What is a Deferred Profit Sharing Plan (DPSP)
A deferred profit sharing plan (DPSP) is an employer-sponsored Canadian profit sharing plan that is registered with the Canadian Revenue Agency. DPSPs are a type of pension. On a periodic basis, the employer shares the profits made from the business with all employees or a designated group of employees. Employees receiving a share of the profits paid out by the employer do not have to pay federal taxes on the money received from the DPSP until it is withdrawn.
BREAKING DOWN Deferred Profit Sharing Plan (DPSP)
An employer that chooses to participate in a DPSP with some or all of its employees is referred to as the sponsor of the plan. Employees who are granted a share of the profits are the trustees of the plan. Employees who participate in a deferred profit sharing plan see their contributions grow tax free. They can access the funds prior to retirement; funds may be withdrawn partly or in their entirety within the first two years of membership.
Deferred Profit Sharing Plans: Key Facts
- Contributions are tax deductible to the employer; individuals don't pay taxes on contributions until money is withdrawn.
- Investment earnings are tax sheltered; individuals don't pay tax on earnings until a withdrawal.
- Registered Retirement Savings Plan (RRSP) contribution room is reduced by DPSP contributions made the year before.
- DPSPs are often combined with pension plans or a Group RRSP to provide employees with retirement income.
- Most plans allow individuals to decide how their DPSP money is invested, though some companies may require employees to purchase company stock with their contributions.
- When an individual leaves an employer, they can move their DPSP money to an RRSP or a Registered Retirement Income Fund (RRIF), or use it to buy an annuity. They can also cash out, though that would trigger a tax event with a tax payment required in the year the money was received.
Deferred Profit Sharing Plans and Employers
For employers, a deferred profit sharing plan paired with a group retirement savings plan can be a cheaper alternative to a defined contribution plan. Some of the positive attributes of DPSPs include:
- Tax incentives: Contributions are paid out of pre-tax business income and are therefore tax deductible and exempt from both provincial and federal payroll taxes.
- Cost: DPSPs can be a cheaper alternative to administering a defined contribution plan.
- Employee retention: DPSPs give employers a valuable tool in helping ensure that their best talent is incentivized to stick around (such plans are tied to company profits and are subject to a two-year vesting period).