A Deferred Profit Sharing Plan is not tax deductible for the employee, because employees are legally barred from putting their own money into one. Only the employer contributes to a DPSP, so there is no personal expense on your side to claim on your return. The tax benefit for you sits elsewhere: those employer contributions never show up as taxable income when they’re made, and the money grows sheltered from tax inside the trust until you withdraw it.
Why There’s Nothing for You to Deduct
A deduction requires an expense. With a DPSP, you don’t have one. The Income Tax Act requires that no contribution be made to the plan other than by the employer for the benefit of its employees.1Justice Laws Website. Income Tax Act RSC 1985, c. 1 (5th Supp.) – Section 147 The Canada Revenue Agency states it plainly: employee contributions to a DPSP are not permitted.2Canada Revenue Agency. Contributing to a Deferred Profit Sharing Plan
This is where a lot of the confusion starts, because a DPSP looks superficially like a group RRSP and people assume the tax treatment matches. It doesn’t. With a group RRSP, part of your salary goes in and you claim a deduction that lowers your taxable income. With a DPSP, the employer funds everything, you spend nothing of your own, and there is nothing to write off. You give up the personal deduction, but you also never spent a dollar to get the benefit.
The Tax Benefit You Actually Get
Even without a deduction, the tax advantage is real. Employees don’t pay tax on contributions the employer makes to the plan on their behalf.3Canada Revenue Agency. Register a Deferred Profit Sharing Plan – Overview The contribution isn’t on your T4 as employment income and isn’t hit by your marginal rate the year it goes in. If your employer puts $5,000 into your DPSP this year, the full $5,000 lands in the trust and starts earning returns immediately.
Growth inside the trust is also sheltered. You won’t get a T3 or T5 for dividends or capital gains earned in the plan. The compounding on a pre-tax balance is the core of what makes a DPSP worthwhile: the entire amount grows untouched by annual tax until you take money out. For someone in a higher bracket, that deferral can be worth a substantial amount over a career compared with receiving the same dollars as taxable salary and investing the after-tax remainder.
The Employer’s Side, Briefly
Because searchers often mix up who gets the deduction, it’s worth being direct about the other side. The employer can deduct DPSP contributions as a business expense, which reduces the company’s taxable income. Contributions have to come from profits, and the plan lets the employer skip contributions in unprofitable years. So the deduction on the arrangement exists, it just isn’t yours.
The Catch: Your RRSP Room Shrinks
Not having a personal deduction matters in one very practical way. Every dollar your employer puts into a DPSP creates a Pension Adjustment that reduces your RRSP contribution room the following year. The PA appears in Box 52 of your T4, and the CRA uses it to work out how much you can still contribute to your personal RRSP.4Canada Revenue Agency. Line 20600 – Pension Adjustment
The PA for a DPSP member equals the employer contributions allocated to you during the year, plus any forfeited amounts from other members reallocated to your account.5Justice Laws Website. Income Tax Regulations CRC c. 945 If your employer contributed $8,000 to your DPSP in 2025, your 2026 RRSP deduction limit drops by $8,000. Your usable RRSP room is 18% of last year’s earned income, up to the annual dollar cap, minus the PA.
The PA itself isn’t income and isn’t a deduction on your return. You just report it on line 20600 and the CRA does the math.6Canada Revenue Agency. T4 Slip – Statement of Remuneration Paid Your notice of assessment each year will show your updated RRSP room. Check it before making any large RRSP deposit. Over-contributing triggers a 1% per month penalty on the excess.
Tax When the Money Comes Out
The deferral ends when you withdraw. Any amount you receive from a DPSP, whether at retirement, when you leave the employer, or when the plan winds up, is taxable income in the year you receive it.7Canada Revenue Agency. Deferred Profit Sharing Plan (DPSP) Lump-Sum Payments The payer withholds tax at these rates for Canadian residents:
- Up to $5,000: 10% withheld (5% in Quebec)
- $5,001 to $15,000: 20% withheld (10% in Quebec)
- Over $15,000: 30% withheld (15% in Quebec)
Those rates are often lower than your actual marginal rate, so you may owe more when you file. A $40,000 payout triggers $12,000 of withholding at 30%, but if your combined income for the year lands you in a 40%+ bracket, the difference comes due at tax time.
Transferring to Defer the Tax
You can skip the immediate tax by arranging a direct transfer from the DPSP into another registered account: an RRSP, a RRIF, another DPSP, or a registered pension plan. The word that matters is “direct.” If the trustee sends the funds straight to the receiving plan, nothing is withheld and nothing is reported as income.7Canada Revenue Agency. Deferred Profit Sharing Plan (DPSP) Lump-Sum Payments If the cheque comes to you first and you deposit it into your RRSP later, you’ve already triggered a taxable event. It can’t be undone.
The Funds Are Not Locked In
DPSP money isn’t locked-in retirement savings the way a registered pension plan is. Once your employer’s contributions have vested, you can take the balance in cash if the plan terms allow. You’ll pay tax on it, but no one forces you to move the money into a locked-in retirement account or a life income fund. That gives departing employees genuine options: take the cash and the tax bill, roll it into an RRSP to keep deferring, or split the difference.