DPSPs offer a supplement to a company's Registered Pension Plan or Group RRSP. An employer may contribute any amount out of profits, up to legislated maximums, into an employee DPSP account, or a trust fund, where contributions and earnings are sheltered from income tax until withdrawn.

Opportunity to thank employees. Sharing company profits usually instills a sense of company ownership which may have spin-off benefits: higher efficiency, higher morale, and higher profits.

Retain key employees. The vesting provision helps retain staff and reduce turnover.

Flexibility. There is no defined formula to DPSPs, so contributions can be tailored to better reflect business revenues, market conditions, or other intangible factors. The company is not obliged to contribute, so the amount and frequency are left to the discretion of the employer.

Cost effectiveness. Employer contributions are exempt from federal payroll taxes, including CPP, EI and other applicable provincial payroll taxes. This may help you offset plan costs. DPSPs are a perfect complement to a voluntary group RRSP.

Unlike pension plans, which are provincially regulated and governed by the Pension Benefits Act, DPSPs are registered with the Canada Customs and Revenue Agency and governed by the Income Tax Act.

Unlike a Group RRSP or pension plan, only employer contributions are allowed under a DPSP. Most employers use a DPSP as a complement to a non-contributory Group RRSP - i.e. an RRSP with no employer contributions.

Contributions to a DPSP are limited to the lesser of 18% of employee compensation, or half of the defined contribution (or RRSP) limit: $6,750 for 2001 and 2002; $7,250 for 2003; $7,750 for 2004; and indexed from 2005.

No contribution receipt is issued to employees. Employees receive a Pension Adjustment (PA) reducing their RRSP contribution limit for the following year.

Note: Connected persons are not eligible to participate in DPSPs.