Retirement compensation arrangement (RCA)
A retirement compensation arrangement (RCA) is a plan under which an employer, former employer or, in some cases, an employee makes contributions to a custodian. The custodian holds them in trust for later distribution to the employee or another beneficiary. Part XI.3 of the Income Tax Act taxes it.
A buyer may find an RCA in place for a seller or key employee. The Income Tax Act defines it in s. 248(1), and the CRA describes distributions as made on, after or in contemplation of events such as retirement, loss of an office or employment, or a substantial change in the services the employee provides. See what happens to the pension or benefits plan on a sale.
How the tax works
The CRA says the employer’s contributions to the custodian are taxable under Part XI.3 of the Act, and that the tax is refundable to the custodian when the T3-RCA return is processed, taking into account distributions made out of the RCA trust and income earned by the trust in the year. The custodian files that return each year, even if there has been no activity.
What to ask
- Who the custodian is and how the arrangement is documented.
- Which people are beneficiaries and which events trigger a distribution.
- Whether the T3-RCA returns have been filed each year.
- How the arrangement differs from a registered pension plan.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentRetirement Compensation Arrangements
- 02Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 248 (definitions, including business)
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