Contribution Room – Defined Benefit vs RRSP


Registered Retirement Savings Plans (“RRSPs”) are investment accounts that are well-known to most Canadians. Amongst other benefits, an RRSP provides a personal tax deduction when an eligible investment is contributed into the plan, and investments can grow tax-deferred as long as they are held within the plan.


One key limitation of RRSPs is the annual contribution amount. This is 18% of earned income up to a set maximum each year ($25,370 for the 2016 tax year). The maximum RRSP contribution amount may not be large enough to offset the personal tax bill of the business owner; a situation that often comes up when using the “bonus down” strategy* as a part of the tax plan for the Corporation.

(*Ask your accountant for more information)


Like the RRSP, the annual contribution limit for a Defined Benefit (“DB”) Plan is based on earned income. However, it also takes the age of the employee into account. In general, an employee over the age of 40 would have greater contribution room in a DB plan than in a traditional RRSP. This can be a powerful tax-planning tool for a business owner who has corporate income in excess of the $500,000 small business deduction limit.


By setting up a Personal Pension Plan (“PPP”), the business owner can also add a significant level of flexibility:

  • In high income years, choose the Defined Benefit sub-account which generally provides the greatest contribution room.
  • In lower income years, choose the Defined Contribution sub-account. The minimum contribution is only 1% of T4 income, allowing the business owner to keep more cash in the business to offset the reduced cashflow.

Properly executing this strategy each year requires an integrated, holistic plan developed by your tax accountant and an Investment Advisor who is familiar with the tax and investment benefits available through the PPP structure.


I can assist you in determining the value of implementing the PPP as part of your overall investment and tax plan. Contact me for a free consultation to see if a PPP makes sense for you.

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All material has been prepared by Nicol Sanchez Wealth. Nicol Sanchez Wealth is an investment advisor team or Investment Advisor at Richardson GMP Limited. The opinions expressed in this blog are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

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