Retirement compensation arrangements (RCAs) are defined under subsection 248(1) of the Canadian Income Tax Act, which allows 100 per cent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee.
Contributions to an RCA should not exceed what is required to fund the "entitlement" under the "generally accepted guidelines" for pensions, which are:
This entitlement calculation must be reviewed and recalculated periodically as circumstances change (e.g., salary, RRSP and RCA investment performance).
The RCA provisions were set up in 1986 by the CRA as part of pension tax reform to ensure a comprehensive limit on tax assistance provided under employer sponsored pension plans and RRSPs.
The RCA rules are an anti-tax avoidance scheme that are meant to eliminate the earning of income on tax deferred employer contributions.