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Retirement Compensation Arrangements
What are RCA's?
The Retirement Compensation Arrangement (RCA), as defined in section 248(1) of the Income Tax Act sets out a mechanism that will allow for a company to make tax deductible contributions to a registered plan for the retirement of their employees above and 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 an "RCA contribution" it must be reasonable in the eyes of Canadian Customs and Revenue Agency (CCRA). 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 T4 earnings.
When a contribution is made to an RCA it is divided into two separate accounts. Half of the contribution is invested and the remaining half is held by CCRA in a Refundable Tax Account (RTA).
The investments that can be held in an 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 result 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 the individual retires or terminates their employment with the RCA sponsoring company, they can then draw on the assets in both the RCA Investment Account and the RTA. That 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 CCRA.
For individuals who are no longer resident 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.
- Employees or Business Owners with substantial T4 incomes
- 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 resident in Canada 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 who seek large deductions and welcome augmented cash flow through a Front End Leveraged RCA.
