Retirement Compensation Arrangement
RCA’s: Strategic Retirement Planning for High-Income Professionals
Traditional retirement vehicles like RRSPs and pensions often have contribution limits that don’t meet the needs of high-income professionals. Retirement Compensation Arrangements (RCAs) offer a powerful, tax-advantaged solution for business owners, executives, and professional athletes looking to secure their financial future. If you earn income through a Canadian corporation, an RCA can be a key part of a cross-border tax and retirement strategy to help you retain more of your wealth.
What Is a RCA?
A Retirement Compensation Arrangement (RCA) is an employer-sponsored retirement plan authorized under the Canadian Income Tax Act. It allows Canadian-controlled corporations to make tax-deductible contributions to a dedicated RCA trust for high-income individuals. These funds grow tax-deferred until withdrawn, typically during retirement when the individual may be in a lower tax bracket.
How Contributions Work:
50/50 Split: Contributions are divided equally between an Investment Account (for growth) and a Refundable Tax Account (RTA) managed by the Canada Revenue Agency (CRA).
Tax-Deferred Growth: Funds in the Investment Account grow tax-deferred, with investment income subject to a refundable 50% tax.
Withdrawals: When funds are withdrawn, the CRA reimburses the RCA trust from the RTA on a dollar-for-dollar basis, preserving the full benefit.
Key Differences From RRSP’s
No age restrictions for contributions or withdrawals
No contribution limits, subject to CRA reasonableness
No mandatory withdrawal timelines
Enhanced tax efficiency for high earners
Protection from probate and creditor claims
Who Should Consider aN RCA?
Incorporated Business Owners and Executives: Those with income exceeding RRSP limits.
Professional Athletes: Individuals with high earnings in a short career window.
Cross-Border Professionals: Canadians working abroad or Americans employed by Canadian entities.
High-Income Professionals: Those seeking to optimize tax-deferred retirement savings.
Eligibility Note: RCAs must be funded by a Canadian employer or corporation.
Key Benefits
For Individuals:
Unlimited Contributions: No caps based on income, subject to CRA reasonableness.
Tax-Deferred Growth: Investment earnings accumulate without immediate tax liability.
Lower Tax on Withdrawals: Funds are taxed as ordinary income in retirement, often at a lower rate.
Independent of Other Plans: RCA contributions do not affect RRSP or TFSA contribution room.
Asset Protection: RCA funds are generally exempt from probate and creditor claims.
Flexible Withdrawals: Access funds after employment ends, with no mandatory timeline.
Cross-Border Advantages: Potential tax treaty benefits (e.g., 15–25% withholding tax) for those retiring abroad.
For Corporations:
Tax Deductions: Contributions and administrative costs are fully deductible.
Payroll Tax Savings: No EI, CPP, or other payroll taxes on RCA contributions.
Executive Retention: Enhances compensation packages for key employees or shareholders.
Balance Sheet Optimization: Reduces passive income and retained earnings exposure.
How It Works
Setup: A Canadian employer establishes an RCA trust for a key employee, executive, or shareholder.
Contributions: The corporation contributes to the RCA trust, with 50% allocated to an Investment Account and 50% to the CRA’s RTA.
Growth: Funds in the Investment Account grow tax-deferred, with investment income subject to a refundable 50% tax.
Withdrawals: Upon retirement or termination, the beneficiary receives income from the RCA. The CRA releases matching funds from the RTA.
Taxation: Withdrawals are taxed as ordinary income in the year received, often at a lower rate.
Case Study: RCAs for Professional Athletes
Professional athletes often earn high incomes over a short career, with limited RRSP contribution room and exposure to top marginal tax rates. RCAs address these challenges by:
Deferring Income: Athletes can defer a portion of their salary to a tax-sheltered RCA, reducing current tax liability.
Flexible Withdrawals: Funds can be accessed post-career or during lower-income years, minimizing tax exposure.
Cross-Border Benefits: Athletes retiring abroad may benefit from tax treaty rates (e.g., 15–25% withholding tax) instead of Canadian marginal rates.
Requirement: The athlete must be compensated by a Canadian-based organization.
Frequently Asked Questions (FAQs)
Q: How much can I contribute to an RCA?
A: There are no fixed limits. Contributions are based on retirement needs and must meet CRA reasonableness standards, often supported by actuarial calculations.
Q: Do RCA contributions impact RRSP or TFSA room?
A: No, RCAs operate independently and do not affect other registered plan limits.
Q: How are RCA withdrawals taxed?
A: Withdrawals are taxed as ordinary income in the year received. The CRA reimburses the trust from the RTA, preserving the full benefit.
Q: Can RCAs be used for cross-border professionals?
A: Yes, if income is earned through a Canadian corporation. RCAs are often used in cross-border compensation structures.
Q: What happens if I leave Canada permanently?
A: Withdrawals are subject to non-resident withholding tax (typically 15–25%), potentially reduced or exempt under tax treaties, depending on the destination country.
Why Choose New World Agency?
At New World Agency, we specialize in designing RCA strategies for high-income professionals, executives, and athletes, including those with complex cross-border tax needs. Our team collaborates with your legal and tax advisors to:
Ensure CRA compliance
Maximize tax efficiency
Create flexible, long-term retirement plans
Whether you’re building wealth, planning for retirement, or relocating abroad, we tailor RCA solutions to your unique financial goals.
Take Control of Your Retirement
If RRSPs and pensions fall short—or if you want to retain more of your income—an RCA could be the key to a secure financial future.