Saving for retirement is a challenge for most Canadians. Between paying a mortgage, paying off credit card bills, and saving for a rainy day, retirement sometimes has to take a backseat.
That's where employer-sponsored retirement plans come in. They can fill in the gaps between your own contributions and what you actually need for your golden years.
If you start a new job and your company says they offer a Deferred Profit Sharing Plan (DPSP), you might be wondering how to take advantage of that. Here's what you need to know about how DPSPs work, their tax implications, and how they compare to other retirement plans.
What is a deferred profit sharing plan?
A DPSP is an employer-sponsored retirement plan registered with the Canada Revenue Agency (CRA) that allows a company to share its profits with employees. The employer distributes a portion of its profits into accounts set up for select, or all, employees.
Only employers can make contributions to a DPSP. Employees don't have to pay taxes on contributions until they withdraw money from the plan. DPSPs can include a vesting schedule where employees will only retain the amount saved on their behalf if they stay at their employer long enough.
Companies create DPSPs to attract employees (and encourage current employees to stay) and to reduce their tax burden — all of the company's contributions are tax-deductible.
How does a DPSP work?
Here's how a DPSP works. The company goes over their accounting for the year and reports a profit. This can happen on a regular or irregular basis.
They decide to share part of the profit with their employees in the form of distributions to their DPSPs. The money they distribute is tax-deductible for them and tax-deferred for the employees. Companies have 120 days after the end of the fiscal year to make contributions.
The employees receive these proceeds, which they can use to invest in various funds, stocks, or bonds. They can also buy company stock with the money. Employees don't have to pay taxes on these contributions unless they withdraw and claim the income on their taxes.
When the employee signs up for the DPSP, they'll designate someone as their beneficiary, most often a spouse or long-term partner.
DPSP contribution limits
The CRA sets annual limits on how much an employer can contribute to an employee's DPSP. The maximum contribution is the lesser of:
18% of the employee's compensation for the year
Half the money purchase limit for defined contribution plans — for 2026, that’s $17,695
There is no minimum contribution requirement — employers can choose to contribute as much or as little as they like in any given year, including nothing at all.
Employer contributions to a DPSP create a pension adjustment (PA), which directly reduces the employee's available Registered Retirement Savings Plan (RRSP) contribution room for the following year.
DPSP tax implications
DPSPs offer tax advantages for both employers and employees. Here's how the tax treatment works on each side.
For employers
Tax-deductible contributions: all contributions an employer makes to a DPSP are fully deductible as a business expense, reducing the company's taxable income
Payroll tax savings: unlike cash bonuses or salary increases, DPSP contributions are generally not subject to Canada Pension Plan (CPP) or Employment Insurance (EI) premiums
For employees
Tax-deferred growth: employees do not pay income tax on employer contributions when they are made — the money grows tax-deferred inside the plan until it is withdrawn
Withdrawal taxation: when funds are withdrawn, the full amount is added to the employee's taxable income for that year. Withdrawing after retirement, when income is typically lower, can mean paying less tax overall
RRSP room reduction: DPSP contributions create a pension adjustment that reduces RRSP contribution room for the following year. For example, if your employer contributes $3,000 to your DPSP, your available RRSP room the next year will be reduced by $3,000
Advantages and disadvantages of a DPSP
Advantages for the employer
Flexible contributions: the employer can make contributions when they want to. If a company's having a bad year, they don't have to put any money into a DPSP
Custom schedules: they can create their own contribution schedule — monthly, per pay period, or saved for annual bonuses
Employee retention: a DPSP can have a maximum vesting period of 2 years, which can help prevent turnover. An employee who leaves before the vesting period has to forfeit the DPSP
Formula flexibility: a company can decide which formula to use when distributing money, such as "everyone receives an equal share of the profits" or "employees receive a percentage of their salary up to a certain amount"
Tax deductibility: contributions are tax-deductible for the employer, which makes them preferable to a regular profit sharing plan
Disadvantages for the employer
Ownership restrictions: a DPSP is an employee-only plan, so owners, their relatives and spouses, and anyone with more than a 10% stake in the company are prohibited from participating
Profit dependency: distributions depend on the employer having profits, so in a bad year, the employer may not make any contributions. This can affect employee morale
Advantages for the employee
No personal contributions required: a DPSP is entirely funded by employer contributions. The employee doesn't have to put any money in to receive the full benefit
Short vesting period: the maximum vesting period is 2 years. Your company may have an even shorter vesting period or make employees automatically 100% vested
Early access available: once you're vested, you can withdraw funds before retirement, though they'll be taxed at your current tax rate. Waiting until retirement, when you may be in a lower tax bracket, is typically more tax-efficient
Disadvantages for the employee
Limited investment control: the employer can require the employee to purchase company stock with their DPSP funds. Employees who don't have full control of their investments should make sure they're diversified in their RRSP or other retirement accounts
Company stock risk: if the employee purchases company stock and the value drops significantly, their DPSP could lose substantial value
No guaranteed contributions: employers aren't required to contribute if they don't produce enough profit. If the DPSP is your main source of retirement savings, consider what you'll do if your company can't afford contributions in a given year
No spousal splitting: the DPSP is an employee-only plan, so you can't split the funds with your spouse. This is a key difference between a DPSP and an RRSP
DPSP vs. RRSP
The key differences between a DPSP and an RRSP come down to who contributes, vesting rules, and contribution limits.
Feature | DPSP | RRSP |
|---|---|---|
| Who contributes | Employer only | Employee (and sometimes employer) |
| Vesting | Up to 2 years | Immediately vested |
| Contribution limits | Lesser of 18% of pay or half the MP limit | 18% of earned income up to the annual RRSP limit |
| Impact on RRSP room | Reduces RRSP room via pension adjustment | N/A |
| Spousal splitting | Not allowed | Allowed (spousal RRSP) |
Employer contributions to an RRSP are automatically vested, so an employee can leave and take the RRSP with them. A DPSP may have a vesting period of up to 2 years. This can be a sticking point, but since a DPSP is essentially free money from the company, it doesn't matter as much unless you receive a much better job offer elsewhere.
An employee who has both a DPSP and RRSP will have the DPSP contributions subtracted from their RRSP limit. If the person's company adds $1,000 to their DPSP, that's $1,000 less they can contribute to their RRSP.
DPSP vs. profit sharing plan
A DPSP and a profit sharing plan both operate on the same basic principle. When a company has profit, it can share that profit with its employees as a major benefit. When there's no profit, the company doesn't have to make any contributions.
The most important difference is tax treatment. With a general profit sharing plan, employees have to record the contributions on their taxes in the year they receive them. With a DPSP, the money is tax-deferred — employees don't owe tax until they withdraw.
Because a DPSP is a registered plan, any contributions to it create a pension adjustment, which reduces the employee's available RRSP room. This is an important factor to consider when evaluating your total retirement contribution strategy.
How to transfer a DPSP to an RRSP
When an employee leaves a company, they can transfer their DPSP to an annuity, a Registered Retirement Income Fund (RRIF), or an RRSP. Employees can also cash out the amount. If they receive the amount as a cheque or cash, they have to report it on their taxes and pay income tax on it.
Transferring a DPSP directly to an RRSP avoids triggering a tax bill, especially if you have a significant amount of money in your DPSP.
Contact the DPSP provider to ask how to transfer the money into your RRSP account. If you don't have an RRSP account yet, set one up beforehand. It's important to do a direct rollover from your DPSP to your RRSP in order to avoid a large tax burden. You must be 71 or younger to transfer your DPSP to an RRSP.
If your spouse or partner passes away and you receive ownership of their DPSP, you may transfer it to your RRSP account. If you and your spouse separate or divorce and the agreement gives you some or total ownership of your former spouse's DPSP, you may transfer it to your RRSP.
The bottom line on DPSPs
A DPSP is a valuable, employer-funded retirement benefit that lets you grow your savings on a tax-deferred basis without contributing any of your own money. The key things to keep in mind are the vesting period (up to 2 years), the impact on your RRSP contribution room, and the fact that contributions depend entirely on your employer's profitability.
If you have access to a DPSP, it's worth understanding how it fits into your broader retirement plan alongside your RRSP and any other savings.
