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Group RRSPs: The Extra Edge

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Among the many Canadians who have displayed the foresight to contribute to an RRSP, there is a growing segment of even more fortunate individuals: those who are enjoying several additional valuable benefits because they have chosen to participate in a Group RRSP through their employer.

Group RRSP Basics

A Group RRSP is simply a collection of individual RRSPs where the employer arranges for employees to make contributions through regular payroll deductions on a pre-tax basis. After you complete the application form and decide how much you want to contribute, your employer deducts that amount from your pay in pre-tax dollars. These funds get forwarded to the financial organization selected by your employer as the investment manager and administrator for the group plan. Your contribution is then deposited into your RRSP and invested as you specify.

No matter how satisfying it may be to get a tax refund from Revenue Canada, getting one means you gave the government an interest-free loan. With a Group RRSP, contributions are made on a pre-tax basis by payroll deduction, so the amount of tax your employer is required to deduct at source is calculated after your Group RRSP contribution is removed, resulting in an instant tax saving. In other words, you will not overpay your taxes during the year and then have to wait until your income tax return is processed to receive a refund.

So why over-pay your taxes and then wait for a refund from the government? A Group RRSP will cut your taxes instantly at source and give you that money as extra take-home pay to spend or save as you see fit.

The above table compares an employee who contributes to a Group RRSP to one who does not.

For every $300 monthly contribution to a Group RRSP, take-home pay is reduced by only $226 because the tax deducted at source is $74 less ($443-$369)

In effect, each dollar invested in a Group RRSP will cost this employee only 75 cents (cost will vary according to your salary, amount of contribution, province, and personal situation).

The $74 difference, when multiplied by 12, equals the tax refund typically received in the following year – assuming the employee saves $3,600 ($300×12) in after-tax dollars during the year and deposits it in a single lump sum into a regular RRSP at the end of the year.

Additional Group Benefits

In addition to the instant tax savings, a Group RRSP also offers the following benefits of contributing by instalment:

• Payroll deduction offers the ultimate convenience; It is the easiest way to save.

• Avoid the last-minute RRSP rush at the end of February.

• It's easier to reach your RRSP limit than with a single lump-sum contribution at the end of February.

• Contributing earlier maximizes the value of your savings by keeping them tax-sheltered longer than year-end lump-sum contributions.

• It eliminates the need to borrow money from a bank to make an RRSP contribution, thus saving interest costs.

Deferred Profit Sharing Plan (DPSP)

DPSP's can be used as a pension plan or supplement to a company's Group RRSP. Like a registered pension plan, you must register a deferred profit-sharing plan with Revenue Canada. It must comply with the terms and provisions of the Income Tax Act and regulations.

The employer may contribute an amount "out of profits," or related to profits, into a trust fund that will accumulate sheltered from income tax. The employer's contributions are tax-deductible and are not taxable to the employee until paid out. Employee contributions are not permitted.

Employer contributions into a DPSP are limited to the lesser of 18% of the employee's compensations of the year from the employer or a dollar limit equal to one half of the defined contribution pension plan limit as follows:

1998 through 2002 – $6,750 

2003 – $7,250 

2004 – $7,750 

2005 indexed

Amounts allocated to a member's account must vest to the member after two years of membership in the plan or earlier if it allows for it. Any non-vested amount forfeited by a terminating employee must either be allocated to other plan members or refunded to the employer no later than the end of the year following the year in which the amount was forfeited.

A DPSP may give members the right to withdraw vested benefits from the plan at any time. However, a member's vested benefit must be paid no later than 90 days after the earliest of: 

• If the member is vested, Mackenzie allows for a $500 withdrawal per calendar year.

• Death of the member

• Termination of the employment of the member

• Attainment of age 69

• Termination of the plan

Highlights

• No minimum employer contributions

• Employer contributions are not subject to payroll taxes

• Only employer contributions are permitted into the plan

• The employer may impose a vesting period of up to 2 years

• You can restrict withdrawals to termination, death, and retirement

• Owners or relatives of owners cannot participate in the plan

• Terminated employees can withdraw the total vested amount subject to taxation

• Creates a pension adjustment

• It can be used to share profits with employees or as a pension plan.

Defined Contribution Registered Pension Plans (DCPP's)

DCPP's are formal arrangements made by a sponsor to provide employees with a monthly income on retirement. Legislation requires the employer to contribute to the plan. If the employee is required to contribute, the plan is referred to as a contributory plan. Otherwise, it is a non-contributory plan.

Highlights

• The employer may impose a vesting period of up to 2 years

• The contribution formula is clearly defined (minimum employer contribution is 1% of YMPE)

• After the contributions vest, all monies are locked-ion

• Employer contributions are not subject to payroll taxes

• The legislation states that voluntary contributions are allowed to be redeemed. However, employers have the option of locking in all contributions

• Plans are creditor proof

• Low administrative costs

• The employer is responsible for the plan

• Creates a pension adjustment

Combination DPSP/ Group RRSP

This type of arrangement allows you to take advantage of the features of both plans.

The employer contributions are made to the DPSP, while employee contributions are made into the Group RRSP. The employer contributions can be made contingent upon the employee contributing to the Group RRSP. 

Highlights

• No minimum employer contributions

• Employer contributions to the DPSP are not subject to payroll taxes

• The employer may impose a vesting period of up to 2 years on the DPSP only

• You can restrict withdrawals to termination, death, and retirement on the DPSP

• Owners or relatives of owners cannot participate in the DPSP portion

• Terminated employees can withdraw the total vested amount subject to taxation

• The DPSP creates a Pension Adjustment

• The DPSP can be used to share profits with employees or as a pension plan

• Employer and employee contributions can be made in any combination but cannot exceed an individual's RRSP limit