When most Canadians think about retirement savings, the usual suspects come to mind: RRSPs, TFSAs, and perhaps a workplace pension. But for high-income earners, executives, incorporated professionals, and business owners, there’s a lesser-known yet remarkably powerful solution worth considering: the Retirement Compensation Arrangement (RCA). Paired with a Supplemental Executive Retirement Plan (SERP), this strategy can unlock substantial tax advantages and enhance your retirement flexibility.
What Is an RCA?
An RCA is an employer-sponsored retirement plan created for individuals whose income and retirement goals exceed the limits of RRSPs or defined benefit pensions. Unlike registered plans with strict caps, RCAs allow you to set aside additional funds in a tax-deferred structure. This is particularly valuable for those earning into the six or seven figure range.
Here’s how it works:
- Contributions are made by the employer (or your corporation) to a trust.
- Half of each contribution is invested.
- The other half is remitted to a Refundable Tax Account (RTA) with the CanadaRevenue Agency (CRA).
While the 50% remittance can look discouraging at first glance, it’s effectively a refundable tax prepayment. This setup defers taxation until funds are withdrawn, often in retirement, when your tax rate may be considerably lower.
What Is a SERP?
A SERP is an employer’s promise to pay retirement benefits over and above what’s permitted in registered plans. While some SERPs are unfunded (essentially an IOU), many are structured within an RCA trust to secure the benefits and create a more favourable tax profile.
Key Advantages of RCAs and SERPs
Below are some of the compelling reasons high-income Canadians use RCAs and SERPs as part of an integrated wealth strategy:
- Tax Deferral: RCA contributions are not taxed as personal income when made. You defer income tax until withdrawals begin, often during retirement years when you may be in a lower tax bracket.
- Corporate Tax Efficiency: For business owners, RCA contributions are fully deductible expenses—making them an efficient way to move retained earnings out of a corporation while reducing corporate tax.
- Tax-Sheltered Investment Growth: The invested portion of the RCA compounds tax-free within the trust, much like an RRSP, which can significantly increase your retirement nest egg over time.
- Creditor Protection: Because RCA assets are held in trust, they’re generally protected from creditors—an important safeguard for professionals and entrepreneurs in higher-risk fields.
- Flexible Plan Design: RCAs and SERPs can be tailored to your specific needs, including options such as inflation indexing, early retirement provisions, and survivor benefits.
- Enhanced Retirement Income: Together, RCAs and SERPs can provide a level of supplemental income that far exceeds the maximum RRSP and pension limits, offering the flexibility and security many high earners require.
Is an RCA Right for You?
If you’ve already maximized your RRSP and TFSA contributions and are looking for more sophisticated solutions, consider these questions:
- Are you currently taxed in the highest marginal bracket?
- Do you want to build a retirement income stream beyond traditional plans?
- Are you seeking efficient ways to extract retained earnings from your corporation?
- Would you value creditor protection for your future retirement assets?
If the answer is yes to any of these, an RCA could be a smart next step.
Interested in exploring whether RCAs and SERPs fit into your financial strategy?
Tune into the Free Lunch podcast for an in-depth discussion.
At Canvas Wealth, we partner closely with your accountant and actuaries to design and administer RCA and SERP strategies in strict compliance with CRA rules. When implemented properly, these plans can meaningfully improve your after-tax retirement outcomes and help you achieve the retirement you envision.
