Registered Retirement Savings Plan - Income Replacement Benefit

Registered Retirement Savings Plan Rules

Contributions to a registered retirement savings plan (RRSP) are limited to 18% of the preceding year's earned income to a maximum specified by Canada Revenue Agency annually less the preceding year's pension adjustment (PA).
The pension adjustment (PA) is the value of the pension benefit the employee accrued under an RPP or DPSP. The amount of the PA is the sum of:

  • the total employer plus employee contributions to defined contribution RPPs
  • the total contributions to DPSPs
  • (9 times the annual pension benefit earned in the year in defined benefit RPPs, less $1,000)

The annual contribution limit was intended to increase annually but the increases have frequently been postponed.

Contributions may be deducted in the calendar year that they are received. Contributions made during the first 60 days of the calendar year may be claimed in the year made or previous calendar year.

Contributions may be made to a spousal RRSP in which case the contributor receive tax relief and the spouse owns the RRSP and will be taxed on proceeds after they have been in the plan for at least 3 years.

This is general information to assist with plan design and not intended for tax planning purposes. There are numerous rules (rollover, carry-forward, settlement options, age limits etc.) that individuals should research or seek professional advice on.

Structured Group RRSP

A structured group RRSP is the retirement savings vehicle that is the easiest to establish and maintain. Your only involvement with the government is a letter to Revenue Canada (Taxation) requesting permission to provide tax relief at source. You establish the plan rules, remit payroll deductions as well as any matching contributions, and coordinate the flow of information between employees and the plan administrator. The plan administrator follows the employee's investment instructions, provides tax reporting, prepares accounting statements and provides employee communication material.
Employer matching formulas often fall within the 50%-100% of employee contributions to a maximum of 3%-5% of earnings. Your formula can be tied to service or participation and can vary by class of employee. Employees often make excess voluntary contributions.

With a group RRSP, employer contributions are considered earnings, attract payroll taxes and vest immediately. Employees make all investing decisions and may withdraw funds. The rules of your plan should include restrictions particularly future employer contributions when an employee withdraws funds that the employer has contributed or matched.

It is common to combine the a structured group RRSP with a deferred profit sharing plan (DPSP) to maximize value and simplicity. A favourite plan design is a DPSP containing a profit sharing component designed by HR plus an schedule for the employer matching employee contribution to a Structured Registered Retirement Savings Plan based on profit. The matching rate would be a minimum of 50% and maximum of 100% of employee contributions. The maximum employee contribution that could be matched is 1% of earnings during the first year of participation, 2% during the second year, 3% during the third year, 4% during the fourth year and 5% of earnings after 4 years of participation.