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Retirement Compensation Arrangements

What are RCAs?

A Retirement Compensation Arrangement (RCA), as defined in subsection 248(1) of the Income Tax Act sets out a mechanism that will allow a company to make tax deductible contributions to a registered plan for the retirement of their employees beyond current pension contribution restrictions. The ability to deduct potentially large sums of money has made the RCA a powerful retirement planning tool, and also has become instrumental in helping companies in their annual tax planning strategy.

The Income Tax Act clearly defines a "RCA contribution" in that it must be reasonable in the eyes of Canada Revenue Agency (CRA). To assure this, you must have a qualified actuary certify the amount and basis for the contribution. The basis for this calculation is an average of the individual's best three years earnings. When a contribution is made to a RCA it is divided into two separate accounts. Half of the contribution is invested and the remaining half is held by CRA in a Refundable Tax Account (RTA).

The investments that can be held in a RCA are exhaustive, however; the financial advisor should recommend investments that are tax efficient. If the investments held in the RCA generate any income, or results in any realized capital gains, one half of that amount must be remitted annually to the RTA. The assets held inside the RCA, given that a pension plan text is included in the structure, are protected from creditors.

When an individual retires or terminates their employment with the RCA-sponsoring company, they can draw on the assets in both the RCA Investment Account and the RTA. The individual then pays tax at their marginal tax rate. Annual administration for an RCA is quite simple as a T3-RCA is prepared and submitted to CRA.

For individuals who no longer reside in Canada the relevant income tax treaty should be consulted. Often non-residents enjoy a substantial tax reduction. For instance an individual who resides in Ireland may pay 0% tax on withdrawals from their Canadian RCA.

Who can benefit from using a RCA?

  • Employees or Business Owners with substantial T4 earnings.
  • Business Owners who would seek to replace the traditional bonus down strategy.
  • Incorporated Professionals earning considerable income.
  • Executives, Professionals and Business Owners who will NOT be Canadian residents in retirement.
  • Businesses owners and professionals seeking substantial creditor proofing.
  • Employers wishing to create "golden handcuffs" for their key employees.
  • Individuals, who wish to manage, defer or often reduce tax on certain types of bonuses.
  • Business that seek large deductions and welcome augmented cash flow through a Front-End Leveraged RCA.

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