RETIREMENT COMPENSATION ARRANGEMENTS (RCA)
A retirement compensation arrangement (RCA) is a plan or arrangement between an employer and an employee under which:
- The employer or employee makes contributions to a custodian of the RCA trust.
- The custodian may be required to make distributions to the employee or another person on, after, or in view of the employee’s retirement, the loss of an office or employment, or any substantial change in the services the employee provides.
- An RCA is first and foremost a Trust, as such the terms and conditions of this trust must clearly set out the terms of the trust, pension benefits available and triggering events that establish the employee’s or their beneficiaries right to the money in the trust.
Who can Benefit:
Generally speaking, high-income earners who maximize their other retirement options and have considerable excess earnings which are taxed at rates above 50%. These could be Senior Executives, Professional Athletes or Entertainers, Business Owners, and High-Income Professionals. This is important as both the deposit when made and the earning declared in a year are taxed at the 50% tax rate. Consequently, those who are in an above 50% tax bracket would benefit.
Why is a RCA Beneficial:
- Tax deductible contributions deemed a business expense.
- Flexibility in both the amount paid and whether it is paid in any given year.
- Creditor Protected
- There are few Investment Rules or Restrictions
- There is no specific time frame upon which withdrawals must be commenced.
- Taxes Paid are deposited into a Refundable Tax Credit Account. For every $2 withdrawn, $1 of
tax credit is refunded. This has the effect of deferring high tax income into years when a low tax
rate can be utilized. - Can be set up as a Defined Benefit or a Defined Contribution Plan.
- Contributions do not impact RRSP or RPP contribution allotments.
- Income taxes paid at a 50% rate or higher is lost to you forever. Refundable tax @ 50% is able
to be used to offset future taxes owed.
Potential Strategies:
Deferred Income: This can be employed as an income smoothing mechanism, whereby an employer defers income to the employee in a particularly high-income period and distributes income in a later year(s) when income is lower and the refundable tax can mitigate the taxes owed in the year of withdrawal.
Employee Retention Incentives: Employers can also utilize RCAs for what’s referred to as Golden Handcuffs. An employer can require an employee to meet certain length-of-employment requirements before the pension contributions vest. This will help employers retain key employees that are vital to their operations.
Strategic Tax Reduction: A RCA can be used to eliminate certain corporate income and in so doing reduce taxes in order to satisfy the small business CCPC definitions and tax obligations.
These assets can then be borrowed back by the corporation in order to replenish their capital position. It is very important to note that the RCA recipient who lends back the money must receive sufficient payments to establish the legitimacy of an arm’s length financial arrangement i.e. reasonable rates of interest.
Alternatively, utilizing unsecured letters of credit to limit the value of the RCA contribution and thus the refundable tax remittance.
There are a number insurance companies and trust companies which have products tailored to there use in an RCA.
Caution, CRA may have issues:
Though an RCA offers significant flexibility and tax benefits, funding an RCA requires the application of “reasonable” to any contributions made. Generally, CRA uses a defined contribution funding outline, in determining the allowable contributions to an RCA. At present this limitation would roughly equal the funding allowed for a Defined Benefit Pension Plan (DBPP). These contributions are both age and income determined. Unlike a DBPP however, there isn’t a tax maximum. A qualified Actuary can help you determine what a reasonable RCA contribution might be.
Fiduciary Obligation: An RCA requires a Trust Document and 2 Trustees; the plan member and an advisor. No RCA should ever be entered into without competent Actuarial, Accounting and/or Legal Advise skilled in Taxation.