Retirement
Compensation Arrangement (RCA)
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Retire Compensation Arrangement (RCA)
A Retirement
Compensation Arrangement (RCA) is an arrangement defined in subsection
248(1) of the Income Tax Act (Canada) under which an employer, former
employer, or in some cases an employee, makes contributions to a
custodian. The custodian holds the funds in trust with the
intent of eventually distributing them to the employee (beneficiary)
on, after, or in view of retirement, other severance from employment,
or any substantial change in the services the employee provides.
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CRA Refundable Tax
A 50%
refundable tax is payable on all contributions to as well as investment
income earned by the fund. Specifically,
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When
the employer makes a contribution to an RCA, 50% of the contribution
is deposited with the custodian; the remaining 50% is remitted
to Canada Revenue Agency as a refundable tax.
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When the custodian files the annual trust return (T3-RCA) for
the trust, 50% of the net investment income for the year is
remitted to Canada Revenue Agency as a refundable tax.
The investment income includes interest and dividends as
well as realized capital gains less realized capital losses.
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When benefits are paid to RCA members and beneficiaries, $1
is refunded to the custodian for every $2 of benefits paid.
The
refundable tax account at Canada Revenue Agency is not interest-bearing.
Please refer to this chart
for information on RCA Cash Flows and how the 50% Refundable Tax
works. Back to Top
Advantages
- Significantly
higher contribution limits than registered plans.
- Immediate
deduction to employer and not taxable to employee until paid.
- Flexible
investment options.
- Allows
deduction at current high tax rates and deferral of recognition
of income by employee to future years at potentially lower tax
rates.
- High
benefit security as funds are held by custodian in trust.
- Flexible
settlement options allowing member control over timing of income
recognition.
- Does
not affect RRSP or RPP (Registered Pension Plan) contribution
limits. Back to Top
Disadvantages
-
Refundable
tax account is non-interest-bearing, therefore investment yield
for an RCA is only half of that of a registered plan with funds
invested in interest-bearing securities.
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Limited
access to funds while employed. Back
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Investments
Unlike
registered pension plans, investment rules for RCAs are very flexible.
Plan assets can be invested in stocks, bonds, mutual or pooled funds,
T-bills, GICs, interest in a life insurance policy, etc. Funds
can even be loaned back to the Company at reasonable interest rates.
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Plan Design Issues
Plan
design can be on a defined benefit or a defined contribution basis.
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Where
coincidental insurance needs exist, a split-dollar universal
life policy may be used. The company is the beneficiary
for insurance purposes, while the RCA trust owns the cash value.
The cash value is not taxed until distribution, thereby saving
the 50% refundable tax on investment income.
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Vesting
of benefits – Most pension legislations require the vesting
of pension benefits after the completion of two years of plan
membership. Therefore, pension benefits provided to members
with more than two years of plan membership will be vested immediately.
An RCA allows the employer to have a longer vesting period for
retirement benefits than that under a registered pension plan.
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Letter
of credit – A letter of credit for funding the RCA would be
advantageous if the contribution is deemed to be the cost of
the letter of credit (unsecured). This design would provide
benefit security for the executives while eliminating most of
the tax inefficiency due to the 50% refundable tax on contributions.
However, Canada Revenue Agency’s recent position on this type
of funding has not been favourable on "secured" letters
of credit where Company assets are pledged as collateral.
Their position on the “contribution” seems to be leaning more
towards the “face value” of the letter of credit rather than
the actual cost the Company is paying the bank for such a facility
if the letter of credit is "secured". Back
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Coordination of Retirement Savings / Consumption
The
general rule of thumb for retirement savings and consumption of
retirement funds is that the more tax-effective registered assets
(Registered Pension Plan or Registered Retirement Savings Plan)
should be on a “First In, Last Out” basis, and the less tax-effective
non-registered assets (Retirement Compensation Arrangement) should
be on a “Last In, First Out” basis. Therefore, the preferred
sequence is to fund an RCA shortly before retirement and consume
RCA assets immediately after retirement prior to drawing an income
from registered assets. Thus, registered assets are allowed
to grow tax-free for a longer duration. Back
to Top
Services Provided by Westcoast Actuaries Inc
- Prepare
Trust Agreement and Plan Text.
- Prepare
and submit the T733 Form (Application
for a RCA Account Number) to Canada Revenue Agency.
- Remit
50% refundable tax on Company contributions to Canada Revenue
Agency.
- Remit
with holding taxes on distributions (payments) from RCA.
- Prepare
and file T3-RCA tax returns and remit
refundable tax, if any, on investment income to Canada Revenue
Agency after end of year.
- Prepare
T735 – Application for a Remittance Number for Tax Withheld From
a RCA and file with Canada Revenue Agency at benefit commencement.
- Prepare
T4A-RCA and T4A-RCA Summary, or, if
applicable, NR4 and NR4 Summary, to report benefits paid from the
RCA.
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Prepare
and file T737 RCA Summary and Supplementary
to report Company contributions. Back to
Top
Fees charged by Westcoast
Actuaries Inc.
Westcoast
Actuaries Inc.
recommends that our clients approach RCAs differently, depending on the type of plan desired,
as follows:
1) The purpose of the RCA is to
allow business owners or shareholders to achieve additional tax-deductible
contributions and to defer recognition of taxable income. We recommend
that these plans be operated on a defined contribution or money
purchase basis and a short form actuarial valuation be performed
to identify maximum contributions as needed. For
each short form actuarial valuation report, the fee changed by
Westcoast Actuaries Inc. is approximately:
