You have maxed your RRSP and IPP. Now what do you do with the rest?
If you are earning well above $200,000 in T4 income and your registered plan room is fully used, the surplus left in the corporation is invested and taxed as passive income each year. A Retirement Compensation Arrangement lets the corporation make deductible contributions toward your retirement beyond what registered plans permit, as long as they are reasonable for your services. Half of each contribution is held by CRA as refundable tax, earning no interest, until benefits are paid.
How It Works
The mechanics are straightforward. The trade-off is the 50% refundable tax, which we will address directly.
The Corporation Contributes
The corporation makes a contribution to the RCA trust. Contributions are deductible in the year they are made, as long as they are reasonable for the services you provide. There is no fixed annual dollar limit. The value of the deduction depends on the corporation's tax rate: on a $100,000 contribution, about $23,000 at Alberta's 2026 general rate of 23%, or about $11,000 on income taxed at the small business rate of 11%.
CRA Holds Half as Refundable Tax
CRA withholds 50% of each contribution as a refundable tax, held in a Refundable Tax Account. The remaining 50% is invested in the RCA trust. Investment income earned inside the trust is also subject to the 50% refundable tax. This is the primary cost of the arrangement, but the tax is not permanent.
You Receive the Benefits in Retirement
When you retire and begin receiving benefits, CRA refunds the tax at a rate of $1 for every $2 paid out. The benefits are taxable to you as ordinary income. The result: the corporation deducted the contribution, and you pay personal tax on the benefits later, ideally when your marginal rate is lower than during your working years. That lower rate is not certain.
What This Actually Means for You
The RCA exists for a specific problem that registered plans cannot solve. Here is what it does in practice.
There is no fixed dollar limit
Unlike RRSPs ($33,810 for 2026) and IPPs (limited by the actuarial formula), an RCA has no fixed dollar maximum, though contributions must be reasonable for the services provided. For owners earning well above $200,000 who have already used every registered option, it is one of the few remaining ways to set aside corporate surplus specifically for retirement.
Reasonable contributions are deductible
Contributions that are reasonable for the services provided are deductible in the year they are made. CRA can deny a deduction for a contribution that is not reasonable, so the amount should be supported by your compensation history and documented with your accountant.
It works alongside your RRSP and IPP, not instead of them
The RCA is designed as the next layer in a retirement savings stack. You maximize your RRSP first, then your IPP, then use the RCA for whatever surplus remains. Each structure has its own tax advantages, and they complement each other.
You control the timing and structure of payouts
Benefits can be structured as a lump sum, periodic payments, or a combination. The timing can be designed to optimize your personal tax situation in retirement, spreading income across lower-bracket years or starting before age 55 if you plan to retire early.
RCA assets may have creditor protection
Depending on how the trust is structured and the applicable provincial legislation, RCA assets may have some degree of protection from creditors. This varies by jurisdiction, so specific legal advice is needed for your situation.
The Trade-offs
The RCA has real costs. The 50% refundable tax is the biggest factor, and it needs to be weighed honestly against the alternatives.
The 50% refundable tax is a real drag on investment returns. Only half of each contribution is available for investment, and half of all investment income is also withheld. The opportunity cost of having 50% of your capital locked at CRA earning no return is significant.
RCA benefits are taxed as ordinary income, not pension income. They do not qualify for the pension income tax credit and cannot be split with a spouse for tax purposes.
The trust requires proper legal documentation, a trustee, and ongoing administration. Setup costs are typically $5,000 to $10,000, with annual administration fees of $2,000 to $5,000.
If the corporation's financial situation changes and it cannot continue contributing, the existing assets remain in trust but the overall strategy may fall short of its intended retirement income target.
The strategy is most effective when you expect to be in a lower tax bracket in retirement. If your retirement income will be similar to your working income, the tax deferral benefit is reduced.
This strategy is not suitable for everyone. It works best for individuals with T4 income above $200,000 who have already maximized RRSP and IPP room and have a corporation with consistent surplus.
Common Questions
How does the 50% refundable tax actually work?
When the corporation contributes $100,000, $50,000 goes to CRA as refundable tax and $50,000 goes to the trust for investment. When the trust earns $10,000 of investment income, $5,000 goes to CRA and $5,000 stays in the trust. When the RCA pays out $100,000 in benefits, CRA refunds $50,000 to the trust. You then pay personal income tax on the $100,000 benefit. The refundable tax is not a permanent cost, but it reduces the amount of capital working for you during the accumulation period.
When does an RCA make more sense than an IPP?
They serve different purposes and are often used together. The IPP is more tax-efficient because there is no refundable tax drag, but it has contribution limits tied to the defined benefit formula. The RCA has no contribution limit but carries the 50% refundable tax cost. For someone who has maximized their IPP and still has corporate surplus to deploy, the RCA is the next layer in the stack.
Can I use an RCA to fund early retirement?
Yes. Unlike registered pension plans, there is no minimum age requirement for receiving RCA benefits. The timing of payouts is determined by the terms of the RCA agreement, which can be structured to begin at any agreed-upon date. This flexibility makes the RCA useful for executives planning to retire before age 55.
What can the RCA trust invest in?
The trust can invest in a wide range of assets: stocks, bonds, mutual funds, GICs, and in some cases real estate or private investments. The investment policy is determined by the trustee and the terms of the trust agreement. Keep in mind that 50% of all investment income is withheld as refundable tax, which affects the net return on more aggressive strategies.
Find out if the numbers work for you.
The RCA works best as part of a layered retirement strategy, after RRSP and IPP room is used. A short call is enough to tell whether it is worth modelling for you.
This information is general and does not constitute financial, tax, or legal advice. Retirement Compensation Arrangements involve complex tax rules and trust legislation and need a trustee. This strategy is not suitable for everyone. Confirm any decision with your accountant and lawyer. Tax rules, interest rates and policy values change, and values that are not guaranteed can be lower than illustrated. Five Ridge Financial Ltd. is licensed to sell life insurance and segregated fund contracts in Alberta and British Columbia and is paid commissions by insurers on policies placed.