What is a Deferred Profit Sharing Plan?

by Investing School on October 10, 2012

The Deferred Profit Sharing Plan (DPSP) is a Canadian profit sharing plan that is employer sponsored. The DPSP must be registered with the Canadian Revenue Agency as a pension plan, meaning that the Agency must recognize and approve of the receiving plan for it to qualify for tax breaks. The employer shares the profits of the business on a periodic basis with some or all of the employees.

Employees do not have to pay federal taxes on these disbursements until they withdraw the funds. Government regulations may allow the proceeds from a DPSP to be moved to another type of retirement or investment account. Doing so may reduce the tax rate applied to withdrawals.

Employers enjoy many benefits when setting up a deferred sharing profit plan. Attractive tax breaks for contributions is the primary advantage. Deductions can be significant, depending upon the size of the contribution. There are limits on how much an employer can contribute during each tax period.

Employees that have a vested interest in the profitability of their employers are among them. Since profits directly impact the annual contributions made by the employer, employees are more inclined to be productive and use company resources more carefully. When this dynamic comes into play, the bottom line can improve significantly.

While the DPSP is designed to be a retirement plan, there are few circumstances which will allow the employee to withdraw funds prematurely. Financial hardship is the case most often cited. The situation will determine how much tax is assessed upon the withdrawal.

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