What is a Retirement Compensation Arrangement (RCA)?

J.P. LaPorte

With a new minimum tax on the horizon after the last federal budget, business owners may be more interested in discussing ways to protect their future wealth.  A retirement compensation arrangement (RCA) may be a way to do that. Tax and financial advisors may wish to come up to speed to engage clients in more high value advice post tax season. Here’s what you’ll want to know:

An RCA is a supplemental employer-provided retirement solution that normally supplements the pension income generated by a registered pension plan.

Much like a pension plan, it is funded out of pre-tax corporate dollars (enabling the employer to claim a corporate tax deduction) and is not treated as a taxable employer benefit in the hands of the employee. RCAs are usually reserved for top executive employees of large corporations but is often used for professional athletes and some owner / operators of private enterprises.

While the RCA shares many similarities with a pension plan, it is subjected to a very special tax regime in that for every $1 contributed to the RCA, 50% or 50 cents must be immediately remitted to the Canada Revenue Agency and recorded in a “Refundable Tax Account”.  The other 50% is invested in the trust fund set up under the RCA.  Taxable earnings generated within the RCA Trust fund are also subjected to this 50% refundable tax rule.

The account at the CRA is called “Refundable” because ultimately all of these dollars end up being returned to the RCA Trust during decumulation.  That is, when an RCA pension benefit is paid out, for every 2$ of pension income paid to the plan member, the CRA will refund 1$ out of the Refundable Tax Account.  Once that RCA trust is exhausted, the balance of any money left in the Refundable Tax Account is paid back to the RCA trust fund.

The RCA can be funded in a number of ways including using a universal life insurance policy, stocks, bonds, GICs and other asset classes.  The corporation sponsoring an RCA can also post a letter of credit with a bank.  Recent proposed Budget changes would exempt the fees paid in connection to securing the letter of credit from this 50% refundable tax regime, thus facilitating the use of such letters of credit.

Learn more about the implications of the Federal Budget and other factors pertinent to retirement planning strategies this year at the May 24 Virtual CE Summit.