Retirement Compensation Arrangements

Retirement Compensation Arrangements (RCAs) are defined under subsection 248(1) of the Canadian "Income Tax Act", which allows 100 per cent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the "entitlement" under the Generally Accepted Guidelines for pensions, which are:

"a normal level of benefits would be the same benefit provided under a registered pension plan without regard to the Revenue Canada maximum. This would be 2% x years of service x final five-year average earnings or about 70% of pre-retirement income for an employee with 35 years of service."" (CRA Roundtable discussion, 1998).

Failure to follow the Generally Accepted Guidelines increases the risk that CRA could deem the RCA not to be an RCA, but rather a Salary Deferral Arrangement (SDA) with substantial tax and penalties payable. To ensure the RCA qualifies under CRA’s Generally Accepted Guidelines, an Integrated Final Earnings calculation determines the entitlement from the RCA and the resulting maximum level of funding. This entitlement calculation must be reviewed and recalculated periodically as circumstances change (e.g., salary, RRSP and RCA investment performance). If you earn more than $125,000 annually, you can expect to experience ‘pension discrimination’ because of the cap on contributions in Registered Pensions Plans (RPP) such as Registered Retirement Saving Plans (RRSPs), Individual Pension Plans (IPPs) and Money Purchase Pension Plans (MPPPs). In other words, your pension benefits will be significantly lower than the acceptable standard of 70 per cent of pre-retirement income. Payments from the RCA combined with those from your RRSP, IPP, and/or Registered Pension Plan provide the total desired pension.

An RCA can be funded using various investments. One of the most effective is the specially designed tax-sheltered insurance policy underwritten by a major insurer. The funding amounts the same as a conventional non-insurance funded RCA, but insurance funded RCAs provided enhanced benefits such as pre-retirement death benefit and survivor benefits. The first tax-sheltered RCA was designed by [http://www.rcf.ca Retirement Compensation Funding (RcF)]

Since RCAs on average can run for 30 to 50 years, a Corporate Trustee is strongly recommended to protect the interests of the Plan Member, Spouse, and Children.

History of the RCA

Originally, the RCA provision was setup in 1986 by the CRA as a deeming provision for Corporate Owned Life Insurance (COLI) policies. Shortly after the 1986 legislation, a ruling was requested from the CRA (then Revenue Canada) to fund an Executive's (of large public corporation) pension shortfall. After the green light from the CRA, the first RCA was established in Canada. Working with RcF’s consulting actuary, [http://www.rcf.ca RcF] designed the first tax-sheltered insurance funded RCA in the late 1980s, and designed the first illustration system for it.

Up until 1998, RCAs were primarily established for employees of Public Corporation. In 1998 the CRA clarified its position, and allowed Private Corporations to establish RCAs to match their counter parts in Public Corporations. As such, RCAs have become more and more popular for Owners & Key Executives of Private Corporations.

References

* [http://www.cra-arc.gc.ca/E/pub/tg/t4041/t4041-e.html CRA RCA Guide]
* [http://www.canlii.org/ca/sta/i-3.3/ Canadian Income Tax Act]
* [http://www.canlii.org/ca/regu/crc945/ Canadian Income Tax Regulations]

ee also

*Pension
*Registered Retirement Savings Plan (RRSP)
*Individual Pension Plan (IPP)

Further reading

* [http://bpmmagazinec.powweb.com/02_archives/2006/october/serp_tax_sheltered_rca.html 'The New Executive SERP: Tax Sheltered RCAs' Benefits and Pension Monitor Published: October 2006]

* [http://www.advisor.ca/images/other/aer/aer_0208_net_worth_report.pdf 'Dealing with the Pension Shortfall: RCAs vs. Corporate Insured Retirement Plans' Advisor Edge Report Published: February 2008]