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Deferred Profit Sharing Plan (DPSP)

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A deferred profit sharing plan is an employer-funded arrangement that shares profits with employees on a tax-deferred basis. Only the employer contributes; amounts are allocated to accounts held for individual employees and are not taxed until they are paid out. A DPSP is registered with CRA and files its own annual return, and because contributions build retirement savings, they generate a pension adjustment that reduces the employee's RRSP deduction limit for the following year. DPSPs are frequently paired with a group RRSP or a money purchase provision, and most of the difficulty you will meet comes from that pairing rather than from the DPSP itself. The other recurring problem is participation: the rules shut out people connected to the employer, which owner-managed businesses tend to discover late. This tutorial covers who may participate, the contribution limit, vesting and forfeitures, the reporting cycle, and those restrictions.

How to work through this tutorial

This follows a DPSP from setup through the annual cycle: 1. Understand what a DPSP is and how it differs from a pension plan. 2. Check who may participate — the exclusions here are absolute and catch owner-managed businesses. 3. Register the plan with CRA. 4. Contribute within the annual limit, and understand how it interacts with other plans. 5. Apply the vesting rule and deal with forfeitures. 6. Determine and report each member's pension adjustment. 7. File the plan's own annual return and report payments out. 8. Handle terminations, including any pension adjustment reversal. 9. Check your work against the common pitfalls. 10. Verify every specific against CRA's published guidance before relying on it. This tutorial explains obligations and method. It does not calculate contributions, limits or pension adjustments.

What a DPSP is

A deferred profit sharing plan lets an employer share profits with employees without those employees being taxed on the amounts when they are allocated. The employer contributes, the trustee holds the funds, amounts are allocated to individual employees, and tax is deferred until money is actually paid out. The employer contributes and the employee does not. This is the structural feature to hold onto, because several other rules follow from it: there is no member contribution component in the pension adjustment, and the plan cannot be used as an employee savings vehicle. Despite the name, contributions do not have to come out of current-year profits in any strict accounting sense — but the plan's terms govern how the contribution is determined, and a plan whose contributions bear no relationship to profits invites questions about whether it is really a DPSP. A DPSP is not a pension plan. It is registered under its own provisions of the Income Tax Act, it files its own return, and it is not subject to the registration conditions that govern registered pension plans. What it shares with a pension plan is the tax-assisted saving room it consumes, which is why it produces a pension adjustment. In practice DPSPs are often paired with a group RRSP or a money purchase provision — the DPSP taking the employer contribution and the companion arrangement taking the employee's. That pairing is the source of most of the administrative complexity.

Who may not participate

The participation restrictions are the most important thing on this page for an owner-managed business, because they are absolute and because breaching them puts the plan's registration at risk rather than merely producing a reportable error. A DPSP may not benefit a connected person — broadly, an employee with a significant ownership interest in the employer. Nor may it benefit relatives of such a person, or relatives of the employer where the employer is an individual. Confirm the precise definitions and the ownership threshold in the guide, since they are drawn technically and indirect holdings count. The practical effect is that a DPSP is unavailable for exactly the people who often want one: the owner of a small incorporated business, their spouse, and their children on the payroll. Advisers who reach for a DPSP as an owner-compensation tool have reached for the wrong instrument, and the mistake is usually discovered later rather than sooner. Ownership can also change. An employee who was validly a DPSP member may become a connected person by acquiring shares — through an employee share plan, an estate, or a reorganisation. Ownership changes are not visible from payroll data, so this is worth checking periodically rather than only at enrolment. Where the plan has benefited an ineligible person, deal with it promptly and take advice. The consequences run to the plan, not only to the individual.

The contribution limit

Employer contributions and reallocated forfeitures credited to an employee for a year are capped. The ceiling is the lesser of two things: the DPSP limit for the year, and a fixed percentage of the employee's compensation for the year. The DPSP limit is set annually and changes every year. It is related to the money purchase limit rather than being independent of it, so a change to one moves the other. This tutorial does not state either value — take both from CRA's published limits table for the year you are administering. The percentage component mirrors the percentage used in the RRSP deduction limit and in the pension adjustment cap. What counts as compensation for this purpose is a tax definition and is not necessarily the same as the earnings measure your plan uses to determine contributions. Where the two differ, using the plan's measure in place of the tax definition produces a wrong ceiling. Where an employee also participates in a money purchase provision, the two do not have independent room. Contributions across both count against the employee's overall tax-assisted saving, so a DPSP contribution made without regard to what the companion plan contributed can push the employee over. If you administer a paired arrangement, look at the combined position per employee, not at each plan separately. Employer contributions are deductible to the employer within the limits, and the timing rules for when a contribution is treated as made for a year should be confirmed rather than assumed.

Vesting and forfeitures

A DPSP must vest amounts in the employee within a maximum period from the time they become a member. The plan may vest sooner — immediately, if the employer wishes — but it cannot vest later than the statutory maximum. Confirm the period in the guide; it is short, and a plan drafted with a longer vesting schedule is not compliant however common that schedule may be in other benefit arrangements. When an employee leaves before vesting, the unvested amount is forfeited and stays in the plan. Forfeited amounts must then be dealt with: reallocated to remaining members, or applied to reduce the employer's future contributions, within a time limit running from the forfeiture. Leaving forfeitures unapplied past that limit is a compliance failure, not a bookkeeping choice. Where a forfeiture is reallocated to an employee, the reallocated amount forms part of that employee's pension adjustment and counts against their contribution limit. This is the component most often missed, for the same reason it is missed in a money purchase provision: the reallocation increases the employee's entitlement without any new money arriving from the employer, so it does not appear in payroll records or contribution remittances at all. It is visible only in the plan's own accounting. An administrator who builds pension adjustments from payroll data will understate them for every employee who received a reallocation. Build them from the plan's account records.

The pension adjustment and reporting

A DPSP produces a pension adjustment for each employee: the employer contributions allocated to them for the year plus any reallocated forfeitures. There is no employee contribution component, because employees cannot contribute. The PA is reported on the employee's T4 slip in the pension adjustment box, on the same slip and to the same deadline as any other pension adjustment. Where the employee has a PA but no T4 from you, it goes on the alternate slip. The pension adjustment tutorial covers the boxes, the deadline and the cap. As with any pension adjustment, the amount reduces the employee's RRSP deduction limit for the following year rather than the current one. Employees in a paired DPSP and group RRSP arrangement are often surprised by this, because they can see their own RRSP contributions but not the DPSP allocation that is quietly consuming their room. The plan itself files an annual return covering the trust's income and activity for the year. This is separate from the employees' slips and separate from anything the employer files, and it is the filing most often overlooked when a DPSP has been set up by an adviser and then administered in-house. When amounts are paid out to an employee or a beneficiary, the payment is reported to them and is taxable in their hands at that point. Certain amounts may be transferred to another registered vehicle instead — confirm what qualifies and the mechanics before treating a transfer as tax-deferred.

Terminations and payouts

When an employee leaves, the vested portion of their DPSP account is theirs. The plan's terms and the Act govern the options available — a lump sum payment, a transfer to another registered vehicle, or an annuity — and the tax treatment differs between them. Amounts must be paid out or transferred within the period the plan's terms and the legislation allow following termination; a DPSP account cannot be left in the plan indefinitely for a departed employee. Confirm the applicable deadline, as leaving accounts to sit is a common informal practice that the rules do not support. A pension adjustment reversal can arise where the amount the employee actually receives is less than the total pension adjustments reported for them — the classic case being a termination before full vesting, where PAs were reported for amounts the employee never got. The PAR restores the corresponding RRSP room. PARs for DPSPs are reported on the same form and to the same deadline as PARs for pension plans, and that deadline runs from the calendar quarter in which the termination occurred rather than from year end. It is short and it is the most commonly missed deadline in this area. The pension adjustment reversal tutorial covers it. On death, the account is dealt with according to the plan's terms and the beneficiary designation, with its own reporting.

Common pitfalls

Setting up a DPSP for an owner-manager, their spouse, or their children. Connected persons and their relatives cannot benefit from a DPSP, and this is the single most common error with the vehicle. Not rechecking connected status after enrolment. An employee can become connected by acquiring shares, and nothing in the payroll file will show it. Building pension adjustments from payroll data. Reallocated forfeitures never appear there. Leaving forfeitures unapplied past the deadline. Drafting a vesting schedule longer than the statutory maximum, often by copying a schedule used for a non-registered benefit. Treating the DPSP limit and the money purchase limit as independent room for an employee in a paired arrangement. Look at the combined position per employee. Carrying forward last year's DPSP limit. It changes annually. Using the plan's earnings measure instead of the tax definition of compensation when applying the percentage cap. Overlooking the plan's own annual return. It is separate from the slips and separate from the employer's filings, and it is routinely missed when administration moves in-house. Leaving a departed employee's account in the plan indefinitely. Missing the PAR filing window after a pre-vesting termination — which is exactly the situation a DPSP produces most often.

What to verify this tutorial against

This was drafted without a source document. Confirm every specific against CRA's published guidance before acting on it — particularly the participation restrictions and the vesting period, where the consequence of being wrong falls on the plan rather than on a single filing. CRA's guidance on deferred profit sharing plans covers registration, the participation restrictions, the contribution limits, vesting, forfeitures and the plan's own return. The pension adjustment guide covers how a DPSP pension adjustment is determined and reported, and the pension adjustment reversal guide covers PARs on termination — the common case for a DPSP. The employers' guide to filing T4 and T4A information returns covers slip preparation and deadlines, and the reporting of amounts paid out. The DPSP limit is published annually in CRA's limits table alongside the money purchase limit, the defined benefit limit, the RRSP dollar limit and the year's maximum pensionable earnings. All change every year. Use the table for the year you are administering. Where the plan's own terms govern — how the contribution is determined, the vesting schedule, how forfeitures are applied, the payout options — the plan text is authoritative and should be read rather than assumed.

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