How to invest inside a corporation

How to invest inside a corporation

As a new owner of a corporation, I’ll admit it’s a brand-new world for me to consider how to invest inside a corporation.

I’m in the very fortunate position to be still working full-time, so I don’t need any income at this point from the corporation to cover my living expenses. But it might not always be that way. That’s especially true, when I consider semi-retirement / working on my own terms in a few years.

So, I’m considering my possibilities including how to invest inside a corporation now.

It seems there are many issues to consider when deciding what to do with your corporation’s surplus of funds. What options are available? What are the tax implications of those options?

Whether you can invest some or most of your corporation’s surplus I feel this post is for you (and me).

Salary or dividends from a corporation?

Previously on My Own Advisor, I wrote a post about whether you should pay yourself a salary or a dividend, which can be a complex decision for many business owners.

Salary or dividends from a corporation

That decision has pros and cons on both sides of the accounting ledger.

Yet few blogposts existed in my research about how to invest any money inside a corporation, and what that might entail tax-wise.

Of course, none of this content is direct tax advice for you, but I wanted some support to demystify what I understand and what may or may not be the best course of action for me to consider.

So, for more support on this topic today, I want to welcome back a not-so-grumpy accountant Neal Winokur to the site.

Neal Winokur, CPA, started his practice in 2013 and his grumpiness has grown steadily over time – when it comes to our Canadian tax system. An active blogger, several of his articles have been published in the National Post. Neal continues to feel a moral obligation to speak out against any Canadian tax system flaws while educating others as best he can.

You may recall I profiled Neal’s excellent book The Grumpy Accountant here.

Neal, welcome back to the site!

Great to be back Mark and happy to contribute to discuss this subject with you. By the way, I’m not sure why you think I’m “not-so” grumpy! There is so much to know and navigate for business owners. Our tax system is not helping them!

Heck no!

OK Neal, last time we talked, we discussed the concepts of “active business income” and “small business deductions” – essentially within a Canadian Controlled Private Corporation (CCPC), their eligibility for the “small business deduction” which allows the first $500,000 of profit to be taxed at the low 12.2% (combined Federal+Ontario) rate. Profit above $500,000 is taxed at 26.5% (combined Federal+Ontario). That’s a lot I know – does that mean I should invest all surplus cash?

Like we discussed in our previous post together Mark, I think it’s important for business owners in your position, to take out as little money as possible from the corporation each year. Essentially, take out only what you need for personal use (and some extra to max out your TFSA and possibly RRSP, RESP etc.) but then, leave the rest in the corporation.

That said, this approach may not work for others – business owners need to figure out what surplus funds they will actually have. Let me explain.

If the business needs money in the coming 1-2 years, that money should probably not be invested. Just like your personal finances, any money needed in the short-term should remain safe and liquid. There are a few reasons why your corporation may need the excess cash.

First, you may need any surplus cash to pay income tax – a profitable business may be required to pay regular income tax instalments. These instalments most often will equal the amount of income tax paid in prior years, assuming the level of income is the same as the prior year. The importance of paying these instalments, on time, is huge because missing tax instalments can be costly.

Second, and we discussed this in your last post Mark, Harmonized Sales Tax (HST)/Goods and Services Tax (GST) is also paid on an instalment basis. There will also be penalties if instalment payments are late or missed. Instalments are based on the amount of HST/GST owed in the previous year, assuming if the income is the same as in prior years. HST/GST is calculated when the HST/GST return is prepared. This is done on a monthly, quarterly, or annual basis.

Lastly, depending upon your business (even though you might not have many ongoing expenses Mark), there could be slow periods or months where your revenues are low. As a business owner you need to anticipate these periods – they will happen. Corporate debt may occur now and then. A business owner may need to consider paying down that debt. Alternatively, corporate debt can fund new purchases or investments for the business.

So, in summary, small business owners have lots to consider and investing might not even be an option.

Neal, excellent considerations including keeping any HST/GST charges “set aside” for future remittance. I’m doing that now.

OK, let’s dive a bit deeper. What ways can business owners invest? Can they invest in taxable account? RRSP? TFSA?

Business owners have some flexibility in terms of where to invest their money. They can make use of their Tax-Free Savings Account (TFSA) assuming they have the contribution room. One should always double and triple check their TFSA contribution room before making the contribution in order to avoid over-contribution penalties. If a business owner pays themselves a salary from their corporation, they will create RRSP contribution room and they can contribute to their RRSP and invest within the RRSP.  They can also invest through non-registered investment accounts owned personally. Of course, a business owner can also invest funds within the corporation itself. There are advantages and disadvantages to all these different accounts so one should always consult their tax/financial/investment advisor before deciding. It should also be mentioned that the decision will also depend on one’s short-term, medium-term and long-term goals.

Are investments inside a corporation treated any differently than personal investments? (i.e., taxable, RRSP, etc.)

Investment income earned within a corporation is subject to tax each year. The tax rates are different than they are if the investment income was earned personally. For example, let’s assume a business owner earned $10,000 of capital gains, $10,000 of interest income and $10,000 of dividends within their CCPC (Canadian Controlled Private Corporation) and let’s assume the CCPC is resident is in Ontario and this occurs in the 2021 tax year. The taxes payable will be as follows:

  • $10,000 of capital gains:
    • 50% of the gain is taxable and 50% is tax-free
    • The 50% taxable portion is included in taxable income and the tax rate on this income is 50.17%
    • Therefore the tax will be $5,000 * 50.17% = $2,508.50
  • $10,000 of interest income:
    • Interest income is fully taxable and the tax rate on this income is 50.17%
    • Therefore the tax will be $10,000 * 50.17% = $5,017
  • $10,000 of dividends:
    • Let’s assume “eligible” dividends earned from publicly traded Canadian companies and let’s assume the business owner does not pay out a dividend to him or herself for simplicity
    • The tax rate on the dividends will be 38.33%
    • Therefore the tax will be $10,000 * 38.33% = $3,833

Please note all of the above mentioned taxes can be reduced by the owner declaring a salary and claiming the salary specifically against the capital gains and interest income. And the dividend tax becomes refundable to the corporation (as part of RDTOH refundable dividend tax on hand) once the business owner pays out a dividend to him or herself. The mechanics of this are beyond the scope of this article as it gets complicated! Again, our tax system is not helpful to small business owners Mark!

Also, remember the tax-free portion of the capital gain flows into the “capital dividend account” (CDA) and then the CDA can be paid out with a tax-free dividend to the owner. But this can be a complicated bureaucratic process and the CDA is more complicated than it seems so the details and mechanics of this are beyond the scope of this article and a competent tax advisor must be consulted!

OK, complex!

Neal, I’ve heard about some “double-taxation” that may occur inside a corporation – is that true, does it exist? When with dividends or not? I like owning dividend paying stocks in my personal taxable account. Is this advisable for a corporation as well?

There is no double taxation, Mark. The Canadian tax system has a principle known as “integration” in which on an overall basis, the overall income tax paid should be the same (or at least similar, it’s not perfect) whether the income is earned personally or within the corporation.

I too love owning dividend paying stocks. As I described above, you can have your corporation own dividend paying stocks. The tax on the dividend income each year will be refunded to the corporation when the corporation pays out a dividend to the shareholder. You will pay personal income tax on the dividend based on your personal marginal tax rate. So, the idea would be to pay out the dividend to yourself in years in which you have a lower level of income. This is similar, in principle, to trying to time your RRSP withdrawals in years in which you have lower levels of income.

Make sense. I will be considering owning dividend paying stock in my corporation later this year or potentially an all-in-one ETF for simplicity.

That brings me to this. Seems to me as a business owner that runs a corporation, you can invest “for growth” (i.e., for capital gains) or “for income” (i.e., via dividends) or both? Is one better over the other? What do some of your clients do and why?

Well, this type of investment advice is beyond the scope of my role which is to try to explain to people the tax consequences of different types of investments. That being said, whether one wants to pursue a growth strategy or an income strategy depends on one’s particular circumstances. For example, someone with a very long-term outlook who is far away from retirement might have more tolerance for risk and can therefore pursue more of a growth strategy. However, one closer to retirement with a lower tolerance for risk might want to consider more of an income strategy. From a tax perspective, the nice thing about a growth strategy is that you don’t pay a penny of tax until shares actually sold. Unrealized gains are not taxed. The taxable event occurs only when the stock is sold, whereas income earned from investments is taxed each year. Please of course keep in mind reinvested dividends are still taxable each year.

Good points. So how is any income taxed when you decide to pay yourself income from the corporation? Is there a good tax table we can point to?

This really depends on whether you pay yourself a salary from your corporation or a dividend or a combination thereof.

This is my favourite tax calculator:

These are my favourite tax tables showing the different tax brackets based on your province:

We discussed the salary versus dividend issue previously here which was great fun!

Generally speaking, every dollar you withdraw from the corporation for personal use must be recorded as personal income, unless it is repayment of shareholder loans.

Great stuff Neal.

Folks, I’m just starting to scratch the surface when it comes to investing inside a corporation. No doubt I’ll have more questions for Neal and even more considerations for how I manage my corporation as time goes on. 

I hope this post helped share some insights about how to invest inside a corporation for any of your small business plans.

A big thanks to my friend Neal Winokur again for his insights. I hope to have Neal back again on the site to talk tax stuff.

About this post and Neal:

Neal Winokur, CPA, started his practice in 2013 and his grumpiness has grown ever since. An active blogger, several of his articles have been published in the National Post. Neal feels a moral obligation to speak out against the inherent flaws, unfairness and needless complexities that define Canadian tax. His dream is for the Canadian tax system to be massively simplified to the point where his job as a tax accountant would no longer exist. His wife won’t be too happy about this, but it’s for the good of the nation!

This post is about general tax perspectives and is not considered personal tax advice to My Own Advisor or any reader. You are encouraged to seek professional tax expertise whenever you are in doubt or should you need any support for your personal or corporate investing needs.

Further Reading:

Tax efficient investing using ETFs

Investing in taxable accounts

How I built my dividend portfolio

For other business owners – how do you invest inside your corporation? Insights? Thoughts? Personal tax tips?

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

39 Responses to "How to invest inside a corporation"

  1. Thanks for the great post Mark and Neil. I have a question and will be thankful if you can answer it. We opened a corporation last year and my wife was the only employee. I and my wife are directors. This year my wife is on maternity leave and she is not working anymore and so we plan to close the corporation. However there is some money left in the corporation. I would like that money to be taken as dividend and paid to her as she will be in the lower tax bracket. But I read that the remaining money should be paid to both of us equally as we both are directors. Is this true? If so, can I remove myself as a director so that she can take the money?

    1. Thanks very much for the kind words Kathir. I cannot offer tax advice (neither can Neal) but I will let him take that question in some general terms based on how to close out a corporation.

      If I had to guess, totally a guess, shareholders (of dividends, form a corporation) are different than directors. When declaring a dividend the dividend must be declared equally to all shareholders of a class of shares and are paid out to each shareholder in proportion to the number of shares held. If you are directors and also shareholders, then payout occurs.

      Again, just a guess based on my own set-up of my corporation.

      1. Thanks Mark for your response! I understand your point and it makes sense. I am not sure whether I am a shareholder though. Because we don’t remember assigning any shares of the company to any of us. When we created the company, the form just asked for directors if I remember it right. Do you know how can I verify it? Sorry if it is not relevant to this topic.

        1. Nope, you don’t have to assign shares per se but it would be in your documentation when you incorporated though – with your lawyer, tax accountant or via online tools like Ownr.

          Again, not convinced I am correct so I would need to confirm everything you are asking me as well.

          I know Neal is taking some summer vacation now but maybe he can chime in.

  2. Guys and Gals, do not trade stocks inside your corporation.

    first of all, If trading stocks is the main business of the corporation. All your gains are not income and not capital gains.

    There is no way this will qualify for the small business tax deduction, you don’t have 5 employees, it is an investment company. so it is taxes at the highest bracket.

    paying your self a salary or dividend will be almost the same thing, the only difference is the CPP contribution and matching, which is not an issue if you are investing yourself.

    Max your TSFA then RRSP then RESP if you have kids, get a big principal residence, buy and hold index funds in non registered accounts, buy insurance. That is how you defer taxes.

    1. I didn’t proof read sorry.

      If the main business of a corporation is trading and investing in stocks. then all the gains are considered income. not capital gains.

      that is why it is better to invest personally, because your main business is your job and your stocks are your savings that have appreciated and so made capital gains.

    2. I wouldn’t trade stocks, I would invest in companies and buy stocks for the long run inside my corporation. Or an ETF. Not sure yet but thanks for your comment.

  3. Hi mark, got a question for Neil…
    say my holdco is owned by the wife an myself
    & We’re both 58, got 160k coming in from cad dividends per year & it’s our only source of income, we live in bc – we pay zero tax ?
    Am I right Neil…80k each

      1. Yes Neil, 47 now
        But once I’m retired want to have 160k coming in on dividevnds
        80k each from hold co, only source of income for both

        1. Well you still might have CPP and OAS, no? Pushing you into higher brackets?
          Remember when you pay out the dividends from the corp – the tax rate will depend whether they are “eligible” or “non-eligible”.. the tax rate is higher if they are non-eligible.
          And remember they are grossed up personally to the higher taxable amount. It can get complicated
          I don’t think you would each pay zero tax.. but it would be minimal, much less than if you were earning employment income or RRSP withdrawal income (RRIFs) or other pension income…

  4. This is great stuff. I always considered registering my own corporation even when working as a full-time employee to take advantage of the tax benefits. However, I wonder how the government looks at paying family members to basically reduce the tax.

    Let’s say I want to pay my wife $14K a year. What kind of paperwork of proof does the government need? Basically, the family member won’t do anything except performing the task of reducing the taxes on the whole corporate / family income. In addition, defining dividends payouts sounds complex.

    I’d love to know more about this and also learn some tricks from your experience.

    1. This is no longer allowed. New income splitting rules for Canadian Corporations were introduced in 2018. The family member has to work for the Corporation for at least 20 hours per week to receive dividends.

    2. You cannot register your own corporation if you are a full-time employee
      Meaning, you can open a corp to invest within the corp but you cannot put your salaried employment income into the corp
      If you tried that, this would be known as “personal service business” and would be a horribly horrible nightmare tax outcome.
      Dividends are actually simpler than salaries because there are no CPP and income tax deductions to calculate and no payroll remittances to CRA.
      You can’t pay a family member a salary if they are not actually doing work for you.
      The comment below about the 2018 rule changes was referring to dividends, not salaries. Those rules are known as TOSI and they are EVIL rules but they are referring to dividends.
      You can still pay your family member or spouse a salary but they actually have to be doing work for you and if CRA audited you would have to be able to document the work using timesheets, emails etc.
      But again – if you are a full time employee you cannot transfer your full time salary T4 income into a corp, that is a big no no. (personal service business!)

      1. Thank you, Neal. Very much appreciate the details. Yeah, I looked into having a Full-Time T4 into corporation years ago and didn’t feel it is a smart idea. However, if I can show that I provide services to multiple clients through consultancy contracts, then that’s another story but again have to prove income from multiple sources which isn’t the case for me.

        And for the family member getting paid income or dividends, it needs a whole planning. Yes, of course it will be for a real work but is there a law saying you are limited to pay certain wage / hour? Let’s say I have a family member do proof reading or editing for me. It takes them 10 hours a month. I’d like to compensate $200 / hour. Would that be an issue legally as it is not a normal salary for an editor?

        1. Exactly, to avoid personal service business status, you have to have multiple clients and be able to prove you are truly independent from the clients, as opposed to being stuck with an employer-employee relationship.
          No, there is no law saying you are limited to pay a certain wage/hour. It simply has to be ‘reasonable’ in light of work performed, reasonable in terms of what you would pay an external person who you are not related to. So is $200/hour a normal reasonable rate for that type of work that you would pay an editor who you are not related to? Perhaps yes, perhaps no.. there is subjectivity involved…

    1. Indeed. I haven’t figure out the best way for me, yet, hence the post and timely guidance from Neal to confirm my thinking but I am leaning on a few strategies for semi-retirement. There is no absolute rush to invest this year but in the coming years, I will for sure. Definitely some advantages in owning my corporation. Headaches too!

    2. Yes, the Canadian tax system is insane.
      After 10 years of practicing this ridiculously completely unnecessary profession, I realize that the income tax should simply be abolished in its entirety.
      Only 50% of government revenue comes from individual income tax.
      It should be abolished.
      And the GST/HST should be simplified and also raised to make up the difference ( along with significant cuts to wasteful government spending).
      This would not hurt the poor/lower income people as some economists claim because we exempt from GST/HST basic goods such as residential rent, groceries etc, and we send out GST/HST credits as tax-free payments to those with lower incomes.

  5. Mark, I’m guessing you’ve set up the corporation for business income from your blog? Aren’t the examples of Passive income from investments showed to be taxed at the highest rate. The example of capital gains or interest income are taxed at over 50%. I suspect you wouldn’t be paying >50% tax on these investment if they were not in a corporation.

    I acknowledge there maybe benefits down the road with the CDA, but if held outside the corporation the balance of the funds are available now, without having to then disperse through dividends later on even if tax free.

    I looked at setting up a Corporation which would primary hold investments and came to the conclusion that with all the reporting requirements, accounting fees, potentially higher tax rates on the investments, it didn’t make sense. But I would have no active income in the corporation so maybe a different scenario. That was my thinking at the time – I may look again.

    1. Hey Jeff,
      You got it. 🙂 I mean, I really started the corp. to ensure I’m not getting nailed at my personal tax rate with blog income – too painful at tax time!

      True, I wouldn’t be taxed that high if under a corporation, I recall the tax rate is around 12% – ish for Ontario.

      Yes, there are some fees on my side (accounting, etc.) but that’s less than the tax I would be paying on the personal side each year so I figure that’s a small win. I’ll keep you and others posted about what I invest in and why!

      All the best Jeff,

    2. Good points Jeff
      These types of corps are worth it for small business owners who earn active business income where the tax rate is 12.2% (federal + Ontario rate for 2021).. so if a small business owner, let’s say, earns $150,000 per year but only needs $75,000 to live off of. They can earn $150k in the corp, pay themselves a salary of $75k, pay personal tax on the $75k. But the other $75k leave in the corp and only pay 12.2% tax instead of personally, paying double or more than that. So they’ve said potentially, in this case, $15,000 of tax or more and they can invest that within the corp. So they have more money to invest in the first place even though the investment income is subject to higher rates.
      Interest is taxed at 50% in the corp but capital gains are at 25% (cuz half the gain is tax-free, and the other half is at 50%)…
      So it is beneficial for people who can save money in the corp each year
      But I also recommend people still max out their TFSAs even though they have withdraw from the corp in order to do that and pay the personal tax. And even RRSPs as well which we discussed in a previous article.

      1. Neal,

        Thanks for the reply.

        Regarding capital gains, I was referring to the tax rate. As you showed in the example, the rate inside a corporation is 50.17% on 50% of the gain – the ~ 25% you calculate, whereas most individuals don’t pay that rate; eg. for combined manitoba up to $98,040, it’s 19.95%.

        For a person with active income, I see the merits of a corporation and in fact used to have one years ago – went from a farming Corp but then was primarily an investment Corporation which became more tedious. As you know, the rules have changed a lot, so now if the corporation only has passive income then I don’t think its generally beneficial. I’d be interested and glad if you can correct me on that point.

        Also, I have ordered your book – although these days I’m not sure if I need more things to P me off.

        1. Exactly right, good point.
          If the corp is no longer earning active business income and just passive investment income then the cost/benefit analysis is diffferent. The benefit is that you have complete flexibility of when you withdraw the $ from the corp into your personal hands so there is still high rates of personal tax deferral that can be an advantage. Remember you only pay the capital gain tax rate when you sell the stock, so someone who doesn’t do a lot of trading, just buy and hold and earn dividends, it can still be advantageous. But of course it really depends on the specific individual’s personal tax rate.
          Thanks for ordering my book! Hope you enjoy it and let me know your feedback!

          1. Thanks Neal for the comments. I may look into it again as I want to be able to defer some capital gains until later, I.e after I’m gone. Already have insurance to cover that number – farm land has gone from $700/ac to $6000/ac. So a bit of capital gains as a result and can’t claim any CG exemption now.

  6. Great article. Also worth considering are the carrying costs of investing in a corp. Annual filing of tax returns etc. Corp tax returns can be quite a bit more costly to prepare and file than personal tax returns. Still, if your investment pool is large enough the advantages may be worth it. Other considerations…tax implications of foreign equity or fixed income. And winding down implications when you die or if/when your remaining investments are so minimal that it no longer makes sense to retain the corp.

    1. Great points Rob on the estate planning. I hope to keep the corporation for a few years ~10 (?) and then wind it down to avoid such headaches in my 50s and 60s. The ability now to basically “bank” any business income away from personal income taxes is great – that was really the driver for it.

    2. Good points Rob
      for estate planning many people do a secondary will (at least here in Ontario) to hold the shares of the corporation to avoid Probate (this is an Ontario estate issue..)
      And on the date of death, the value of the corporation is included in the ‘deemed disposition’ of one’s assets and a capital gain must be recorded.
      The shares might qualify for the lifetime capital gains exemption but they might not.. it can be complicated, so yes, proper planning for long-term is definitely always recommend.
      And the costs are ridiculous, I agree.. this is what I write about in my book The Grumpy Accountant!

    1. There is a tax consequence, since withdrawals from the corporation are general incurred at your personal tax rates.

      So, business owners have a few option as I understand them:
      1. pay themselves a “reasonable salary (or wages)”. You can do this for family members/employees as well. From a tax perspective, business owners and family members will be taxed on salary (or wages) at regular personal marginal tax rates that apply based on the jurisdiction in which they live.
      2. pay themselves a dividend – distribute money from the corporation to both you and your family members. I recall there are TOSI rules above my pay grade to figure out!
      3. A mix of #1 or #2 of course, and
      4. cash withdrawals – taxation at personal rates.

      Neal will likely correct me on this 🙂

      1. Right – withdrawals from the corporation into your personal hands are taxable personally.
        Think of the corporation like having a baby. It’s a separate legal entity that you give birth to, has to file its own tax return etc. When you transfer cash from the corporate bank account to yourself, for personal use, we have to show that as personal income.
        Mark is correct in his reply
        Keep in mind if you pay salary to a family member/employees, the salary has to be reasonable in exchange for the work performed.
        Dividends to family members can be complicated especially under the new EVIL TOSI rules which are the most punitive in the world! No joke! So be carefuly with that. NEVER pay a dividend to a child under the age of 18.
        # 4 in Mark’s reply “cash withdrawals” it has to be recorded somehow as salary or dividend
        Keep in mind if you as the owner deposited money into the corporation over the years, then you are entitled to take out that money back tax-free. This is known as “shareholder loans”…

  7. A good article and Neil explains it well. I have a good friend who is a retired CPA, and he has a book out called “Backyard BBQ Financial Planning”. Hope you won’t mind that I give it a plug.

      1. A young couple discussing financial matter with their neighbour, who is an accountant, over the years. About saving, starting a business, financial matters related to the business and retirement.


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