Tax-Efficient Employee Compensation – How DPSP’s help Your Small Business

Incentive compensation has long been used to recruit and retain talent while staying competitive in the market place. There are several different options available, it is important to consider which option will help achieve your business goals. For this article we want to focus on tax-efficient employee compensation – how DPSP’s help your small business.

Some other types of tax-efficient employee compensation include stock options and traditional employee profit sharing plans. All of them have their benefits for different types of businesses. However, a small family-owned business owner may be reluctant to introduce third-parties into ownership and are hard pressed to commit to large pension contributions in order to secure top talent. In this case, a deferred profit sharing plan (DPSP’s) is much more tax-efficient and cost-effective for a small business owner.

DPSP contributions are paid out of pre-tax business income, so they are not considered part of the employee’s taxable income. This gives the employee immediate tax savings on an investment they earn through a strong performance. These funds are contributed, on the employee’s behalf, to a variety of investment vehicles. These include GIC’s, segregated funds, Canadian bonds, and other equity funds. DENT has partnered with Manulife to offer a variety of DPSP investment options. These include a “Build-Your-Own Portfolio” option for employees with a high level of investment experience, and a “Retirement Date Fund” for those who prefer to be hands-off when choosing investment vehicles.

DPSP’s make sense when a company has two or more employees and expects to contribute at least $10,000 annually to a pension plan. Here are a few benefits for the small business owner to consider:

  • Employer contributions are tax deductible and do not attract payroll tax
  • Contributions are tied to company performance, so employer expenses are reduced when the company is not profitable
  • Vesting periods give you greater control over company contributions
  • Motivates your employee’s to be productive as they have a vested interest in your bottom line

Committing to defined contribution pension plan (DCPP) or traditional profit sharing plan can be costly for a small business owner. Especially if you have a down year and are looking to shore up your finances to remain solvent. Group plans such as a DPSP can help you stay competitive and compensation that is tax-efficient for both your employees and your business.

If you want to learn more about tax-efficient employee compensation – how DPSP’s help your small business, contact the employee retention and group benefit plans experts at DENT Benefits!

The information in this material is derived from various sources. Material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact us for benefit, pension and insurance advice based on your corporate or personal circumstances.

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