For business owners who have already maximized their RRSP and/or IPP contributions (see Individual Pension Plans) the Retirement Compensation Arrangement, or RCA, can add some significant value in the right circumstances. Due to costs and complexity, care should be taken.
The RRSP contribution limits have been too low for too long, mostly hurting private business owners who couldn't build up the same kind of retirement savings as counterparts in public sector and government.Maintaining the small business tax rate meant owners had to bonus down annually to the small business threshold, causing immediate tax personally and usually at the top marginal tax rate. Then, most or all of these funds were invested outside of registered plans, causing more personal tax on all the growth each and every year. While the IPP allows more contribution room than RRSPs, particularly after age 50, it is still quite limited when compared to the RCA.
RCAs can provide for hundreds of thousands of dollars in contributions, often in a single year, all of which are fully deductible by the company. This makes it a good option to consider when the company has had a banner year, or on the sale of the company. The matching deposits to a Refundable Tax Account (RTA) with Canada Revenue Agency is an important reason to use the IPP first- which does not require such deposits- and this is the main reason some accountants are hesitant to endorse them, but in the right situation, the result is far better than the alternative.
On the plus side, this has been fully approved by CRA with guidelines established and published, so there are no 'grey' areas open to later review or interpretation. The flow chart below shows how funds flow into the RCA and then paid out to owners and key employees in the form of a pension plan. While the income is taxable, the benefits of substantial corporate funding is key.
While no interest is paid on the refundable tax account, the money is fully repaid at retirement, which is far better than the current plan of many business owners; sending cheques to Ottawa into non-refundable tax accounts; ie: it's gone.Also, funds in the RCA are held in a trust, meaning they are already fully protected from creditors in the event of lawsuits or insolvency.