A DPSP in Canada is a Deferred Profit Sharing Plan — an employer-sponsored retirement arrangement in which a company funnels a share of its profits into a registered trust for eligible employees. Only the employer contributes; employees cannot add their own money. The funds grow tax-deferred inside the trust, and tax applies only when money is paid out or transferred to a non-registered account. The plan must be registered with the Canada Revenue Agency under section 147 of the Income Tax Act, which sets the rules for contributions, vesting, eligibility, and payouts.1Canada Revenue Agency. Register a Deferred Profit Sharing Plan – Overview
How the Plan Is Funded
The employer sets up a trust, registers it with the CRA, and agrees to direct a portion of business profits into individual accounts for eligible employees. The trust holds those assets separately from the company’s operating funds, which keeps the retirement savings legally insulated from the employer’s finances.
The contribution formula has to be tied to profits. Employers define “profits” in the plan document and express contributions as a percentage of them, and they can use their own profits or the combined profits of related corporations.2Canada Revenue Agency. Deferred Profit Sharing Plans In a year with no profit, the employer is not required to contribute anything.3Canada Revenue Agency. Contributing to a Deferred Profit Sharing Plan That is the central difference between a DPSP and a traditional pension: contributions rise and fall with the business.
Contribution Limits
Annual contributions for each employee are capped at the lesser of 18% of the employee’s compensation for the year or half the money purchase (MP) limit.3Canada Revenue Agency. Contributing to a Deferred Profit Sharing Plan For 2026, the MP limit is $35,390, so the DPSP ceiling is $17,695 per employee.4Canada Revenue Agency. What’s New – Savings and Pension Plan Administration The limit was $16,905 for 2025 and $16,245 for 2024.5Canada Revenue Agency. MP, DB, RRSP, DPSP, ALDA, TFSA Limits, YMPE and the YAMPE
Contributions made in the first 60 days of the following year can count toward the prior year’s limit, which gives employers a short window after year-end to finalize deposits.3Canada Revenue Agency. Contributing to a Deferred Profit Sharing Plan If an employer exceeds the limit, the plan’s registration becomes revocable, which means the CRA can strip the tax-advantaged status entirely.6Canada Revenue Agency. Fixing Errors in a Deferred Profit Sharing Plan
Who Can Be in a DPSP
Not everyone connected to the business can participate. The Income Tax Act bars several groups from being beneficiaries: anyone related to the employer, anyone who is a specified shareholder of the employer, anyone related to a specified shareholder, and (where the employer is a partnership) anyone related to a partner.2Canada Revenue Agency. Deferred Profit Sharing Plans A specified shareholder generally means someone who owns 10% or more of any class of the company’s shares, directly or indirectly.
If a contribution is made on behalf of an excluded individual, the CRA can move to revoke the plan.6Canada Revenue Agency. Fixing Errors in a Deferred Profit Sharing Plan The restriction is deliberate: a DPSP is meant to benefit rank-and-file employees, not the owners who control the company.
Vesting: When the Money Becomes Yours
Vesting determines when the employer’s contributions actually belong to you. Canadian law caps the vesting period at 24 consecutive months of plan membership.3Canada Revenue Agency. Contributing to a Deferred Profit Sharing Plan Some plans vest immediately; none can require more than two years. Once vested, the money is yours even if you resign the next day.
Leave before vesting and the unvested contributions are forfeited. What happens to the forfeited amounts depends on the plan document — they may be redistributed among remaining participants or returned to the employer.
Pension Adjustment Reversal
Forfeiture creates a side problem. The CRA has already counted those employer contributions against your RRSP room through a Pension Adjustment. To make you whole, the trustee calculates a Pension Adjustment Reversal (PAR) and reports it on a T10 slip, and the PAR restores the lost RRSP room in the year it’s reported.7Canada Revenue Agency. Reporting a Pension Adjustment Reversal If you were immediately vested, no PAR is needed — you received everything the PAs reported.
Getting Money Out
Inside the plan, investment gains, dividends, and interest accumulate tax-free. Tax applies when funds come out, and the method of withdrawal determines what you pay.
Cash Withdrawals
A lump-sum cash payment is added to your taxable income for the year. The plan administrator withholds tax at source before paying you and issues a T4A slip for the withdrawal.8Canada Revenue Agency. T4A Slip – Information for Payers Depending on your marginal rate, you may owe more at filing time or get some of the withholding back.
Tax-Deferred Transfers
To avoid an immediate tax bill, you can transfer DPSP funds directly into another registered account. Eligible destinations are an RRSP, a RRIF, a registered pension plan (RPP), a pooled registered pension plan (PRPP), a specified pension plan (SPP), another DPSP, or an advanced life deferred annuity (ALDA).9Canada Revenue Agency. Deferred Profit Sharing Plan (DPSP) Lump-Sum Payments Transfers to a TFSA or FHSA are not permitted. A direct plan-to-plan transfer is a non-taxable event, and once the funds land in an RRSP they follow RRSP withdrawal rules.
The Age 71 Deadline
Money cannot sit in a DPSP indefinitely. All vested amounts must be paid out or dealt with by the end of the year you turn 71. You have three options: take a cash withdrawal and pay tax, transfer to an eligible registered account, or use the funds to buy a life annuity with a guaranteed term of 15 years or less from a licensed annuity provider. The annuity must begin no later than the end of that same year.10Canada Revenue Agency. Payments From a Deferred Profit Sharing Plan If you leave employment or the plan terminates before age 71, the vested balance has to be paid out within 90 days of that event.2Canada Revenue Agency. Deferred Profit Sharing Plans
If a Plan Member Dies
When an employee dies, vested amounts are paid to the designated beneficiary or to the estate.2Canada Revenue Agency. Deferred Profit Sharing Plans A surviving spouse or common-law partner can receive the funds through a direct, tax-free transfer into their own RRSP, RRIF, RPP, PRPP, SPP, or DPSP, preserving the deferral.11Canada Revenue Agency. Transfers to or From a Deferred Profit Sharing Plan A beneficiary who takes cash instead reports the amount as taxable income for the year.
Effect on Your RRSP Room
Every dollar your employer puts into your DPSP reduces your personal RRSP room the following year through a Pension Adjustment (PA). The employer reports the PA on your T4 or T4A, and the CRA uses that figure when it calculates how much new RRSP room you earn.12Canada Revenue Agency. Pension Adjustment Guide The PA appears on line 20600 of your return, in box 52 of a T4, and in box 034 of a T4A.13Canada Revenue Agency. Line 20600 – Pension Adjustment
In practice: an $8,000 DPSP contribution this year cuts next year’s RRSP deduction limit by $8,000. The CRA treats DPSP contributions and personal RRSP contributions as parts of the same tax-assisted savings pool, capping the total so that employees with employer plans don’t get a larger break than those without. Check your Notice of Assessment for your current RRSP room before making any contribution. If you over-contribute to your RRSP, the CRA allows a $2,000 lifetime buffer; anything beyond that triggers a 1% monthly penalty tax on the excess until you withdraw it.14Canada Revenue Agency. Excess Contributions
DPSP Compared to a Group RRSP
Many employers offer a group RRSP alongside or instead of a DPSP, and they are not the same product. In a group RRSP, employees contribute through payroll and the employer may match some portion. In a DPSP, the employer contributes everything and employees put in nothing. That makes the DPSP a pure employer benefit tied to company performance, while a group RRSP functions as a shared savings vehicle.
Vesting is the other main split. Group RRSP contributions belong to the employee immediately. DPSP contributions can take up to two years to vest, which gives the employer some retention leverage. Both plans reduce RRSP room through Pension Adjustments. It’s common to see the two paired: a DPSP for the employer’s profit-sharing contributions, and a group RRSP for the employee’s own contributions and any match.