A sure thing: Whether you're a small business owner or an employee in a large firm, retirement compensation arrangements offer a variety of economic benefits.

Traditional employee, executive and entrepreneurial wealth supplements, such as the ubiquitous stock option, have lost their lustre under current market and economic conditions. Even the value of the trusted company pension has deflated in this environment of company-hopping. However, high-income earners have an alternative solution -- a retirement compensation arrangement (RCA) -- which can offset looming shortfalls and much more.

The growing appeal

Established in 1986 by the Canadian federal government, an RCA has typically been used by Canadian corporations as a tax-deductible vehicle for providing employees with additional retirement benefits. However, the shifting business conditions of the last five years have made RCAs more appealing for owners, entrepreneurs and corporations in search of alternative retirement, tax and capital funding programs. As a tax-deductible retirement savings plan funded by a company, an RCA generates supplemental cash for the employee or owner without compromising the integrity of his or her RRSP.

The money contributed by the company is held in a trust, half in a non-interest-bearing refundable tax account with the Canada Customs and Revenue Agency and half in an RCA trust account administered by a trustee. The funds from the trust are available upon retirement (or some other substantial change in employment) and the non-interest-bearing refundable tax account is paid out to the trustee, and ultimately to the employer, as the employee withdraws funds from the RCA.

Finding the right trustee

A trustee is often a lawyer, an accountant or an institution that houses all the required wealth management expertise, such as a trust company. The trustee assists the employer or entrepreneur in ensuring that the RCA is appropriately executed and the tax deductions maximized.

Poor administration of an RCA can be costly and detrimental to the beneficiary's wealth management. For instance, if the terms of the trust are not fully considered in relation to the terms of the beneficiary's retirement or termination, so that the RCA becomes a salary deferral rather than a retirement supplement, the cost and consequences could be considerable. A vigilant and detailed focus is required in the set-up and management of an RCA, so it is critical that the corporation or entrepreneur select a reputable and experienced trustee.

It's important to choose a trustee that can manage and administer the range of professional requirements needed to set-up and sustain a viable RCA. Mistakes at the outset, or a lack of vigilance during the life of an RCA, will dramatically limit the worth of the supplemental arrangement. The trustee should have access to a team of qualified lawyers, accountants and client advisors, as well as the institutional reach to access and manage a range of investment options.

Benefits for employees

RCAs are valuable wealth supplemental tools for a variety of beneficiaries, including senior employees, executives and owner/managers. However, the supplement is of particular interest to high-income earners who cannot achieve adequate retirement savings through the $13,500 annual maximum contribution of an RRSP or through limited company pension plan contributions.

Employers have most commonly used RCAs as an alternative employee incentive program that, like an annual bonus, is tax deductible to the employer. With declining executive retention rates, increased mergers and acquisitions activity and market volatility, employees are increasingly driving the growth of RCAs. The potential immunity a beneficiary gains from corporate insolvency, new management arrangements or changing personal conditions make RCAs an increasingly practical retirement savings solution for today's high-income earners.

Benefits for owner/managers

An RCA can be much more than a tax-deductible retirement savings benefit. It can solve a wide range of complicated issues, such as business development and succession planning, for present and future generations alike.

An entrepreneur seeking to leverage tax advantages, such as the small business deduction, can potentially lower corporate earnings by establishing RCAs for him or herself and other senior employees. The value of this solution is that the owner achieves desired corporate earning levels, as well as the associated tax advantage as a result of the tax-deductible nature of the RCA.

Business owners in need of financing for capital development may also have an alternative and cost-efficient borrowing solution in an RCA. Under certain conditions, some financial institutions will lend against an RCA and the funds secured can be invested back into the company. The terms of the loan would stipulate that it be paid in full prior to the date of retirement.

The succession dilemma

Perhaps the most compelling advantage of an RCA for owner/managers is the solution it offers families in the midst of succession planning. By contributing to an RCA prior to selling a business, an owner can reduce the value of his/her company, thereby allowing a child or another family member to purchase it at a reasonable price. Because RCA contributions are based on years in business and historical salary levels, as well as an actuary's calculation of future retirement needs, the ultimate pre-sale RCA contribution will likely be substantial enough to significantly help the next in line, both in terms of value and the reduced amount needed to provide future income to a retiring parent. The parent can also release the reins of management without unduly worrying about the financial repercussions of poor business decisions implemented by the successor.

A well-managed RCA can establish the long-term financial security and flexibility that high-income earning professionals and entrepreneurs need in changing and volatile business environments. Because they generate premium tax benefits, RCAs can he used to augment the growth of a business, create an employee retention incentive, or provide solutions to companies in the throes of succession -- making it an even more compelling wealth and retirement supplement solution.

Donna Cappon is vice-president and managing director of Trust Services at BMO Harris Private Banking. Robyn Hawkins is the director of Trust Services at the national office of BMO Harris Private Banking.