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Retirement Compensation Arrangement: Canadian Tax Lawyer Guide

Published: February 23, 2021

Last Updated: June 11, 2021

How does a Retirement Compensation Arrangement work and what are the benefits? – tax guidance from a Canadian tax lawyer

What is a retirement compensation arrangement (RCA)?

As described in CRA publication T4041(E) Rev.20, an RCA is a plan or an arrangement under which an employer, former employer, and in some cases an employee makes contributions to a person or partnership, referred to as a custodian who manages the funds. The custodian then holds the funds in trust with the intent of eventually distributing them to the employee, former employee or other beneficiary on, after, or in contemplation of a) an employee’s retirement; b) an employee’s loss of an office or employment; c) any substantial change in the services the employee provides.

How does an RCA plan work?

Under subsection 207.7(1) the Income Tax Act, when an employer makes a contribution to a custodian for an RCA trust, the employer must withhold the refundable tax that is equal to 50% of the amount of the contribution and remit the tax to the Canada Revenue Agency (CRA). Since the contributions to the custodian are not made to the employees, they won’t be subject to any tax consequences in the year the contributions are made. However, all distributions out of an RCA fund are taxable. When a distribution is made from an RCA plan to an employee, the refundable taxes paid are recovered at the same rate (e.g. $1 for every $2 paid) and the employee pays personal tax on these distributions. When the custodian of an RCA buys an annuity contract to be held by the beneficiary as the legal owner, the CRA treats the amount paid to purchase the contract as a taxable distribution out of the RCA trust to the beneficiary. This full amount is taxable in the year the custodian purchases the contract.

See also
Will & estate planning: Important Considerations

Custodian responsibilities

A custodian has the following responsibilities:

  1. If a custodian receives a contribution for an employee that was withheld from income by the employer, the custodian must send the employee a letter of acknowledgement that tells the employee if the amount is deductible.
  2. Although contributions made directly to an RCA trust by an employee will not have refundable tax withheld, the custodian of the RCA trust can remit the refundable tax based on contributions made directly by the employee using the remittance voucher on Form T901B.
  3. A custodian of an RCA trust must file Form T3-RCA every year no later than 90 days after the end of the RCA trust’s tax year. The CRA will apply a penalty if the return is filed late.
  4. A custodian must provide the CRA with address change information, any information on changes to the RCA’s custodian and details of any funds transferred to or from another RCA trust.

Who will benefit from an RCA?

An RCA plan could provide some benefits to both employers and employees. In particular, companies involved in Scientific Research and Experimental Development (“SR&ED”) may benefit the most.

  1. Employers

Employers can use RCA plans as a “Golden Handcuff” to require an employee to work for a certain period time before the RCA contributions vest. This can help employers retain certain key players that are valuable to their operations.

  1. Employees

Employees can generally enjoy peace of mind when they participate in an RCA plan because the assets of the RCA would be protected against any creditor of the employer even if the employer were to close down.

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Medical Expense Credit for Travel

Another advantage of the contributions to the RCA by an employee is that it will not reduce the RRSP contribution limit, unlike the case for any contribution made to a Retirement Pension Plan.

  1. Companies involved in SR&ED

Companies involved in SR&ED may benefit the most from RCA plans. In order to retain the benefits from the enhanced investment tax credits, these companies have to maintain low taxable income and taxable capital figures. One typical method is to declare bonuses for the owner-managers and pay these bonuses out of the company to reduce taxable capital. Since the top tax rate in several Canadian provinces is above 50%, an RCA plan can defer up to 4% of personal tax since the withholding tax rate is only 50%.

Pro tax tips – RCA plan requires careful planning

The employer, the custodian and a person who has bought an interest in an RCA will have to remit refundable tax in that year and be subject to penalties if they don’t do so in a timely manner. If a person is subject to this penalty more than once in a calendar year, the CRA will assess a 20% penalty on the second or later failure if they were made knowingly or under circumstances of gross negligence. Aside from that, an RCA plan can result in adverse tax effects without careful planning. Therefore, you should always seek professional tax guidance advice from an experienced Canadian tax lawyer if you are considering utilizing an RCA plan for potential tax benefits as part of your retirement planning.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."


Yes. The CRA can provide taxpayer relief provisions. This legislation allows the CRA to cancel or waive penalties or interests if they believe that a certain taxpayer cannot meet their tax obligations due to circumstances beyond their control. You can file a taxpayer relief by filling out Form RC4288.

The penalties for remitting late are: 3% if the amount is one to three days late, 5% if it is four or five days late, 7% if it is six or seven days late, and 10% if it is more than seven days late or if no amount is remitted. The CRA can also charge interest on any late payment owed. Being assessed this penalty more than once in a calendar year entitles the CRA to assess a 20% penalty to the second, or later, failures if made knowingly or because of gross negligence.

If an employer fails to withhold the 50% refundable tax on contributions made to a custodian, the employer must remit to the CRA an amount equal to that of the contribution made to the custodian. For example, if the employer contributes $5,000 directly to the RCA custodian, the law requires the employer to remit $5,000 to the CRA.

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