How does DPSP vesting work, and what happens when an employee leaves early?

Vesting is the feature that makes a DPSP a retention tool. It’s also the feature owners most often misunderstand, so let’s be precise.

The rule

Under section 147 of the Income Tax Act, a DPSP must vest each employer contribution no later than 24 months after the employee became a member of the plan. You can choose a shorter period, such as 12 months, or vest immediately. You can’t go longer than 24 months.

When the clock starts

The clock starts when the employee joins the plan. It does not restart with each contribution. This is the detail that trips people up:

• An employee who joined the plan 8 months ago has 16 months left before your contributions vest.
• An employee who joined the plan 3 years ago has passed 24 months of membership. Every contribution you make for them now vests the day it’s made.

So vesting protects you against people who leave early. It does not hold back money from employees who have been with you a long time.

A worked example

Maya joins your DPSP in January 2026. Your plan vests over 24 months. During 2026 you contribute $5,000 for her. In October 2026 she resigns.

• She has been a member for about 9 months, so the $5,000 has not vested. It’s forfeited.
• Her own savings in the Group RRSP are untouched. That money was always hers.

Compare that with a $5,000 raise in 2026. If she left in October, the raise left with her. There was no way to get it back.

Where forfeited money goes

Your plan document decides. The two usual options are:

1. Back to the business. The money is returned to the employer, or used to reduce the contributions you owe for remaining members. Because you deducted it when you contributed, money returned to the business is generally taxable to it.
2. To the employees who stayed. The money is reallocated among the remaining members.

The tax rules require forfeited amounts to be dealt with on a set timeline, generally by the end of the year after the year of forfeiture. Confirm how your plan handles it with your provider and accountant.

What happens to vested money when someone leaves

Vested DPSP money belongs to the employee. Depending on the plan’s options, they can transfer it tax free to an RRSP, a RRIF or a registered pension plan, or take it in cash and pay tax on it.

Making vesting actually work

Vesting only keeps people if they know about it. Explain it at enrolment, show the vesting date on statements, and mention it at review time. A retention tool nobody understands doesn’t retain anyone. If you also run a Group RRSP, which has no vesting, see tiered matching for the equivalent there.

Sources: Income Tax Act (Canada), section 147 (deferred profit sharing plans), including the requirement to vest within 24 months and rules on forfeited amounts. Forfeiture treatment depends on your plan document. General information, not tax advice.

Common questions

What is the maximum vesting period for a DPSP?
24 months. Under section 147 of the Income Tax Act, employer contributions must vest no later than 24 months after the employee joined the plan.

When does the DPSP vesting period start?
It starts on the date the employee becomes a member of the plan. It does not restart with each new contribution. After 24 months of membership, new contributions vest immediately.

What happens to DPSP money if an employee quits before vesting?
The unvested amount is forfeited. Depending on the plan rules, it is returned to the employer or reallocated to the remaining members.

Is forfeited DPSP money taxable to the employer?
Generally, yes, if it is returned to the employer, because the employer deducted the contribution when it was made. Confirm the treatment with your accountant.

Can an employee transfer a DPSP to an RRSP when they leave?
Yes. Vested DPSP money can generally be transferred tax free to an RRSP, a RRIF or a registered pension plan, depending on the plan’s options.