Registered Compensation Agreements

What is a Retirement Compensation Agreement or RCA?

A retirement compensation agreement (RCA) is supplemental to a pension plan. It is the Income Tax Act’s retirement planning solution for affluent professionals, business owners and corporate executives. It is established by a company to extend additional benefits after the employee has retired, lost their employment, or restructured the way in which they deliver service to their employer. An RCA provides benefits beyond what is offered through RRSPs, pensions, and other statutory plans. And unlike registered pension plans, an RCA is not subject to contribution levels, restrictions, policy, or benefit options.

The Origin of the Retirement Compensation Agreement

Today, there are a number of ‘retirement savings’ instruments in Canada. A retirement compensation agreement is one type of retirement tool that benefits executives and other business professionals who make over $100,000 annually. It was created in response to the contribution limitations put in place by the traditional Registered Retirement Savings Plan (RRSP), founded on the premise that an annual tax-deductible contribution of 18 percent of an executive’s or business owners reported income would be enough to live out retirement.

Starting in 1976, the Canadian Government set Registered Pension Plan limits at $60,000. This amount was thought to be enough for business to procent an employee pension at 70% of their average income. Since this limit did not kept pace with inflation, people earning salaries of $100,000 of higher began to develop pension contribution discrimination.

To curb this discrimination, the Canadian federal government introduce the Retirement Compensation Agreement in 1986 as part of the Income Tax Act in s. 248 (1).

How Retirement Compensation Agreements work

The contributions of both the wage earner and the corporation they work for are distributed into two accounts: the RCA Investment Account and the Refundable Tax Account. Only the investment account is eligible for gaining interest. The Refundable Tax Account, on the other hand, is administered to the owner of the RCA at retirement by the Canadian Revenue Agency.

It’s important to note that an RCA is supplemental to plans like an RRSP or Registered Pension Plan (RPP). This means any contributions to the RCA will have no effect on the contribution limit or status of your other insured retirement plans. This makes a Retirement Compensation Agreement an effective way to minimize taxes and contribute to your retirement portfolio.

Considerations to be made

Since half of the RCA’s investment will not grow from interest, RCAs aren’t used as often as the Individual Pension Plan.

On the other hand, Retirement Compensation Agreements can be powerful savings methods for those who plan on leaving the province upon retirement, since they aren’t administered by local government. They tend to cost more to set up, but offer high flexibility in terms of investment and settlement options.

Retirement Compensation Agreements are best suited for individuals who make more than $150,000 a year, as IPP contributions up to this annual income level are more cost-effective. However, past this point, individuals will start to notice a lag in contributions that necessitates a new retirement strategy.

Know your options about the insured retirement plan

Before making your final decision on whether or not an RCA is the right choice for you, consult the legal and financial professionals at MLD Wealth Management. We’ll acquaint you with what you stand to gain from establishing a Retirement Compensation Agreement and help you learn the rest of your savings options to maximize your potential retirement benefits.

 

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The information on this web site is intended for use by persons resident in Canada. Independent Wealth Management advisors are registered with IIROC through Canaccord Genuity Corp. and operate as agents of Canaccord Genuity Corp. Canaccord Genuity Wealth Management is a division of Canaccord Genuity Corp., Member - Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.