What Is a Deferred Profit Sharing Plan (DPSP)?

What Is a Deferred Profit Sharing Plan (DPSP)?

Let me explain what a Deferred Profit Sharing Plan, or DPSP, really is. It's a Canadian employer-sponsored profit sharing plan designed to help you save for retirement. The money in your DPSP account grows on a tax-deferred basis until you withdraw it.

Key Takeaways

You need to know that Deferred Profit Sharing Plans (DPSPs) are employer-sponsored retirement plans in Canada, with contributions coming solely from employers. The money grows tax-deferred until you withdraw it, which can lead to significant investment growth over time due to compounding.

As an employee, you benefit because you don't pay taxes on those employer contributions until the funds are withdrawn. These plans are often paired with pension plans or Group Registered Retirement Savings Plans (RRSPs) to give you more comprehensive retirement options.

For employers, offering DPSPs provides tax incentives, flexible contributions tied to profits, and a way to boost employee retention.

In-Depth Look at Deferred Profit Sharing Plans (DPSPs)

Diving deeper, DPSPs are a type of pension plan registered with the Canada Revenue Agency, which is essentially Canada's equivalent to the IRS in the United States. Employers periodically share business profits with all employees or a designated group through the DPSP.

If you're an employee receiving a share of those profits, you don't pay federal taxes on the money until you withdraw it from the DPSP. Employers who offer these are called sponsors, and trustees handle the fund management.

The funds in your DPSP account grow tax-deferred, potentially leading to larger investment gains over time thanks to compounding. You can withdraw your vested funds before retirement, even while still employed, or transfer them to another registered plan to keep the tax-deferred status. Taxes apply only when you actually withdraw.

Here's a fast fact: Most plans let you decide how to invest your DPSP money, though some companies might require you to buy company stock with the contributions.

Key Requirements for Deferred Profit Sharing Plans (DPSPs)

Understand that contributions to DPSPs can only come from employers; you as an employee cannot contribute. Those contributions are tax-deductible for the employer, and you don't pay taxes on them until withdrawal.

Investment earnings are also tax-deferred. Note that your Registered Retirement Savings Plan (RRSP) contribution limits get reduced by DPSP contributions. DPSPs are frequently combined with pension plans or Group RRSPs to provide retirement income.

When you leave your employer, you can transfer your DPSP funds to another registered plan or buy an annuity, keeping the tax-deferred status. Cashing out triggers taxes in the year you receive the money.

Benefits of DPSPs for Employers

From an employer's standpoint, a DPSP paired with a group retirement savings plan can be a more affordable option than a traditional pension plan. You get tax incentives because contributions are paid from pretax business income, making them tax-deductible and exempt from provincial and federal payroll taxes.

DPSPs are generally less expensive to administer than other plans. They offer flexibility, as you can base contributions on your yearly profits and skip them if there's no profit. Plus, they aid in employee retention with a two-year vesting period for contributions.

What Is a Registered Retirement Savings Plan (RRSP)?

A Registered Retirement Savings Plan (RRSP) is a defined contribution retirement plan in Canada, similar to a 401(k) in the U.S. It can be an individual plan or an employer-sponsored group plan, where the employer might match your contributions.

What Happens If an Employee with a Deferred Profit Sharing Plan (DPSP) Dies?

If you have a DPSP and pass away, your surviving spouse or common-law partner can roll over the vested balance into their own registered retirement plan, maintaining the tax-deferred status. Other heirs must take the funds as cash and pay taxes on them.

The Bottom Line

In summary, DPSPs are employer-sponsored retirement plans in Canada that help you build savings through employer profit contributions. The funds grow tax-deferred for potential big gains, with employers having flexibility based on profits and no employee contributions allowed. If you need more details on your DPSP, contact your employer's HR department or plan administrator.