End Pension Discrimination for Business Owners with an RCA

If you are an executive working for a large Canadian company, most likely you have a generous pension plan that funds your retirement based on a formula that allows you to have an income equivalent to 70% of your final average earnings.

If you are a Canadian business owner who has made maximum contributions to your RRSP each year and are counting on this nestegg to provide you with a comfortable retirement income you will most likely be shocked to find out that the level of income you can expect is going to be nowhere close to the level of income that a Canadian executive with a pension plan can expect, even if both of you have been making the exact same amount of money during your working years.

This pension gap is so significant that it can amount to the pension income being received by the executive of the public company (with a pension plan and supplemental agreement) with 35 years of service at age 65, being three times that of the income received from RRSP savings by a 65 year old business owner who has contributed the maximum to his/her RRSP over 35 years of service and has had exactly the same income as the executive during his/her working years.

Fortunately there is a solution for this serious problem. According to Roy W. Craik, President of Retirement Compensation Funding Inc. in Toronto, “…in 1998, Revenue Canada realized that those in private business were facing serious pension discrimination over those in the public sector. A provision in the Income Tax Act being used by Public Corporations to fill the “pension gap” was extended to Private Business if the guidelines for public corporations were followed. The provision (defined under Subsection 248 (1) of the Income Tax Act) was referred to as a Retirement Compensation Arrangement (RCA) which could be wrapped around whatever form of pension the person in private business had…. The RCA (Retirement Compensation Arrangement) is Revenue Canada’s tool for equalizing a business owner’s pension to provide the remainder of the 70% allowed for funding a full pension. The RCA will eliminate the pension discrimination that high earning executives face with Registered Pensions Plans, and is wrapped around the owners RRSP or IPP.”

A unique feature of an RCA is that 50% of each deposit to the RCA has to be contributed to a Refundable Tax Account (RTA). While the RTA earns to interest while it is being held by CRA, it can provide downside protection from market volatility as it will be refunded as funds are withdrawn at retirement.

Contributions made by the corporation to the RCA are tax deductible to the corporation, and are exempt from payroll taxes. The business owner is not taxed until distribution begins from the RCA at retirement. The RCA is a trust and assets are held in a Trust and may be protected from creditors with a third party Trustee. The RCA can also be helpful in succession planning and be part of an exit strategy for the business owner on the sale of business.

If you are a business owner or executive with earnings over $500,000 or are accumulating excessive amounts of cash and investments in your corporation, a key executive with an underfunded corporate pension plan or an executive with stock option plans and your income as reported on your T4 slip is in excess of $125,000 then you should seriously consider an RCA and discuss it with your financial advisor.

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