Deferred Profit Sharing Plans (DPSP) in Canada

Deferred Profit Sharing Plans (DPSPs) are group retirement savings plans offered in Canada. They provide tax benefits for both employers and employees while helping Canadians save for retirement. Our guide will explain what DPSPs are, how they work, their key features and benefits, and how they compare to other savings plans.

What is a Deferred Profit Sharing Plan (DPSP)?

A Deferred Profit Sharing Plan (DPSP) is a registered employer-sponsored retirement plan in Canada that allows employers to share company profits with their employees.

Only employers contribute to these plans—employees cannot add their own money. Contributions come from company profits and grow tax-deferred until withdrawal.

The purpose of a DPSP is to provide an additional avenue for employees to save and prepare for retirement in a tax-efficient manner.

How Does a Deferred Profit Sharing Plan Work?

First, the employer establishes and registers the DPSP with the CRA. On an ongoing basis, the employer then decides if and when to share company profits with employees by making contributions into the DPSP accounts. This can be done on a scheduled basis, like annually, or only when the employer decides.

The contributions are tax-deductible business expenses for the employer. The funds are deposited into a separate account set up for each eligible employee. Employees do not make any contributions into their DPSP account themselves.

Employees then invest the money based on the investment options made available within the DPSP. Typical investments include stocks, bonds, mutual funds, GICs, and sometimes company stock.

The funds grow on a tax-deferred basis until the employee finally withdraws them, likely upon retirement. A vesting schedule may apply, requiring an employee to work for a defined period, up to a maximum of 2 years, before gaining full ownership of DPSP funds.

What are the Benefits of a DPSP?

Deferred Profit Sharing Plan DPSP can benefit both the employer and employees in multiple ways. Here’s a closer look at how they can help.

Benefits to the Employer

From an employer’s perspective, the key advantages of offering a DPSP include:

• Tax-Deductible Contributions: All contributions made to a DPSP are considered tax-deductible business expenses. This provides an incentive for employers to provide retirement savings for their workforce.
• Profit-Sharing Flexibility: Employers can choose if and when to share profits with employees, and how much to contribute. In years where profits are lower, contributions can be reduced or suspended.
• Employee Retention: The vesting provision, which lasts up to 2 years, helps retain employees and reduces turnover costs. Employees who leave prior to vesting forfeit their non-vested DPSP funds back to the company.
• Cost Savings: A DPSP can cost significantly less to administer than a formal pension plan, making it accessible for small to mid-sized companies.
• Optional Participation: Employers can offer DPSPs to select key employee groups only, whereas pension plans require broader participation.
• Limited Liabilities: DPSPs do not come with the long-term funding liabilities associated with defined benefit pension plans. The company’s only obligation is to make contributions, not guarantee future income levels.

A DPSP lets employers share company profits to help employees save for retirement. It’s flexible, tax-friendly, and doesn’t create big, long-term commitments for the employer.

Benefits to Employees

On the other hand, the key advantages of participating in an employer’s DPSP include:

• Tax-Deferred Growth: Investment earnings in the DPSP account grow tax-free until funds are withdrawn. This enhances the power of compound growth.
• Employer Funded: Employees do not have to contribute their own funds to receive the full employer DPSP contribution. Contributions are made solely by the company based on profits.
• No RRSP Impact: DPSP contributions do not reduce available RRSP contribution room. Employees can maximize both plans.
• Pre-Tax Contributions: Since DPSP contributions originate from employer profits before tax, employees get pre-tax savings deposited into their accounts.
• Flexible Withdrawals: Unlike pensions, funds can be withdrawn at any time, subject to tax, providing access in case of financial need.
• Short Vesting Period: The maximum 2-year vesting period means funds fully belong to employees sooner than many retirement plans.
• Retirement Readiness: DPSPs promote forced savings and retirement readiness, as employees cannot withdraw funds until leaving the company.
• Portable: Upon leaving the company, vested DPSP funds can be rolled into an RRSP or other registered plan to maintain tax-deferred status.

What are the Contribution Limits for DPSPs?

DPSPs have legal limits on how much an employer can add to an employee’s account each year. Key limitations include:

• Percentage of Salary: Employer contributions cannot exceed 18% of the employee’s total compensation for the year. (Source)
• Dollar Limit: For 2025, the maximum dollar amount is $16,905 per employee. This aligns with the annual money purchase contribution limit as outlined in the Income Tax Act. (Source)
• Excess Contributions: Any DPSP contributions exceeding the limits are considered non-tax-deductible over-contributions. These can result in penalties and taxes for the employer.
• RRSP Impact: Although employees do not contribute to a DPSP, the employer contributions are considered a tax-deferred employment benefit. Each year, an employee’s available RRSP room will be reduced by the amount of their DPSP contributions.

In addition to limits on amounts, some additional rules are:

• Contributions can only be made by the employer, not employees.
• Contributions do not require employee consent once the DPSP is established.
• Funds cannot be withdrawn while employed, except in rare cases of financial hardship.

Overall, contribution rules aim to limit tax deferrals under Deferred Profit Sharing Plans DPSPs and align with overarching pension legislation.

How Do DPSPs Compare to Other Retirement Savings Plans?

It’s important to understand how DPSPs fit in and compare to other common retirement savings options in Canada.

The table below summarizes the key differences between DPSPs and other retirement savings plans.

Here’s how DPSPs stack up against each option in more detail.

DPSPs vs Group RRSPs

Both DPSPs and Group RRSPs allow tax-deductible employer contributions. However, Group RRSPs enable employee contributions and have higher overall contribution limits.

Group RRSPs also do not impose any vesting requirements. DPSPs offer employers more control over profit-based contributions and add employee retention incentives.

DPSPs vs Defined Contribution Pension Plans

Pension plans involve fixed ongoing contributions shared by the employer and employees. This provides employees with more certainty of contribution but less flexibility for the employer.

Pensions also guarantee a retirement income level, whereas DPSP income depends on investment returns. Vesting under DPSPs can be longer than typical pension vesting periods. Overall costs tend to be higher for formal pension plans.

DPSPs vs Non-Registered Profit Sharing

Both DPSPs and non-registered profit-sharing plans involve employers sharing profits with workers. The key difference is that DPSPs offer tax deductibility for contributions and tax-deferred growth, creating significant advantages for both employers and employees.

What Happens to a DPSP When an Employee Leaves?

When an employee resigns, retires, or is terminated, the handling of their DPSP account balance depends primarily on whether the funds have fully vested:

• Vested Funds: If fully vested, the employee maintains complete ownership of the funds. They can request a tax-deferred transfer to an RRSP or other registered plan, or take a taxable cash withdrawal.
• Non-Vested Funds: Any non-vested DPSP funds are forfeited back to the employer upon departure from the company. The employee would lose entitlement to those amounts.
• Tax Implications: Taking a pure cash withdrawal triggers immediate income tax on the full DPSP balance. Transfers to an RRSP or RRIF maintain the tax-deferred status.
• Age Limits: Upon retirement, DPSP funds must be transferred to an RRSP or RRIF by age 71 to maintain their tax-deferred status and avoid being taxed.
• Estate Planning: If an employee dies while participating in a DPSP, the funds form part of their estate and can be passed on to heirs as per their will.

The key decisions for departing employees are whether to transfer the funds to maintain tax deferral or take a taxable cash payout.

How Can You Transfer DPSP Funds to an RRSP?

When an employee leaves a company, transferring vested DPSP funds into an RRSP account allows continued tax-deferred growth.

To do this, the employee should first confirm their vested DPSP balance and open an RRSP account if they don’t already have one. The RRSP will be the receiving account for the transfer.

The employee then contacts their former employer to authorize a direct, tax-deferred transfer of vested DPSP funds into the RRSP account. This avoids tax withholdings on the funds.

Once transferred, the employee should confirm receipt with the RRSP provider and invest the funds. The savings can now continue to grow tax-free within the RRSP.

One consideration is that future RRSP room will be reduced by the DPSP transfer amount. Overall, arranging a direct transfer maintains the tax-deferred status of DPSP funds for continued tax-free growth.

The bottom line

Deferred Profit Sharing Plan can be an attractive way for Canadian employers to help employees save for retirement in a tax-efficient manner.

DPSPs provide employee benefits for both employers and employees through tax deductions, flexible contributions, and tax-deferred investment growth. By understanding how DPSPs work and their key features, Canadians can take full advantage of this retirement savings option offered by employers.

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