Finance Terms: Deferred Profit Sharing Plan (DPSP)

A piggy bank with coins spilling out of it

Deferred Profit Sharing Plan (DPSP) is a retirement savings plan that is quite similar to a Registered Retirement Savings Plan (RRSP). It is a type of investment account offered by employers to their employees to help them save for their retirement. In this article, we will explore what a DPSP is, how it works, and its benefits and challenges.

Understanding Deferred Profit Sharing Plan (DPSP): A Comprehensive Guide

A DPSP is a type of defined contribution plan, which means the contribution made by the employer and employee is predetermined, but the eventual payout is based on the investment returns of the DPSP throughout the years. It is a way for employees to share in their employer’s profits while also saving for their future. One of the significant benefits of the DPSP is that the employer can contribute a portion of the company’s profits to the plan, which will then be distributed among the plan beneficiaries.

Contributions to a DPSP account are typically made by both the employer and employee, with contributions being tax-deductible. The contributions made to a DPSP account by the employer are entirely discretionary and depend on the company’s performance. In contrast, the employee can choose to contribute a fixed percentage or amount to their DPSP account.

It is important to note that DPSPs are subject to certain rules and regulations set by the government. For example, there are limits on the amount of contributions that can be made to a DPSP account each year. Additionally, there are restrictions on when and how the funds can be withdrawn from the account. It is essential to understand these rules and regulations before enrolling in a DPSP to ensure that you are making the most of this retirement savings option.

Benefits of Deferred Profit Sharing Plan (DPSP) for Employers and Employees

One of the main benefits of a DPSP is that it provides employees with an additional retirement savings option that allows them to share in the company’s profits. DPSPs are also attractive to employers, as they offer a means to compensate employees while incentivizing them to work harder and increasing their loyalty to the company.

Another significant benefit of DPSPs is that any growth in the plan’s investments happens tax-free until the funds are withdrawn at retirement. Additionally, contributions made to a DPSP account also reduce the employee’s annual taxable income, which could result in lower tax payments. The retirement payouts from a DPSP are taxable, but typically a retiree’s tax rate is lower than their marginal tax rate in their employment years.

Furthermore, DPSPs can also help employers attract and retain top talent. By offering a competitive retirement savings plan, employers can differentiate themselves from other companies and become more attractive to potential employees. This can be especially important in industries where there is a high demand for skilled workers.

How to Set Up a Deferred Profit Sharing Plan (DPSP)

DPSPs are offered by employers and are typically established through an agreement between the employer and employees, which specifies the plan terms and conditions. The process behind setting up a DPSP is determined by each company and depends on the resources available.

The employer may choose to create the plan themselves or get a third-party service provider to develop and oversee the DPSP. They will then need to file relevant government forms, such as the Form T4PS, and ensure that their DPSP complies with regulatory requirements, such as pension laws and income tax regulations.

It is important for employers to communicate the details of the DPSP to their employees, including eligibility requirements, contribution limits, and vesting schedules. Employers may also choose to offer education and resources to help employees understand the benefits of participating in the DPSP and how it can help them achieve their financial goals.

DPSP vs. RRSP: Which is Better for Retirement Savings?

While both DPSP and RRSP are designed to help people save for their retirement, they have different characteristics. In a DPSP, the employer contributes a portion of the company’s profits to the plan, whereas an RRSP is an individual retirement savings plan whereby the individual chooses to contribute a portion of their income to the plan with no employer contributions.

Unlike RRSPs, DPSPs are more suited for those who prefer passive retirement savings, as the employer typically makes all investment decisions on behalf of the employee. If an employee prefers to have more control over their retirement savings, the RRSP is the better option. However, it is always good to note that getting employer-matching DPSP would result in a higher contribution compared to turning an RRSP alone.

Another key difference between DPSP and RRSP is the tax implications. Contributions made to an RRSP are tax-deductible, which means that the individual can claim them as a deduction on their income tax return. On the other hand, contributions made to a DPSP are not tax-deductible, but the employer’s contributions are considered taxable income for the employee. This means that the employee will have to pay taxes on the employer’s contributions when they withdraw the funds from the plan.

Tax Implications of Deferred Profit Sharing Plan (DPSP) Contributions and Withdrawals

Employer and employee contributions to a DPSP account are tax-deductible for the contributor, but the withdrawal of funds from a DPSP upon retirement is considered taxable income for the beneficiary. The tax rate that applies to the recipient of the DPSP payout will depend on the beneficiary’s marginal tax rate at the time of withdrawal.

Additionally, there are specific regulations concerning withdrawals from a DPSP. If a beneficiary withdraws funds from their DPSP before the plan’s maturity, they may be subject to taxes and penalties.

It is important to note that DPSP contributions may also affect an individual’s eligibility for certain government benefits, such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS). This is because DPSP contributions are considered income and may impact the income threshold for these benefits. It is recommended that individuals consult with a financial advisor or tax professional to fully understand the tax implications and potential impact on government benefits before contributing to a DPSP.

Investment Options in a Deferred Profit Sharing Plan (DPSP)

DPSPs are typically invested in various investment vehicles, such as mutual funds, stocks, bonds, and ETFs. The employer generally manages the investment of the funds in a DPSP. However, the investment options and strategies employed by the employer depend on the type and structure of the plan, and the organization’s goals.

It is important to note that while some DPSP participants may prefer a more aggressive investment approach, others may opt for a conservative approach. Such differences in investment preferences may determine any changes in the fund’s investment mix used by the employer.

Additionally, DPSP participants may have the option to choose from pre-determined investment portfolios that align with their risk tolerance and investment goals. These portfolios may include a mix of different investment vehicles, such as stocks, bonds, and cash, and are managed by professional investment managers. Participants can choose to allocate their contributions among these portfolios based on their individual investment preferences.

DPSP Vesting: What it Means and How it Works

Vesting is the process of gaining ownership of funds or assets held in a DPSP account. How vesting works in a DPSP largely depends on the rules of the plan. The employer determines the vesting period in their DPSP plan, which is usually based on the number of years worked or the amount of employer contribution made to the employee’s account.

Employees who have worked for the company long enough or received employer contributions up to a certain level will be fully vested in their DPSP account. In contrast, those who do not meet the employer’s vesting requirements will receive a part of the employer’s contributions when leaving their employment.

It is important for employees to understand the vesting schedule of their DPSP plan, as it can impact their retirement savings. For example, if an employee leaves their job before becoming fully vested, they may lose a significant portion of their employer’s contributions. On the other hand, if an employee is fully vested, they have complete ownership of the funds in their DPSP account and can take them with them when they leave their job.

DPSP Contribution Limits and Matching Programs

Contributions to a DPSP account have limits set by the government, which may change from year to year. The contribution limit is calculated as a percentage of the employee’s salary or up to a fixed figure set by the government.

Employers can also set contribution limits for the DPSP, which can be dependent on company performance or profits. Additionally, some employers may offer to match an employee’s contribution to their DPSP account up to a certain level, creating a more attractive retirement savings package.

It is important to note that exceeding the contribution limit for a DPSP account can result in tax penalties. Employees should be aware of their contribution limits and monitor their contributions throughout the year to avoid any potential penalties.

Matching programs offered by employers can vary in terms of the level of matching and the eligibility requirements. Some employers may require employees to work for a certain period of time before becoming eligible for the matching program, while others may offer immediate eligibility. It is important for employees to understand the details of their employer’s matching program and take advantage of it to maximize their retirement savings.

Retirement Planning with a Deferred Profit Sharing Plan (DPSP)

DPSPs are an essential tool for retirement planning as they allow contributors to save for their retirement while also taking advantage of the company’s profits. When planning for their retirement, beneficiaries need to make informed decisions on how they will use the DPSP payments to finance their lifestyle without fear of outliving their savings.

Retirees can choose to receive their DPSP payments through various methods, such as a lump sum, periodic payments, or an annuity. The choice of the payout method will depend on the beneficiary’s financial goals and income planning strategies.

It is important to note that DPSPs have contribution limits, which vary depending on the company’s policies and the beneficiary’s income. Beneficiaries should also consider the tax implications of their DPSP payments, as they are subject to income tax upon withdrawal. To maximize the benefits of a DPSP, beneficiaries should consult with a financial advisor to develop a comprehensive retirement plan that takes into account their unique financial situation and goals.

Pros and Cons of a Deferred Profit Sharing Plan (DPSP)

Like any investment plan, DPSPs have advantages and disadvantages that potential contributors should be aware of. A significant advantage of DPSPs is that they allow contributors to share in their employer’s profits, providing an additional retirement savings avenue.

However, since the employer manages the DPSP funds and investment strategies, the employee lacks control over their contributions’ investment decisions. The plan’s success is also tied to the company’s fortunes, which could leave contributors vulnerable to poor investment decisions or the company’s economic downturns.

Another advantage of DPSPs is that they can be an effective tool for employee retention. By offering a deferred profit sharing plan, employers can incentivize employees to stay with the company for the long term, as they will have a vested interest in the company’s success.

On the other hand, DPSPs may not be suitable for all employees, particularly those who are looking for more flexibility and control over their retirement savings. Additionally, DPSPs may not be as beneficial for employees who work for companies with inconsistent profits or who are in industries that are prone to economic volatility.

DPSP Distribution Options at Retirement or Termination of Employment

DPSP participants can choose how their retirement savings are distributed upon their retirement or termination of employment. Beneficiaries can choose to receive their DPSP payments through a single lump-sum payment, periodic payments, purchase of an annuity, or any combination of these options.

The beneficiary’s choice of distribution method will depend on their personal financial circumstances, lifestyle, and overall retirement goals. Individuals need to consult with financial experts to discuss their options and evaluate the tax consequences associated with each method.

It is important to note that the choice of distribution method can have a significant impact on the amount of retirement income received. For example, choosing a lump-sum payment may result in a larger initial payout, but may not provide a steady stream of income throughout retirement. On the other hand, choosing an annuity may provide a guaranteed income stream, but may not offer the flexibility to access funds as needed.

DPSP participants should also consider their other sources of retirement income, such as government pensions and personal savings, when making their distribution choice. A comprehensive retirement plan should take into account all sources of income and expenses to ensure a comfortable retirement.

How to Maximize Your Earnings with a Deferred Profit Sharing Plan (DPSP)

To maximize earnings in a DPSP, it is important to start contributing as early as possible to take advantage of the power of compound interest. This means making regular contributions, increasing the contribution amount when possible, and taking advantage of any employer contribution-matching programs.

DPSP participants also need to pay close attention to their investment options, contributing to their account’s high-performing funds and avoiding any funds with high management fees or poor track records. Diversifying their contributions across various investment vehicles can help avoid concentrated risks while maximizing returns.

Another important factor to consider when maximizing earnings in a DPSP is to regularly review and adjust your investment strategy. As your financial goals and risk tolerance change over time, it is important to ensure that your investment portfolio aligns with these changes. This may involve rebalancing your portfolio, adjusting your contribution amounts, or exploring new investment options.

Common Mistakes to Avoid with a Deferred Profit Sharing Plan (DPSP)

When engaging in a DPSP retirement savings plan, it is important to avoid common mistakes that could lead to unfavorable financial implications. One common mistake is failing to enroll in the DPSP program altogether, leading to the loss of any employer matching contributions.

Another common mistake is underestimating the amount of money needed for retirement, leading to inadequate contributions to the plan. Participants should have a well-informed understanding of their retirement goals, expenses, and risk tolerance to make better contribution decisions.

It is also important to regularly review and adjust your DPSP contributions as your financial situation changes. Failing to do so could result in missed opportunities for maximizing your retirement savings. Additionally, participants should be aware of any fees associated with the DPSP plan and ensure they are not paying excessive fees that could eat into their retirement savings.

Finally, it is crucial to have a diversified investment portfolio within your DPSP plan. Investing solely in one type of asset or company could lead to significant losses if that asset or company underperforms. By diversifying your investments, you can mitigate risk and potentially increase your returns over the long term.


A DPSP is a great retirement savings option for employees wanting to share in their employer’s profits while saving for their future. The plan allows for tax-deductible contributions, tax-free investment growth, and a variety of distribution options at retirement or termination of employment.

However, like any investment plan, DPSPs have their challenges, such as lack of investment control, fluctuation in returns, and the potential for loss of employer contributions. Therefore, participants should carefully evaluate their investment options, contributions, and retirement goals before engaging in a DPSP program.

It is important to note that DPSPs are not the only retirement savings option available to employees. Other options include Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and Defined Benefit Pension Plans (DBPPs). Each option has its own advantages and disadvantages, and employees should consider their individual financial situation and retirement goals before choosing a plan.

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