting requirements, he or she is entitled to receive a payment from the plan. If the plan member is not vested, he or she forfeits the value of the employer contributions, which are then either returned to the employer or reallocated among the other plan members.

What effect do contributions to a DPSP have on the employee’s contribution room in their own RRSPs?
Employer contributions on behalf of an employee reduce the maximum amount an employee can contribute to his or her RRSP in the following year.

Under a DPSP, an employer's contributions are considered pension credits to the employee. An individual's total pension credits for the year is known as a Pension Adjustment, and is reported in Box 52 of T4 slips or in Box 34 of T4A slips.

If an employee leaves the plan before retirement and not all the contributions have vested, the benefits paid by the plan could be less than the total amount of the already-reported pension adjustments.

In these cases, a Pension Adjustment Reversal is applied. A Pension Adjustment Reversal restores the reduction in an individual’s RRSP contribution room by the amount the reported pension adjustments exceed the benefits the employee received on termination of his/her membership in the plan. (Note:The individual does not have to terminate employment, only membership in the Plan.)