Understanding Canadian retirement accounts can be a challenge for US and global employers. This blog is here to demystify the Canadian retirement landscape.
Just like in the US, Canadian retirement saving plans may include government-sponsored, employer-sponsored, and individual components. All working Canadians contribute to the Canada Pension Plan and will be eligible for it upon retirement. Some may be eligible for additional social safety net programs or may be able to draw on personal and employer retirement savings.
Employer-sponsored retirement savings, in the form of Group Registered Retirement Savings Plan (RRSPs), are an extremely popular benefit in Canada. When recruiting top talent or in competitive markets they are a must.
In this blog, we will go over the different types of Canadian retirement accounts, employer responsibilities, employer optional contributions, and how EORs can help.
CPP vs Social Security
American employers are familiar with social security and that program has its counterpart in the Canada Pension Plan (CPP). CPP is funded by mandatory employer and employee contributions and is managed by an arm’s length agency.
Your Employer of Record (EOR) partner is responsible for keeping you compliant by invoicing you for CPP contributions, deducting them from employee pay slips, and remitting both to the federal government.
CPP is supplemented by Old Age Security (OAS) and the Guaranteed Income Supplement programs (GIS) that are aimed at alleviating poverty among seniors. Both programs are funded by general federal taxes, not payroll contributions.
CPP, OAS and GIS provide a baseline social safety net in Canada, but personal retirement savings are still critical.
How Employers Help Canadians Save
Just like in the USA, it’s common for Canadian employers to provide financial wellness benefits, including retirement contributions. The most common retirement savings vehicles in Canada are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), with RRSPs being more popular among employers.
RRSP vs 401ks
RRSPs are a tax-deferred vehicle for saving for retirement. Like 401ks, RRSPs allow individuals to deduct contributions against their income and reduce their overall tax rate. Also like 401ks, RRSPs are a vehicle for employers and employees to team up for retirement savings. However, that’s where the similarities end.
Unlike 401ks, RRSPs can be set up by the employer or the employee. Individuals can contribute to both a personal RRSP and to a Group RRSP set up by the employer to offer a matching contribution. GRRSPs are managed by third parties, not the employers themselves.
Individuals can contribute 18% of their pay each year and carry unused contribution room forward to future years. Individuals are solely responsible for monitoring their contribution room and will be penalized for over contributing
The last major difference between 401ks and RRSPs is that where 401ks penalize you for early withdrawals, there are no penalties or qualifications for early RRSP withdrawals – just taxes.
TFSA vs Roth IRA
Tax-Free Savings Accounts are a personal savings vehicle that Canadians can use for multiple purposes, including retirement. They are similar to American Roth IRAs but there are some key differences.
- Individuals can carry unused contribution room forward to future years
- Withdrawals are not qualified for penalized.
Contributions to TFSAs are made post-tax, and withdrawals and interest earned are not taxed. Individuals can contribute $7000 per year and carry forward unused room to future years. Employers can make matching or lump sum contributions.
While TFSAs are a fantastic savings vehicle, employers rarely offer Group TFSAs or TFSA contributions as part of total compensation.
How EORs Help Deliver Top-Tier Employee Retirement Options
Employers of Record (EORs), like Canadian Payroll Services, help US and global employers hire in Canada without needing to set up a local entity. We hire, onboard and pay your Canadian employees, ensuring compliance every step of the way. As your local employment expert, a big part of what we do is stay on top of the local talent market and design benefits plans that help our clients attract top talent.
When it comes to financial wellness, we’ve partnered with a top Canadian RRSP provider that delivers a white-glove investment experience to every plan member, including one-on-one advice, investment options, and educational webinars.
You define the contributions you’d like to make for your employee’s retirement, and we handle everything else.
Elevate your employee benefits package with competitive Canadian retirement accounts. Contact us today to learn how we can simplify the process.
