Payments from a deferred profit sharing plan

From: Canada Revenue Agency

The Income Tax Act and the plan terms will provide payment options from a deferred profit sharing plan (DPSP).

Amounts vested under the plan in respect of a beneficiary who was employed by a participating employer must be paid to the beneficiary, or in the event of the death of the beneficiary to another person designated by the beneficiary no later than the earliest of:

• The end of the year in which the beneficiary turns 71 years of age, and
• 90 days after the earliest of:
  • the death of the employee
  • the day on which the employee is no longer employed by a participating employer
  • the termination of the plan

Types of payments

Payments may include the following:

• payments from the plan
• purchase of an annuity from a licensed annuity provider
• a single payment of vested amounts
• transfer of a lump-sum amount to another registered plan where permitted under the plan terms and the Act

Unless transferred directly to another registered plan, all payments must be included in the recipient’s annual income for tax purposes when received. More information on transfers can be found on Transfers from a deferred profit sharing plan.

Payment from the plan

If the plan allows, the employee may choose to receive an equal annual or more frequent installments over a period of not more than 10 years from the day on which the amount becomes payable.

Annuity purchase

If the plan allows, the employee may choose to have an annuity purchased from a licensed annuity provider with a guaranteed term of 15 years or less, beginning no later than the end of the year they turn 71 years of age. There is no immediate taxation on acquiring an annuity contract, however, any payments under the contract are included in the individual’s income in the year received.

Single payment of vested amounts

A DPSP can permit the employee to withdraw all or a portion of their vested amounts from the plan while continuing employment. If the single payment includes shares of an employer who participates in the plan, and the employee makes an election under subsection 147(10.1) of the Act, the excess of the fair market value of the shares over the cost to the plan can be excluded from income. The employee must file Form T2078, Election Under Subsection 147(10.1) for a Single Payment Received from a Deferred Profit Sharing Plan and be a resident of Canada.

When the beneficiary disposes of or exchanges the shares, or becomes a non-resident of Canada, the sale proceeds must be included in the beneficiary’s income.

More information on how to report payments from the plan can be found on Reporting and filing for a deferred profit sharing plan.

Related links

• Income Tax Act, section 147
• IC77-1R5, Deferred Profit Sharing Plans
• Form T2078, Election Under Subsection 147(10.1) for a Single Payment Received from a Deferred Profit Sharing Plan