An IPP is a registered pension with limits set by an actuary. An RCA is not registered and has no fixed limit, but it comes with the 50% refundable tax and must be reasonable for your services. Many owners who use an RCA have an IPP or RRSP first.
Retirement Compensation Arrangement (RCA)
Retirement Compensation Arrangements for Business Owners
A way for your corporation to fund retirement benefits above registered plan limits. Half of each contribution is held by the CRA and refunded as benefits are paid out.
What It Is
Retirement funding beyond RRSP and IPP limits
A Retirement Compensation Arrangement (RCA) is a trust your corporation funds to provide retirement benefits for an employee, most often the owner. It is designed for people whose income is high enough that RRSPs and Individual Pension Plans don't come close to replacing it in retirement.
Contributions are generally deductible to the corporation when they are reasonable for the services you provide. Unlike a registered plan, an RCA doesn't have a fixed annual limit. In exchange, it carries a unique tax rule: 50% of every contribution, and 50% of the investment income and gains inside the RCA, is sent to the CRA as a refundable tax.
The CRA returns that tax at a rate of $1 for every $2 of benefits paid out. Benefits are taxable to you when you receive them, ideally in years when your income, and your tax rate, is lower.
At a glance
- Funded by your corporationDeductible when the amounts are reasonable
- 50% refundable taxHeld by the CRA, with no interest paid
- Refunded as benefits are paid$1 back for every $2 paid out
- Taxed when you receive itOften in lower-income retirement years
- Needs a custodianPlus a written plan and annual trust filings
How It Works
How money moves through an RCA
Set it up
The corporation documents the arrangement as part of your compensation and appoints a custodian for the RCA trust.
Contribute
Of each contribution, half goes into the RCA trust and half is remitted to the CRA as refundable tax.
Invest
The trust invests its half. Income and gains are also subject to the 50% refundable tax.
Pay benefits
In retirement, benefits paid to you are taxable, and the CRA refunds tax to the trust as they are paid.
Who It Can Fit
Owners who tend to look at an RCA
- High, steady incomeWell above what registered plans can replace
- RRSP and IPP room already usedAn RCA is usually the next layer, not the first
- Lower expected income in retirementSo benefits are taxed at a lower rate later
- A long-term planIncluding key executives the business wants to keep
What to Weigh First
The trade-offs
Half sits with the CRA
The refundable tax earns no interest. Over a long period, that's a real cost compared with investing the full amount.
Reasonableness and scrutiny
Contributions must be reasonable for your services, and the CRA reviews owner-manager RCAs closely. Prohibited investment and advantage rules apply.
Fully taxable benefits
If your tax rate in retirement isn't lower than today, much of the advantage disappears.
Cost and complexity
A trust, a custodian, legal documents, refundable tax remittances and annual filings all add cost.
Insurance-funded RCAs
Some RCAs hold a life insurance policy instead of, or alongside, investments. These designs are more complex and draw more CRA attention, so they need especially careful review by your accountant and lawyer before anything is put in place.
How We Work With Your Accountant
Your accountant leads the tax side
An RCA only makes sense alongside a clear compensation plan, so your accountant is involved from the first step.
We model it
Projected contributions, refundable tax and retirement benefits, compared with simply paying more salary or dividends.
Your accountant reviews
They confirm reasonableness, the compensation strategy and the tax treatment before anything is recommended.
We implement
We coordinate the legal documents, the custodian and the investments, and keep everyone updated.
Common Questions
Questions owners ask about RCAs
The refundable tax stops an RCA from becoming an unlimited tax deferral. The CRA refunds it, $1 for every $2 of benefits paid, as money comes out of the RCA in retirement.
Benefits are taxable income to the person who receives them in the year they are paid. The planning value comes from receiving them in years when your tax rate is lower than when the contributions were made.
Some designs do this. They are more complex, depend on policy performance, and draw more CRA scrutiny, so they need careful review by your accountant and lawyer.
The longer the time frame, the longer half of the money sits with the CRA earning nothing. That doesn't rule an RCA out, but it should be compared carefully with the alternatives.
Related Guides
Strategies that often work together
Individual Pension Plan (IPP)
A corporate-funded pension that can allow larger contributions than an RRSP for owners on salary.
Read the guideCorporate-Owned Life Insurance
Permanent coverage owned by the corporation, with tax-sheltered growth and CDA planning.
Read the guideCorporate Insured Retirement Program
A leveraged concept that borrows against a corporate-owned policy to supplement retirement cash flow.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances.
Retirement Compensation Arrangements in Burlington, Oakville, Mississauga and Hamilton
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