An RPP is a formal arrangement where the employer contributes periodic payments on behalf of am employee to a trust for the employee’s retirement. The rules stipulate that the employee must be a member of the registered pension plan. “Member” is defined in subsection 147.1(1) as a person who has a right (absolute, or contingent on a period of service) to receive benefits under the plan. The amount of the contribution is usually based on the employee’s actual service or the period of employment. The plan is often contributory and the employee may contribute to that same fund. Both the employee and the employer may deduct their share of the contribution, but only within the prescribed limits. Note that the contributions made by the employer are deductible if they are paid during the employer’s taxation year or within 120 days following the end of the employer’s taxation year. These contributions are held in trust and are thus eligible to earn income and capital gains tax free. Eventually, generally upon retirement of the employee, the pension begins to pay out in the form of a taxable annuity. If the taxpayer is 60 years old, he/she is eligible for a non-refundable federal tax credit on the first $1,000 of pension earning received each year. Note that pensions from RPPs are generally locked-in until the taxpayer is 60 years of age. There are two basic types of RPPs:
- defined benefit plans, in which retirement benefits are determined in advance according to a formula; and
- Money purchase plans, in which pension benefits are determined at the time of retirement on the basis of the accumulated contributions to the plan.