# Understanding Deferred Profit Sharing Plans (DPSP) in Canada

![Retired senior couple looking at laptop together and smiling](https://www.investopedia.com/thmb/JWeAN1dwYaWxdB5ajtK7ToOF-OI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/FluxFactory-b7675642bc354e6380e8646070a35fc1.jpg)

*— Investopedia / FluxFactory*

## What Is a Deferred Profit Sharing Plan (DPSP)?

A deferred profit sharing plan (DPSP) is a Canadian employer-sponsored profit sharing plan intended to help employees save for [retirement](https://www.investopedia.com/retirement-savings-accounts-4689692). The money in an employee's DPSP account grows on a [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) basis until it is withdrawn.

### Key Takeaways

*   Deferred Profit Sharing Plans (DPSPs) are employer-sponsored retirement plans in Canada where contributions are made solely by employers.
*   The money in a DPSP grows tax-deferred until withdrawal, which can result in significant investment growth over time.
*   Employees benefit from DPSPs as they don’t pay taxes on employer contributions until the funds are withdrawn.
*   DPSPs are often combined with pension plans or Group Registered Retirement Savings Plans (RRSPs) to provide comprehensive retirement savings options.
*   Employers offering DPSPs gain from tax incentives, flexible contributions based on profits, and enhanced employee retention.

## In-Depth Look at Deferred Profit Sharing Plans (DPSPs)

DPSPs are a type of [pension](https://www.investopedia.com/terms/p/pensionplan.asp) plan registered with the [Canada Revenue Agency](https://www.investopedia.com/terms/c/ccra.asp), which is basically the Canadian version of the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) in the United States.

Periodically, employers share business profits with all employees or a select group through the DPSP. Employees who receive a share of the profits paid out by the employer do not have to pay federal taxes on the money until they later withdraw it from the DPSP.

Employers offering a DPSP are called sponsors, while trustees manage the funds.

The money in an employee's DPSP account grows tax-deferred, which can lead to bigger investment [gains](https://www.investopedia.com/terms/g/gain.asp) over time, due to the [compounding](https://www.investopedia.com/terms/c/compounding.asp) effect. Employees can withdraw their vested funds before retirement, even if they still work for the employer. They can also transfer the money to another registered plan and maintain its tax-deferred status. Taxes are due only upon withdrawal.

> **Fast Fact**
>
> Most plans allow individuals to decide how their DPSP money is invested, though some companies may require employees to purchase company stock with their contributions.

## Key Requirements for Deferred Profit Sharing Plans (DPSPs)

*   Contributions may be made only by employers. Employees cannot contribute.
*   Contributions are [tax-deductible](https://www.investopedia.com/terms/d/deductible.asp) for the employer. 
*   Employees do not pay taxes on employer contributions until they withdraw the money.
*   Investment earnings are tax-deferred as well.
*   [Registered retirement savings plan (RRSP)](https://www.investopedia.com/terms/r/rrsp.asp) contribution limits are reduced by DPSP contributions.
*   DPSPs are often combined with pension plans or a Group RRSP to provide employees with retirement income later in life.  
    
*   When an individual leaves an employer, they can transfer their DPSP money to another registered plan or use it to purchase an [annuity](https://www.investopedia.com/terms/a/annuity.asp), while maintaining its tax-deferred status. They can also cash out, though that would trigger a tax event with a tax payment required in the year when they receive the money.

## Benefits of DPSPs for Employers

For employers, a deferred profit-sharing plan paired with a group retirement savings plan can be a cheaper alternative when compared to a traditional pension plan. Some of the positive attributes of DPSPs from an employer perspective are:

*   **Tax Incentives**. Contributions are paid out of pretax business income and are therefore tax-deductible for the employer. They are also exempt from both provincial and federal payroll taxes.
*   **Cost**. DPSPs can be less expensive to administer than other plans.
*   **Flexibility**. Employers can base their contributions on their profits for the year and are not required to contribute if they didn't make a profit.
*   **Employee Retention**. DPSPs help employers retain employees by requiring a two-year vesting period for contributions.

## What Are the Contribution Limits for Deferred Profit Sharing Plans (DPSPs)?

In 2024, the maximum allowable contribution to a deferred profit sharing plan (DPSP) is 18% of the employee's compensation for the year or $16,245, whichever is less.

## What Is a Registered Retirement Savings Plan (RRSP)?

A registered retirement savings plan (RRSP) is a type of [defined contribution retirement plan](https://www.investopedia.com/terms/d/definedcontributionplan.asp), much like a [401(k)](https://www.investopedia.com/beginners-guide-to-types-of-401-k-s-5323549) in the U.S.

RRSPs can be either individual plans or employer-sponsored group plans. In the latter case, the employer may also make [matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp) to the employee’s account.

## What Happens If an Employee with a Deferred Profit Sharing Plan (DPSP) Dies?

If an employee with a deferred profit sharing plan (DPSP) dies, their surviving spouse or common-law partner can roll over the vested balance into a registered retirement plan of their own, while still keeping the account’s tax-deferred status. Other types of [heirs](https://www.investopedia.com/terms/h/heir.asp) will have to take the funds in cash and pay tax on them.

## The Bottom Line

DPSPs are employer-sponsored retirement plans in Canada designed to help employees build retirement savings through employer contributions. The funds grow tax-deferred, providing potential for significant investment gains over time. Employers have the flexibility to contribute based on company profits, and contributions from employees are not permitted. If you need more details about your DPSP, reach out to your employer's human resources department or your plan administrator for guidance.  

> **Article Sources**
>
> 1.  Government of Canada. “[Register a Deferred Profit Sharing Plan—Overview](https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/deferred-profit-sharing-plans/register-overview.html).”
>     
> 2.  Government of Canada. “[Payments from a Deferred Profit Sharing Plan](https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/deferred-profit-sharing-plans/payments.html).”
>     
> 3.  Government of Canada. “[Pension Adjustment Guide](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4084/pension-adjustment-guide.html).”
>     
> 4.  Government of Canada. “[Contributing to a Deferred Profit Sharing Plan](https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/deferred-profit-sharing-plans/contributions.html).”
>     
> 5.  Government of Canada. "[MP, DB, RRSP, DPSP, ALDA, TFSA limits, YMPE and the YAMPE](https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html)."
>     
> 6.  Government of Canada. “[What’s New](https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/whats-new.html).”
>     
> 7.  RBC Wealth Management. “[Pensions Part 3—Deferred Profit Sharing Plans](https://ca.rbcwealthmanagement.com/documents/264836/2225724/Deferred+Profit+Sharing+Plans.pdf/1fbc29ae-13a4-406d-a3f6-d993671b203d).”