Page 106 - A Canuck's Guide to Financial Literacy 2020

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Retirement Compensation Arrangement

A Retirement Compensation Arrangement (RCA) is a pension plan where a custodian holds
funds contributed by an employer for the purpose of distributing it to the employee in
retirement. RCAs are often catered to high net worth or high earners who are seeking
retirement income in excess of what’s provided by a Retirement Pension Plan.

Contributing into an RCA

The employer contributes funds to a custodian who proceeds to invest the assets to
generate long term return. There are no limits on how much can be contributed but the
amounts must be reasonable and based on actuarial assumptions and methods.

Employer contributions into an RCA are tax deductible and are not considered a taxable
benefit to the employee. Contributions are split between two accounts – the RCA
Investment Account and the Refundable Tax Account. Each account has unique
characteristics.

RCA Investment Account vs Refundable Tax Account

When an employer contributes into an RCA on behalf of an employee, the funds get split
between two accounts

▪ RCA Investment Account

▪ Refundable Tax Account

RCA Investment Account

RCA Investment account is managed by the employer or the employee. They’re responsible
to invest the funds in a manner that is able to generate a return on behalf of the employee.

The account allows for no preferential tax treatments such as capital gains or gross up of
dividends and 50% of investment income/growth generated must be forwarded to the
Refundable Tax Account every year.

Refundable Tax Account

The Refundable Tax Account is registered with Canada Revenue Agency. The balance in
the account earn no interest. When withdrawn, the RTA refunds $1 for every $2 paid to the
employee.

Custodian