Tax Tip: Lump-sum payments from deferred profit sharing plans

If you receive a lump-sum payment from a deferred profit-sharing plan, you can defer paying tax on the amount until retirement by transferring the funds directly into a qualifying account. Eligible accounts include Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs). This rule applies to lump-sum payments from retiring allowances, as well.

Direct transfers between registered plans don’t affect your contributions limit. You can transfer to your qualifying account or your spouse/common-law’s account. A direct lump-sum transfer can be made on behalf of the employee to his account or his spouse/common-law account due to the death of the employee or a breakdown in the relationship with the spouse.

DPSP lump-sum payment made to the beneficiary will be claimed in his income. The beneficiary can transfer the amount indirectly to a registered plan of his own. The same amount can then be claimed as a deduction to defer the taxes.

For example: If you receive a lump-sum payment from your employer, you can keep the cash, and spend it as you like, but you must pay income tax on it. In fact, your boss reports this lump sum payment as employment income on your T4 rather than as retirement income on a T4A. This expense can be unaffordable for many people, but if you transfer it into your RRSP or RPP, you don’t have to pay any income tax on the amount until you withdraw the funds during your retirement.

Employee profit sharing payments are your employer’s way of sharing the company profits with all of the people who make things happen, including you. If you receive income from your employer as part of a DPSP, you can direct transfer it to a qualified Registered Retirement Savings Account using the T2151 form in order to avoid paying tax now. Note that DPSP contributions made on behalf of an employee in a particular year reduce the employee’s RRSP contribution room for the following year. So be ensure you have RRSP contribution room by checking on your most recent NOA (notice of assessment) before transferring the funds to an RRSP account.