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DC plans are often called money purchase plans, since the money in the account will often be used to purchase an income option at retirement.

Under a Defined Contribution Registered Pension Plan (DCRPP), the contributions to the plan are pre-determined, whereas the benefits are not.

Employer contributions are mandatory; a DCRPP can be set up with the

employee either contributing or not contributing. DCRPPs are formal plans that must abide by pension legislation. They are creditor proof, create a pension adjustment, and are designed to provide monthly retirement income for the employee. The pension benefits from a DCRPP depend on a number of factors, like contribution amounts, number of years enrolled in the plan and the

performance of the fund investments.

DCRPPs are surpassing the Defined Benefits Plan in popularity since they provide the employer with more flexibility and certainty in terms of planning and sustaining the pension costs.

Defined Benefit Plans require the employer to fund any shortcomings in the plan, but with Defined Contribution Plans, you are only responsible for making the pre-determined contribution.

Since payments to DCRPPs are fixed, your monthly expenses are easier to

calculate. You always know how much you will need to make your contributions.

In 1996, a change in legislation provided additional deductions under certain circumstances for contributions with respect to service before 1990. Members of RPP’s should be able to obtain details of their deductible contributions from their employer or pension administrator. Depending on the type of RPP, member contributions will be used directly or indirectly by the employer in computing the individual’s “pension adjustment”. This pension adjustment is a limiting factor in determining an individual’s maximum RRSP deductible contribution for the next calendar year.

Employee-directed investments in DC plans

More and more DC plans allow employees to select investments for defined contribution accounts. Usually, the employer selects the basket of investment funds from which the employee may choose.

Employer contributions

In a DC plan, the amount the employer contributes is specified by the pension plan. Usually, these contributions will be equal to a certain percentage of the employee's earnings. The employer makes these contributions to the fund each month.

The provisions of the Canada Income Tax Act require employers to contribute at least 1% of the employees' salary in order for the plan to be recognized as a registered retirement plan.

Investment fund selection

Since the amount of an employee's pension will be affected by how successfully their contributions are invested, it is important that they make informed

investment decisions.

Although the legislation does not specify what information and investment options they should receive, it is prudent that an administrator provide them with at least the following:

• sufficient information to make informed investment decisions

• investment options that provide diversification

• regular statements that show how investments are performing

Participation in the plan

In most provinces an employee's eligibility is mandatory once he/she has earned 35% of the maximum pensionable earnings during the year of his/her application.

The employer will inform an employee as soon as he/she becomes eligible.

The choice of eligibility and enrolment are left to the discretion of the plan provided these requirements meet minimum pension legislation.

Plan registration

A defined contribution plan must be registered with the provincial body in charge of monitoring pension plans (or the Office of the Superintendent of Financial Institutions (OSFI) in the case of employers governed under Federal legislation) and the Canada Revenue Agency. Insurance companies will ensure that the necessary registration is completed.

Subject to the maximums established under the Income Tax Act, contributions to a defined plan are tax deductible if the plan is registered with the Canada

Revenue Agency.

Contributions to a defined contribution plan

The total of the employee, employer and voluntary contributions cannot exceed the lesser of the following amounts:

• The defined contribution limit for the year as determined under the Canada Income Tax Act, and

• 18% of the employee's salary determined under the plan.

Defined contribution plans are gaining in popularity because they are easier to understand and administer than a defined benefit pension plan.

Contributions are "locked in"

"Locked in" means the money in the employee's account cannot be removed prior to retirement. This is a big advantage over Group Registered Retirement Savings plans where often employees cannot resist their access to cash for some personal expenditure.

Retirement income options

There are a number of retirement income options to choose from. The amount in each income option will depend on factors such as:

• The amount of money in the investment account upon retirement

• The interest rate at the time of retirement

Features and Advantages of a DCRPP Lower Payroll Taxes

Contributions to a DCRPP are not subject to Canada Pension Plan, Employment Insurance or any other applicable provincial payroll taxes.

Employee Retention

Employees may become vested after as many as 24 months of plan membership.

Contributions Are "Locked In”

Contributions to a DCRPP are ’locked-in’ until retirement. Because the funds are only available upon retirement, the plan may engender more of a long-term commitment to your company.

Easy to Understand

DCRPP contributions are defined. The employee can always see what their current pension benefit is.

Creditor Protection

Creditors cannot seize registered Pension Plan contributions.

Additional RRSP Contributions

A DCRPP allows continued contributions to an individual RRSP, up to the allowable annual limit. The contributions of the employee and employer to the DCRPP in the previous year will create a pension adjustment in the current year.

Required Employer Contributions

Employer contributions are mandatory; employee contributions are optional, depending on the plan.

An easy way to remember Defined Contribution plans

Defined contribution type of plans is like going into the gas station and telling the attendant to fill it up, and you pay for it by credit card. You do not know how much gas you are going to get until he fills up the tank. These types of plans provide a lump sum accumulation benefit, and when you retire, you buy your income at that time.

Year

Defined Contribution (Money Purchase) RPP Limits Actual

2005 $18,000 $18,000

2006 $18,000 indexed $19,000

2007 Indexing continues $20,000

2008 Indexing continues $21,000

2009 Indexing continues $22,000

2010 Indexing continues $22,450

2011 Indexing continues $22.970

2012 Indexing continues $23,820

2013 Indexing continues indexed