Contributing to a deferred profit sharing plan

From: Canada Revenue Agency

Contributions to a deferred profit sharing plan (DPSP) can be made from:

Employee contributions to a DPSP are not permitted. 

The amount of contributions and the manner in which forfeited amounts are reallocated (if applicable) must be stated in the plan terms that are submitted for registration with the Canada Revenue Agency.

Employer contributions

Contributions can only be made by a participating employer. The employer can base contributions on their own profits for the year or on the combined profits for the year of corporations that do not deal at arm’s length with them. The plan terms must state the manner in which amounts will be contributed from profits on behalf of employees who are the beneficiaries. No contributions are required for those years in which the employer does not make a profit.

Forfeited amounts

Employer contributions must vest to employees after two years of membership in a DPSP, or earlier if the plan allows for it. Any non-vested amounts are forfeited by a terminating employee. Forfeited amounts must either be allocated to other plan beneficiaries or refunded to the employer no later than the end of the following year.

Contribution limits

Employer contributions into a DPSP, as well as any forfeited amounts that are reallocated to a beneficiary, are included in the beneficiary’s pension credit for a year. The pension credit represents the benefit earned during the year and it reduces the amount that the beneficiary can contribute to his or her registered retirement savings plan in the following year. Employer contributions and any forfeited amounts allocated to an employee during the year cannot exceed the lesser of 18% of an employee’s compensation for the year or a dollar limit equal to half of the money purchase limit. This limit is described in subsection 147(5.1) of the Income Tax Act.

Contribution deductibility

Subject to subsection 147(9), subsection 147(8) of the Act provides an employer with a deduction in respect of DPSP contributions to the extent that they are paid based on the terms of the plan and were not deducted in computing the employer’s income for a preceding year. Generally, this includes amounts paid to the plan trustee during the year. It can also include contributions made in the first two months of the following year that are considered to have been made for the preceding year. Deductions are not allowed for amounts that exceed the contribution limit in subsection 147(5.1) or for contributions that are made to a beneficiary who is related to the employer as set out in paragraph 147(2)(k.2) of the Act.

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