Register a deferred profit sharing plan - Overview

1. Overview

A deferred profit sharing plan (DPSP) is an employer-sponsored profit sharing plan that is registered with the Canada Revenue Agency (CRA). The purpose of a DPSP is to permit an employer to share business profits with its employees. The plan can be set up for all employees or a certain group of employees. However, specified shareholders and individuals related to the employer cannot participate in a DPSP.

The CRA will not register a profit sharing plan as a DPSP unless it meets certain conditions for registration under the Income Tax Act.

Only employers can contribute to a DPSP, and annual contributions are subject to specific limits set out in the Act. The contributions must be made to a trustee for the benefit of employees.  Employers can claim a tax deduction for contributions made to a DPSP.

Employees do not pay tax on the contributions that are made to a DPSP for their benefit. The contributions and investment earnings accumulate tax-free while they are in a DPSP, but are included in income for tax purposes when withdrawn. DPSP contributions made on behalf of an employee in a particular year reduce the employee’s registered retirement savings plan contribution room for the following year.   

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