Understanding Deferred Profit Sharing Plans (DPSP) in Canada

What Is a Deferred Profit Sharing Plan (DPSP)?

A deferred profit sharing plan (DPSP) is a Canadian employer-sponsored profit sharing plan intended to help employees save for retirement. The money in an employee’s DPSP account grows on a tax-deferred basis until it is withdrawn.

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

DPSPs are a type of pension plan registered with the Canada Revenue Agency, which is basically the Canadian version of the Internal Revenue Service (IRS) in the United States.

Periodically, employers share business profits with all employees or a select group through the DPSP. Employees who receive a share of the profits paid out by the employer do not have to pay federal taxes on the money until they later withdraw it from the DPSP.

Employers offering a DPSP are called sponsors, while trustees manage the funds.

The money in an employee’s DPSP account grows tax-deferred, which can lead to bigger investment gains over time, due to the compounding effect. Employees can withdraw their vested funds before retirement, even if they still work for the employer. They can also transfer the money to another registered plan and maintain its tax-deferred status. Taxes are due only upon withdrawal.

Key Requirements for Deferred Profit Sharing Plans (DPSPs)

• Contributions may be made only by employers. Employees cannot contribute.
• Contributions are tax-deductible for the employer. 
• Employees do not pay taxes on employer contributions until they withdraw the money.
• Investment earnings are tax-deferred as well.
• Registered retirement savings plan (RRSP) contribution limits are reduced by DPSP contributions.
• DPSPs are often combined with pension plans or a Group RRSP to provide employees with retirement income later in life.
• When an individual leaves an employer, they can transfer their DPSP money to another registered plan or use it to purchase an annuity, while maintaining its tax-deferred status. They can also cash out, though that would trigger a tax event with a tax payment required in the year when they receive the money.

Benefits of DPSPs for Employers

For employers, a deferred profit-sharing plan paired with a group retirement savings plan can be a cheaper alternative when compared to a traditional pension plan. Some of the positive attributes of DPSPs from an employer perspective are:

• Tax Incentives. Contributions are paid out of pretax business income and are therefore tax-deductible for the employer. They are also exempt from both provincial and federal payroll taxes.
• Cost. DPSPs can be less expensive to administer than other plans.
• Flexibility. Employers can base their contributions on their profits for the year and are not required to contribute if they didn’t make a profit.
• Employee Retention. DPSPs help employers retain employees by requiring a two-year vesting period for contributions.

The Bottom Line

DPSPs are employer-sponsored retirement plans in Canada designed to help employees build retirement savings through employer contributions. The funds grow tax-deferred, providing potential for significant investment gains over time. Employers have the flexibility to contribute based on company profits, and contributions from employees are not permitted. If you need more details about your DPSP, reach out to your employer’s human resources department or your plan administrator for guidance.