An RCA is a special trust account, which is created to hold funds earmarked for the retirement of key management personnel.  These funds are held in a special account in much the same way as RRSP funds would be.  Contributions to the RCA are tax deductible by the payor corporation and eventual payouts from the RCA are taxed in the hands of the individual, ideally at low tax rates. RCA’s are particularly advantageous where an individual’s taxable income drops as a result of retirement, or where the individual becomes resident for tax purposes in a different province or a different country.  In the period between contribution and payouts, the RCA essentially posts security with the tax authorities equal to 50% of its assets; this security is completely recovered as the pension is paid out to the individual. 

 Selected RCA Issues to consider:

1. Must register with Canada Revenue Agency (CRA).
2. Pension analysis is normally required.
3. All permitted contributions by the corporation are tax deductible.
4. 50% of all contributions into the plan are paid directly to CRA by the employer.
5. 50% of all earnings in the plan are paid directly to CRA by the RCA.
6. CRA tracks all contributions relating to the RCA and term it a “Refundable Tax”.
7. For each dollar paid out of the RCA, the employee receives a T4-RCA slip and is taxed on that amount.  The RCA withholds tax on such payments and remits these to CRA.  On the other hand, the RCA receives $1 back in refundable tax for each $1 paid out in salary.  Under normal circumstances all of the refundable tax is eventually recouped by the RCA.
8. Professional fees required on initial setup of the RCA and then annual filing fees thereafter.
9. Funds can be loaned back to the payor corporation using prescribed interest rates.
10. RCA can invest in various assets including Mutual Funds, Stocks, Bonds, Real Estate, etc.
11. Typically contributions to RCA would cease once the employee has retired, and generally would not continue past the employees 70^th birthday.
12. Payments from the RCA typically occur once the employee has retired and typically are paid out over a reasonable period such as 10 years.

Notice to Reader

Please note that the above information is a summary only.  The specific taxation issues affecting each taxpayers situation are unique and should be investigated on a case by case basis.  Please contact Canham Rogers, Chartered Accountants to review your situation prior to implementing any of the strategies or transactions noted above.