Understanding the retirement compensation arrangement

By Lawrence Tam; published in CPABC in Focus
Published: 09/01/2019

An Alternative to Traditional Government-Regulated Savings Plans

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High-income earners can find it challenging to meet their retirement income goals given the contribution limits associated with government-regulated savings plans and some pension plans. A Retirement Compensation Arrangement (RCA) is a tool used by many business owners and professionals to address concerns about post-retirement income shortfall and provide a benefit to high-income employees. Understanding the advantages and disadvantages of an RCA can help business owners and professionals avoid any potential negative tax implications and make it more likely for their employees to meet retirement income goals.

Many Canadians rely on government-regulated saving plans, such as a Registered Pension Plan (RPP) or Registered Retirement Savings Plan (RRSP), to help fund their retirement. However, these plans have their disadvantages. Given that RPPs have the potential to be an expensive long-term liability for employers and that the allowable RRSP contribution is only 18% of an individual’s annual earned income,1 these registered saving plans do not always provide adequate retirement income for high-income earners, who may require somewhere between 50% and 70% of their pre-retirement income to maintain their standard of living after they exit the workforce. With that in mind, many business owners and professionals are using RCAs as a supplemental pension benefit to bolster their employees’ post-retirement income.

What is an RCA?

Section 248(1) of Canada’s Income Tax Act (ITA) defines an RCA as a plan or arrangement under which an employer, a former employer, and, in some cases, an employee makes contributions to the custodian of an RCA trust (an inter vivos trust). The custodian holds the funds in the trust with the intent of distributing them to the employee, former employee, or other beneficiary when/if the employee retires, loses an office or employment, or substantially changes the services they provide.

The custodian and the employer who established the RCA sign a trust agreement setting out the terms of the RCA trust, such as the powers of the custodian, how and when the trust funds will be invested through an RCA trust investment account, and the responsibilities and limitations of the parties. Since most RCAs are held until the employee retires or retirement benefits are paid, which may be many years after an RCA’s initial establishment, the 21-year rule that applies to most trusts does not apply to an RCA trust.

Many types of pension plans qualify as RCAs; however, some retirement arrangements (such as RPPs, RRSPs, deferred profit sharing plans, group sickness/accident insurance plans, employee life and health trusts, and salary deferral arrangements) are not eligible.

What are the tax implications of an RCA?

Refundable tax

An employer’s contributions to an RCA trust are subject to a refundable tax under Part XI.3 of the ITA at a tax rate equal to 50% of the amount of contributions. Accordingly, the custodian of the RCA will remit 50% of the employer’s contributions to the Canada Revenue Agency (CRA) as a refundable tax credited to a Refundable Tax Account (RTA). The RTA is non-interest-bearing and accumulates the refundable tax until distributions are made from the RCA trust. At that time, the CRA refunds the previously remitted tax to the RCA trust investment account equal to 50% of the distribution amount (that is, a refund of $1 for every $2 of benefits paid to the employee or beneficiary).

If the terms of the employment agreement require an employee to contribute to the RCA trust, the employee’s contributions are also subject to the 50% refundable tax. If the agreement requires the employer to withhold the contribution amount from the employee’s income, the employer must remit this refundable tax to the CRA. However, if the employee is required to make the contributions directly, the custodian of the RCA trust will remit the refundable tax.

Other tax implications

In addition to RCA contributions, any business or property income (such as dividends and interest income) and any realized capital gains earned in the RCA trust are taxable at the 50% refundable tax rate. In other words, capital gains and taxable Canadian dividends do not qualify for preferential tax treatment. The entire capital gain is taxable (instead of the usual 50%), and the dividend tax credit is not available for taxable Canadian dividends earned by the RCA trust.

Although certain types of income and capital gains earned by the RCA trust lose their preferential tax treatment, an exempt life insurance policy held by an RCA trust remains tax sheltered until the policy is disposed of, which allows the value of the insurance policy to grow on a tax-deferred basis. However, any policy gains realized from the disposition of the life insurance policy are subject to the 50% refundable tax.

Deduction of RCA contributions

When an employer contributes to an RCA trust, 100% of the contributions are deductible to the employer, provided that the contribution amount is considered “reasonable.” Although the ITA does not define a reasonable contribution, the CRA generally considers contribution amounts to be reasonable if they are equal to or less than the benefits that would be appropriate for the employee’s salary, position, and services provided. The CRA has also commented that the determination of whether a particular contribution to an RCA is reasonable is a question of fact. Therefore, to ensure that RCA contribution amounts are reasonable and not offside, employers may want to hire an actuary.

If, under the terms of their employment agreement, an employee is required to contribute to an RCA trust and their contributions are lower than those made by the employer, the contributions may also be tax deductible to the employee.

Distributions from an RCA

All distributions from an RCA are taxable in the hands of the employee or beneficiary and are subject to withholding tax at source. The custodian will provide the employee or beneficiary with a T4A-RCA slip—Statement of Distributions from a Retirement Compensation Arrangement—showing the distribution amount and income tax deducted. The employee or beneficiary will then report the distributions as “other income,” which is taxed at the marginal tax rate, on their personal income tax and benefit return.

What are some advantages and disadvantages of an RCA?

As with any pension plan, there are pros and cons to using an RCA. Here are some examples:


  • Contributions to an RCA trust do not affect an employee’s RRSP contribution room or RPP contribution limit. However, an employer’s contributions to an RPP or Individual Pension Plan may reduce the employer’s allowable contributions to an RCA. This is because RCA contributions must be considered reasonable when taking into account the total retirement package provided by the employer.
  • An RCA provides an incentive to reward long-term employees and can help the employer retain senior executives. It also provides employees with security against employment loss.
  • An employer’s contributions to an RCA trust are 100% tax deductible by the employer in the year they are made, and they are not taxable to the employee until the benefit is paid in the future—potentially when the employee is in a lower tax bracket.
  • An RCA may provide tax advantages to high-earning employees in a province where the top tax rate is higher than the RCA’s 50% refundable tax rate.
  • An RCA is generally protected from an employer’s creditors, although some exceptions apply.


  • Contributions to an RCA trust are subject to a 50% refundable tax that is credited to a non-interest-bearing RTA, leaving only half of the contributions available for investment.
  • There are initial setup fees, ongoing management fees, and other applicable custodial fees for the RCA trust.
  • The custodian of an RCA trust must file a T3-RCA trust return annually, even if there has been no activity in the year.
  • The recent decrease in corporate tax rates for active business income makes RCAs less attractive to owner-managers, as more after-tax corporate funds are available for investment.

Is an RCA the right choice?

Weigh the pros and cons, and plan accordingly. RCAs can provide employees with supplemental pension benefits and can be a useful strategy for employers seeking to provide benefits to their high-earning staff. However, proper planning is needed to avoid adverse tax consequences and ensure that RCAs are helping employees meet their retirement goals.


Lawrence TamLawrence Tam is a tax principal at Davidson & Company LLP in Vancouver, where he specializes in estate and trust planning, tax compliance, and planning for owner-managed businesses and high-net-worth individuals. He also oversees the tax services provided to the firm’s China-based clients.



  1. The maximum RRSP contribution for 2019 is $26,500.

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