Taxation of investment income in a corporation

Taxation of investment income in a corporation

If you thought navigating the maze of personal finance and investing options was challenging enough, you haven’t seen anything yet. Taxation of investment income in a corporation can be quite frankly, overwhelming.

How best to invest in a corporate account can be filled with a myriad of choices, decisions with many pros and cons based on the structure of our Canadian tax system and what objectives you have as an investor.

With thanks to Neal Winokur, my friend who is a Grumpy Accountant, I started to explore the world of paying yourself a salary or dividends from your corporation and hinted at what types of investments could be included inside a corporation:

Should take a salary or pay yourself a dividend from your corporation?

How might you invest inside a corporation?

I’ll link to these at the end of this post as well…

Taxation of investment income in a corporation

Today’s post is going to dig a bit deeper with some references, support and general guidance on the subject of taxation of investment income in a corporation.

But I didn’t want to do this post alone. I wanted to share and profile someone with direct experience with this on the site.

With thanks to Mark McGrath, who holds Chartered Investment Manager (CIM®), CERTIFIED FINANCIAL PLANNER®, and Chartered Life Underwriter (CLU®) designations as a Wealth Advisor with Wellington-Altus Private Wealth in Squamish (site link at end), I figured Mark would be the perfect person to expand on the work that Neal and I started – to highlight the taxation impacts of investment income in a corporation.

Mark works primarily with Canadian Physicians, of which about 70% are incorporated. So he deals with the taxation of corporate investment income on a near-daily basis.

While none of this post, like Neal’s, can be considered any tax nor investment advice, you are encouraged to use this information (current to the time of this post) as a guideline to trigger further due diligence with your tax professional or appropriate tax firm to ensure you are making the most suitable financial decision for your corporation and related needs. 

Mark, great name! Ha. Welcome to the site. A pleasure to discuss this valuable and comprehensive subject with you!

Thanks Mark, a pleasure to be here! Hopefully we don’t confuse your readers, both being Marks and all.

I’ll keep my questions in bold 🙂

Mark, thanks for following My Own Advisor with interest. It’s fun to run the site and interact with professionals like yourself. Let’s learn about you, Mark, including your background and experiences and a bit more if you don’t mind. So, tell us about yourself!

Well, I was going to be a famous rock star, but it didn’t pan out. I went to university with the intention of becoming a dentist since my dad told me that would be a great idea. One day a friend of mine introduced me to the Canadian Securities Course, and I fell in love. I quit university on the spot to study personal finance and investment management full-time, and here I am about 15 years later.

Over the past decade, I’ve worked primarily with Canadian physicians on financial planning, including tax, insurance, retirement, investment, and estate planning. I’m a bit of a planning geek, so I also spend a lot of my free time reading and writing about it. But when I need a break, I still occasionally pick up my guitar and remind myself why my dream of being a rock star was destined to fail.

Great stuff.

Mark, personal finance is personal – is a constant refrain on this site. Meaning, everyone’s financial situation is different albeit there are a few rules of thumb and general guiding principles everyone could consider. What’s your personal finance philosophy?

I couldn’t agree more. In fact, on my office bookshelf I have a sign that says ‘Keep Finance Personal’. I can’t take full credit for that, since I took it (with permission) from another advisor on Twitter. But you’re absolutely right – each family is unique, and everyone has different goals, knowledge levels, risk tolerances, and financial abilities.

I’m big on risk management and getting the important things right. If you do that, you’ll likely meet your goals. Sure, we can tune and optimize a lot of areas, but generally speaking – manage your budget, invest wisely, and don’t pay more tax than you need to, and you’ll likely meet your goals.

Before we get into some corporation and taxation nuts-and-bolts, how are you investing these days yourself? What personal finance taxation principles are you mindful and supportive of? (Example, are you a HUGE fan of the TFSA as much as I am?!) 

Managing the refund well is the linchpin in the RRSP vs. TFSA debate

How can you not be a huge of the TFSA? Especially now that the contribution room is starting to be meaningful for a lot of people. I’m regularly seeing TFSA balances north of $125k now, and for younger folks that can continue to compound their money tax-free over decades – it’s going to be a significant source of retirement income.

As for my investment philosophy, I’m a huge fan of indexing and factor-based strategies. My client portfolios are primarily all-in-one index ETFs, Dimensional Fund Advisors Global portfolios, and here and there a sprinkling of alternative assets where it makes sense.

On factor-investing, there’s compelling academic work that shows tilting your portfolio towards small-cap value stocks and profitable companies provides excess returns over long horizons. To implement this I use the Dimensional Funds I mentioned above. It’s not for everyone, but I’m a fan.

In my portfolio management client presentations, I present five core tenets of sound portfolio management – low-cost, well-diversified, passive, tax-efficient, and simple. There’s no perfect portfolio, unfortunately, but if you get the core philosophies right, you will be okay.

That’s great context for our continued discussions…

For many years, Canadian small business owners earning active business income within a Canadian Controlled Private Corporation (CCPC) have been eligible for the “small business deduction” – which allows the first $500,000 of profit to be taxed at the low 12.2% rate. Profit above $500,000 is taxed at 26.5%. That’s Ontario anyhow!

(Just a footnote for readers, this differs by province, for example in BC it’s 11% and 27%)

That mentioned, we know some small business owners are very profitable and they might consider investing within their corporation, with excess funds available to them.

Before small business owners even consider investing with excess funds available to them, what should they consider first? Maintaining an excess cash float perhaps or paying down debt? Thoughts?

Like all things in financial planning – it depends. Incorporating your business provides other advantages in many cases – like enhanced liability protection and access to the lifetime capital gains exemption on sale of the QSBC shares. So, for many, incorporating the business can make sense even if they aren’t seeing huge excess profits yet.

As for building a corporate investment portfolio, that also depends (sensing a theme yet?). While I’m no fan of debt, some people are comfortable with it and would prefer to keep their debt, in favour of building their investment portfolio. I think that argument is harder to make with current interest rates, but if you can earn a higher return on investment than you can by paying down debt, it can make sense.

Generally speaking, if paying down debt is a priority for you, you might want to delay incorporating your business until you’ve got that under control. If you’re not retaining money in your business, and you’re just paying it all out to yourself to pay down personal debt, then the advantages of being incorporated are reduced.

Like individuals, businesses need emergency accounts too. How much depends on the type of business and its sensitivity to cyclical effects or seasonality. This isn’t an issue for most of the physicians I work with, so their need for business emergency funds is low.

You’ll also need to set aside money each year for corporate income tax, accounting and legal fees, and depending on the business, GST/HST.

So overall, if you have retained earnings in your company, have your emergency and expense needs met, and have either paid off your debts or are comfortable keeping them – it’s probably time to put those profits to work and invest the money. Otherwise, it’s just sitting in your corporate bank account burning a hole in your pocket.

Thanks Mark.

Assuming Canadian small business owners have excess funds to invest, let’s consider the basics before different investment products – and any pros and cons of those investment products.

What are your thoughts on these references?

Reference 1:

https://enrichedthinking.scotiawealthmanagement.com/2022/11/04/passive-income-taxation-for-canadian-controlled-private-corporations/

Reference 2:

https://www.manulifeim.com/retail/ca/en/viewpoints/tax-planning/taxation-of-investment-income-within-a-corporation

It seems like income including interest, is taxed at roughly 50% across Canada!

Unfortunately, it is true. But it’s even more complicated than that.

First let’s make an important distinction – passive income in this context is income generated from investments inside your corporation. If you hold stocks, bonds, GICs, or rental properties for example – you’ll earn investment income in the form of interest, dividends, rental income, and capital gains. It’s this income that is subject to potentially high tax rates. Your active business income – the income you earn from running a business – is taxed quite favourably, as you mentioned above.

Different types of investment income are also taxed differently. For example, only half of a capital gain is taxable, whereas the full amount of interest earned is taxable. Understanding this allows you to build a more tax-efficient investment portfolio by avoiding or reducing certain types of investment income.

As the articles you referenced mention, once you have over $50,000 of taxable passive, your $500,000 small business deduction limit starts to get reduced. That means potentially more of your business income is taxed at the higher general rate, and less is taxed at the small business rate. It’s not the end of the world, and there are other tax mechanisms and strategies you can employ to offset some of this, but it sure gets complicated. Also, you can’t easily get around this just by having a holding company, since CRA will generally look at both corporations as one entity for this purpose. Understanding this yourself or having a good professional team that understands it can help you achieve one of those philosophies I mentioned – don’t pay more tax than you need to.

Totally.

Let’s walk through a couple of examples.

First, how about the consideration that some Canadian small business owners might want to invest in Canadian dividend paying stocks, inside their corporate account.

Let’s compare this to investing inside the RRSP. Thoughts?

As you and many of your readers are aware, your corporation can open an investment account with an online discount brokerage – the same way you can open a personal RRSP or TFSA. That corporate investment account can hold the same types of investments as your personal investment accounts – stocks, bonds, ETFs, mutual funds, GICs, etc. As we’ve discussed, taxes can be high on these investments, and it makes sense to first ensure your RRSP and TFSA are maxed out. This does a few things for you:

  1. Tax diversification. We know how RRSPs and TFSAs are taxed, and that’s not likely to change. Tax legislation has targeted small business taxation several times historically, and who knows how your corporation will be taxed in the future. By spreading out your investments across multiple account types, you reduce the impact of any potential tax change on any one of those accounts.
  2. You reduce the amount of money in your corporate investment account. This can help reduce your passive income and maintain the small business deduction limit. It also helps preserve the lifetime capital gains exemption if you go on to sell your business down the road.
  3. RRSPs are usually protected from creditors. If you are sued personally, assuming you didn’t stuff money into your RRSP specifically to protect the money, it should be creditor-proof. But the shares of your small business corporation are fair game.
  4. You can split RRIF income with your spouse after age 65 in Canada. This can lower the overall family tax bill. That’s not a default option with your corporation unless your spouse also owns shares of the company, which may or may not be the case. And it’s not as simple as just giving your spouse shares – there are some complex tax rules preventing that.

The downsides are:

  1. The money is no longer available for business use. With good planning, this shouldn’t be an issue, but it’s something to consider.
  2. To get RRSP room, you need to pay yourself salary. Because dividend income is not considered earned income, it doesn’t generate RRSP contribution room. So, in some cases your only option is the TFSA, and for many that’s just not enough contribution room to make a difference. And since you need to pay tax on the dividend, you have less capital after-tax to contribute to the TFSA.I usually like to see physicians and business owners paying a decent amount of salary for this reason.

But you asked about Canadian dividend-paying stocks.

It’s complex, but a special type of income tax is applied to a corporation’s investment income. It’s commonly known as refundable tax, and it’s to dissuade people from setting up personal investment corporations just for tax benefits. Basically, when you earn passive investment income in a corporation, the Federal Government hangs on to some of that income until you pay yourself a dividend from your corporation, at which point you can get that tax refunded. Canadian dividend income is special, though – the entire amount of tax you pay is refundable. So, Canadian dividends pass right through the corporate investment account without getting taxed. Of course, you’ll pay tax personally by paying those dividends out to yourself, but overall, Canadian dividends are pretty tax-efficient in a corporation.

(Mark Seed – more reading: https://www.cibc.com/content/dam/personal_banking/advice_centre/tax-savings/in-good-company-en.pdf)

(Mark Seed personal comment: I continue to max out my TFSAs and RRSPs, and then depending on my personal tax bracket over time, I will take extra dividends or bonuses and invest it personally over time. Certainly, if my corporation does well, it could be smart for me to keep retained earnings given the corporation can still provide a decent or significant tax deferral. Thoughts readers?)

OK, another example.

What about passive investing and being tax-efficient in doing so. I interviewed Mark Noble from Horizons ETFs a while back and highlighted some ETFs that Horizons (and other providers offer) for that reason.

What are the pros and cons of investing inside the corporate account, with such ETFs with a total return approach vs. using a personal taxable account?

I’m a big fan of the Horizons Total Returns ETFs and use them frequently in corporate investment accounts for clients. As your readers likely know, they convert investment income into deferred capital gains. So instead of receiving a dollar of interest or dividends, the ETF’s share price goes up by a dollar. This helps not only by reducing tax on investment income but also by deferring it.

You can use these for personal non-registered accounts too. Depending on your tax bracket, they can be very efficient. These ETFs do have additional costs compared to the more well-known index ETFs, but that additional cost can be offset, and more, in tax savings.

Indexing in general is pretty tax-efficient for two reasons:

  1. Low turnover. With an active investment strategy, you or the fund manager are buying and selling securities. This can create capital gains and losses, which are taxable in the year they are realized. Usually, the more turnover, the higher the realized capital gain, and that creates a tax drag on your portfolio. Essentially you realize more taxes on average than you would be if you were able to defer that capital gain into the future.
  2. ETF structures are different from mutual fund structures. While there are index mutual funds and actively managed ETFs, I’m guessing most of your readers that are using an indexing strategy are using ETFs. And the actions of other ETF shareholders have no bearing on the taxes you pay. I like to explain it like this – imagine you’re a mutual fund investor, and you have $100,000 in XYZ mutual fund. The only other investor is Warren Buffet, and he has $100,000,000 of his money in the fund. Well, what if Warren Buffet decides to sell his stake? In that case, the fund managers sell 99% of the stocks to get Warren his money, but any capital gains they trigger are spread out among all the unit holders, pro-rated. So, you end up paying capital gains on your shares based on the actions of the other unitholders.

There are two big differences between using these ETFs in a corporate account vs. using them in a personal account:

  1. Your starting investment balance will be reduced if you invest personally. Say you have $100,000 of retained earnings. In your corporate portfolio, that’s $100,000 you get to invest. But if you want to invest that personally, you must pay yourself a dividend or salary and pay tax first. If you’re in the top tax bracket, that means you’re starting with less than $50,000 after-tax to invest personally.
  2. Capital Dividend Account. When you earn capital gains on the investments in your corporation, only half of the gain is taxable – much like if you earned a capital gain personally. The other half is tax free. So, if you have a $10,000 capital gain in your corporation, you can then generally pay yourself a $5,000 tax-free capital dividend. The other half goes on the corporate tax return and is subject to those high tax rates we talked about. Overall, it’s pretty tax efficient.

So, in some cases it can make sense to invest the money in your corporation, and then pay out the capital dividends tax-free. You can use that money to fund your RRSPs, TFSAs, or invest in a non-registered account.

Exactly where I’m going, Mark.

As we start to wrap, what should Canadian small business owners leave with when it comes to the taxation of investment income inside a corporation?

  • First, it’s important to have a good tax accountant, and if you use a financial planner make sure they understand the tax nuances of corporations. Beyond just the investment portfolio, there is a lot of complexity with insurance, retirement, and estate planning, and you want to ensure you’re working with someone who understands the impact to these areas. I know most of your readers likely don’t work with advisors – hence the name of your blog – but for those that do, this is paramount.
  • Weigh the potential benefits of using a corporation for your investment portfolio vs. the additional complexity and cost. In some cases, you might opt to pay the money out of the company and invest it personally. While you might give up some tax benefits in doing so, you can gain some simplicity and peace of mind, and for many, that’s valuable.
  • In your articles with Neal you talked about tax integration, which is the mechanism that ensures that whether you are incorporated or not, you’re going to pay a similar amount of tax in the end. While you can optimize things to pay less tax using a corporation, you can’t eliminate the tax bill – only control the timing of it.
  • Look to increase the tax efficiency of your corporate investment portfolio by targeting investments that pay capital gains and Canadian dividends. But don’t let the tax tail wag the risk-management dog – you still want to be diversified.
  • Understand the impact of refundable tax on your corporate investment income, and make sure you’re paying yourself enough dividends to get this back.
  • Look to pay out capital dividends – that’s the tax-free half of your capital gains – when you can. Note that your accountant will charge a fee for this, since there’s an election to file. So you might want to do this every few years or whenever it makes sense from a cost-benefit standpoint.

Ultimately, whether a corporate structure will benefit you comes down to your specific situation. Can you retain significant earnings consistently? Do you need the liability protection a corporation provides? Can you sell your business one day and take advantage of the lifetime capital exemption? Are you comfortable with some added costs and complexity if it means the potential for some of the benefits listed above?

If you answer yes to any of those questions, it’s at least worth exploring whether a corporation is right for you.

There are a lot of other considerations that are beyond the scope of our discussion, Mark. Areas like estate planning and insurance are deeply impacted by incorporating as well. Maybe a topic for another chat!

Indeed, let’s consider that!

Mark, very prudent and detailed information. Thanks for doing this.

Readers, I first want to thank Mark McGrath for taking the time to share his expertise. Second, while none of this post can be considered tax advice there are some considerations above to think about including if it even makes sense to invest inside a corporation. Third, our tax system is unbelieveably complex on a good day so on that note, incorporation is not for everyone. Some folks can and should consider running any small business as a sole proprietor with proper business insurance. When in doubt, seek professional tax advice.

I look forward to posting more detailed content on this site. If can’t find what you’re looking for, via my Search bar, then hit me up with an email or a comment below. I will do my best to accommodate.

Mark (Seed) 🙂

Disclaimers:

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 the personal and professional counsel of a tax expert whenever you are in doubt or should you need any support for your personal or corporate investing needs.

Mark McGrath is a Wealth Advisor with Wellington-Altus Private Wealth (WAPW). (Site Link).

The information contained herein is the opinion of the author and not of WAPW. This article is for informational purposes only and is not intended as investment, tax or legal advice. Please contact your financial advisor for advice with respect to your personal financial situation and objectives. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. You can also follow Mark McGrath on the Twitter machine like I do @MarkMcGrathCFP.

Related Reading:

Learn about tax efficient investing using Horizons ETFs.

Should take a salary or pay yourself a dividend from your corporation?

How might you invest inside a corporation?

How much cash on hand should you really keep?

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.

55 Responses to "Taxation of investment income in a corporation"

  1. I am incorporated, paying myself in dividends (47 yr old, home almost paid off, so not a big need to demonstrate a salary for any future loan or mortgage requests). Currently able to retain a decent amount ($70K+ annually) in my corporate account after paying myself, and HST/taxes. I am investing the excess amount in a self directed business brokerage account (ETFs, stocks), and hoping to draw down on this account gradually through my retirement years, when there will no longer be any actively earned income. Is this okay, or not advisable?

    Reply
    1. I can’t offer any advice of course, Derrick, but depending on other assets you own, etc. I’ve seen and helped folks at Cashflows & Portfolios with….winding down corporation assets over time is usually very smart. If you don’t feel you need additional CPP income, etc. then paying yourself a dividend can be an easy method.

      I’ve experienced a few successful business owners spending a bit of money from corporation withdrawals and moving some of that money to non-reg., only to put into TFSA every year and max that out. Something to consider. 🙂

      Hope that helps and thanks for your readership.
      Mark

      Reply
  2. Hi Mark,

    I have a small business that’s incorporated.
    Between my personal and corporate income taxes, my accountant charges about $7,000 which I think it a crazy amount.
    I really want to do my taxes myself, but rather afraid.
    I think this year I will try WealthSimple for my personal income tax, but I was wondering if you do your own corporate income taxes?
    If yes, which software do you use? I was thinking of Quicken.

    Thank you!

    Reply
    1. Well, depending on the size of your corporation, including your investments inside the corporation, spending a few thousand is not uncommon. Spending $7,000 per year for your T2 and your GST/HST filing seems excessive though.

      I do my own personal taxes, with my wife’s, but I don’t do my own corporate taxes. I use a local Ottawa tax accountant for that and many here in Ottawa charge far less than $7k.

      Quicken for corporate taxes, might work but I haven’t used it myself.

      Have you considered shopping around, first, for your tax accountant?
      I hope that helps!

      Happy New Year!
      Mark

      Reply
  3. Thanks Mark S.
    Aside from being informative, I do find your blog posts very open to, and welcoming of, all perspectives. They are balanced and measured that way. I like to think that they are reflective of the author’s (you 😊) personality. Kudos for that.

    And thank Mark M
    Yes, i agree that the approach of investing and how much in the RRSP vs the corporation is situational and subject to a many personal factors and considerations. Too many to discuss here. Some of mine that led me to aim from a mix of the two that involved not maximizing my RRSP in favour of also investing in the corp are:

    – i am single, so no opportunity to take advantage of RRSP income splitting, spousal rollover
    – with the RRSP – corp investments mix i have i actually increase my tax diversification and estate planning flexibility (e.g. corporate estate freeze)
    – partially investing in the corp allows me to invest directly in real estate, therefore allowing me to diversify my assets mix (in addition to equity, personal residence, etc.) as i could not buy RE in the RRSP.

    The real reason why i am commenting further here is, however, to thank you for pointing me to Jamie Golombek’s article and to point out that he indicates that contributing to an RRSP can outperform a corporate investment account after-tax but only for some types of income. For others, like cap appreciation (from RE for example) investing withing a corp comes ahead:

    “ • Interest: Investing in an RRSP is always a better option than corporate investing over a 30-year time period.
    • Eligible dividends: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after 15 years the RRSP would outperform corporate investments.
    • Annually-realized capital gains: Corporate investing always outperforms an RRSP.
    • Deferred capital gains: Corporate investing always outperforms an RRSP.
    • Balanced portfolio: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after six years the RRSP would outperform corporate investments.

    Thanks again for your advice and reply. They and the pieces (i also listened to the podcast you linked) you indicated in my view are in accord with my approach/choices, given my circumstances and objectives.

    Reply
    1. Thanks very much, Gio.

      I do my best to keep an open mind. I figure I won’t learn much if I don’t! 🙂

      Back to your corp, although Mark might write back…

      1. I know other clients with a corp. They work to simplify their objectives first and then they focus on tax efficieny next. Seems like you’re trying to do the same things.
      2. I think capital appreciation makes the most sense in the corp. and taxable investing in general. For #2, I’m looking at owning some lower dividend-yielding stocks more and more over time.
      3. I will likely pay myself a dividend from the corp. eventually. Seems best that way, and then invest the money in a personal taxable account from there after my TFSA is filled up every year since it’s all about tax integration at the end of the day.

      Thanks again Gio.
      Mark

      Reply
    2. Great points here Gio and thanks for the additional context. Glad you enjoyed those resources too.

      Since much of our financial outcome is based on unknown variables like future returns, inflation, tax rates, etc., the optimal decisions are really only knowable in hindsight.

      I think you made smart, informed choices with the information you had at the time and that sounds it led to a great outcome. And that’s really what it’s all about.

      Kudos!

      Reply
  4. A question for Mark McGrath if he is still available to respond to questions:

    What about the use of the Mawer Tax Efficient Balanced Fund (MAW 105) for a corporate investing account? If some readers here (like me) had invested in this before the introduction of the all in one ETF’s and Horizons Products, what are you thoughts on keeping this and not making any switches? or perhaps adding new money to these ETF’s and leaving MAW 105 as is with no further contributions? Also, do you think there will eventually be any regulatory risks associated with the Horizon Products or have they made the necessary changes to their structures to not be impacted by this going forward. They have a big appeal since their deferred capital gains structure is very tax effective and can be helpful in those accounts where the passive income level is getting above 50K. Thanks for any thoughts you may have to share for us all.

    Reply
    1. Hi Sue –

      Before I became a convert to passive & factor investing I relied on Mawer heavily for mine and my clients’ portfolio.

      So while I no longer believe in active management fundamentally, I will say that if I was ever forced to choose an active mutual fund that Mawer would be among my top picks.

      Theor tax efficient balanced fund gains it’s tax efficiency by intentionally looking for opportunities to trigger losses on their portfolio positions to offset capital gains.

      That means you’re still receiving interest and dividend income, so the tax benefits are likely marginal at best.

      While I can’t give you specific investment advice, I will say the Horizons ETFs are much more tax efficient since they convert that interest and dividends into capital gains. And of course being a passive strategy, they get my vote.

      I don’t have concerns with their structure since they completely restructured their funds to be corporate class a few years ago. Corporate class funds are very common, it’s just rare to see them in ETF form.

      Of course you never know if CRA will come after the corporate class structure in the future.

      If it does happen though, the outcome is that you’d have a taxable capital gain, which is still very efficient and would give you a CDA credit!

      Reply
    2. I’m sure Mark will write back soon, Sue, so keep watching for the comment.

      A quick take from me: Mawer has some excellent funds but if taxation is a key concern, hard to compete with some Horizons ETFs like HXS, HXT, etc.

      All my best and thanks for your readership.
      Mark

      Reply
  5. Thanks Mark S.
    Aside from being informative, I do find your blog posts very open to, and welcoming of, all perspectives. They are balanced and measured that way. I like to think that they are reflective of the author’s (you 😊) personality. Kudos for that.

    And thank Mark M
    Yes, i agree that the approach of investing and how much in the RRSP vs the corporation is situational and subject to a many personal factors and considerations. Too many to discuss here. Some of mine that led me to aim from a mix of the two that involved not maximizing my RRSP in favour of also investing in the corp are:

    – i am single, so no opportunity to take advantage of RRSP income splitting, spousal rollover
    – with the RRSP – corp investments mix i have i actually increase my tax diversification and estate planning flexibility (e.g. corporate estate freeze)
    – partially investing in the corp allows me to invest directly in real estate, therefore allowing me to diversify my assets mix (in addition to equity, personal residence, etc.) as i could not buy RE in the RRSP.

    The real reason why i am commenting further here is, however, to thank you for pointing me to Jamie Golombek’s article and to point out that he indicates that contributing to an RRSP can outperform a corporate investment account after-tax but only for some types of income. For others, like cap appreciation (from RE for example) investing withing a corp comes ahead:

    “ • Interest: Investing in an RRSP is always a better option than corporate investing over a 30-year time period.
    • Eligible dividends: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after 15 years the RRSP would outperform corporate investments.
    • Annually-realized capital gains: Corporate investing always outperforms an RRSP.
    • Deferred capital gains: Corporate investing always outperforms an RRSP.
    • Balanced portfolio: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after six years the RRSP would outperform corporate investments.

    Thanks again for your advice and reply. They and the pieces (i also listened to the podcast you linked) you indicated in my view re-affirmed that i was lucky (if not well informed) in my choices.

    Reply
  6. I left out an important aspect, which i only implied: i could have paid myself a higher salary in all those years (therefore ‘maxing out my RRSP’).

    Reply
  7. Thank you both, good read. I incorporated my small business over 30 years ago and feel making a contribution to the discussion here by pointing out that, in my view, the statement “ it makes sense to first ensure your RRSP and TFSA are maxed out” needs to take account of other considerations for the RRSP. The main of these is that one may want (i did) to ensure that the RRSP reaches a fair size but not too big to create unwanted tax consequences (mandated large RRIF withdrawals) and limitations. Income in a corp is not subject to the same limitations. Balance is the operational word in my mind. Of course balance is subjective but for me it meant maxing out my RRSP contributions for about 20 years (in which i paid myself mostly salary and little dividends) and then, in the last 10 years, paying myself mostly dividends with no more RRSP contributions. The RRSP still doubled in value but still leaves me with more options to smooth out withdrawals than would otherwise be the case.

    Reply
    1. That’s a fair comment Gio, and very situational. With pension income splitting, age credits, pension tax credits, and spousal rollover on RRSPs, RRSP/RRIFs are usually very tax-effective.

      In fact, Jamie Golombek has a great article that shows that by contributing to RRSPs, with a long enough time-horizon the added tax deferral from RRSPs can actually outperform a corporate investment account after-tax.

      Ben Felix also did a breakdown on this on the rational reminder podcast, and showed that you’re still better off with an RRSP even when your tax rate is 13.5% higher on the RRSP withdrawal than it was when you contributed.

      There are also additional benefits to the RRSP, like estate planning, tax diversification, and creditor protection.

      Keeping in mind that RRSP returns are tax-free, not tax-deferred, and it’s hard to imagine a scenario where an RRSP can truly get too big in my opinion.

      https://www.jamiegolombek.com/media/RRSPs-for-business-owners.pdf
      https://www.youtube.com/watch?v=XLTeXH1RQYs

      Reply
    2. Thanks for your comment, Gio.

      I think it’s very wise, to consider maxing out the personal TFSA and RRSP before paying too much in dividends or salary and avoiding those accounts. Especially the TFSA. Having a large RRSP/RRIF is great but it’s also a big estate liability as well.

      “Balance” comes to mind to me all the time and very much aligned on that!

      I appreciate you sharing your approach.
      Mark

      Reply
      1. Thanks Mark,
        I do find your blog posts very open to, and welcoming of, all perspectives. They are balanced and measured that way. I like to think that they are reflective of the author’s (you 😊) personality. Kudos for that.

        Reply
  8. Hey Mark, I got to many questions don’t want to take up to much of ur time…. My money I put in my holdco to buy stocks, I’m over 50k in passive income so I get taxed hard…anything I can do to pay less taxes? Should I of just bought low yielding stocks like cp, Cnr etc.. so I wouldn’t be over the 50k ? Then I’d pay way less tax, So many scenarios
    Happy Friday
    Brad

    Reply
    1. Hey Brad,

      There are a few things you can do, but whether any of these is right for your situation would require more information and a consultation with the appropriate specialist.

      1) reduce your passive income – this can only be done by either holding stocks that don’t pay dividends or holding ETFs like the Horizons ETFs we discussed. This will ensure most/all of your investments accrue deferred capital gains, meaning no income until you sell and trigger the gains. But really it’s your after-tax returns that matter – so be careful changing up your portfolio just to pay less tax, as you may also reduce your returns.

      2) ensure you’re paying out dividends to yourself to get the refundable tax back. The passive income grind (the PIG as I like to call it!) is really only a loss of tax deferral – it means your business income is taxed at the higher general rate instead of the small business rate. But remember, when you pay yourself eligible dividends from your GRIP balance – that’s the money that’s been taxed at the general rate – you pay less personal tax than you would on ineligible dividends. I have a whole video on the PIG on youtube, but it’s likely information you already know. With Mark Seed’s permission, I can post it here.

      3) shift assets out of your corporation. You can move them to a life insurance policy, to an IPP/RRSP, pay out capital dividends, or wind down the corporation using a pipeline/surplus strip. Please note in all of these examples, additional information is required, and you should definitely talk to an accountant (and maybe a tax lawyer in the case of a pipeline/surplus strip) about it. This is not advice.

      Otherwise, like I said it’s just a loss of tax deferral – it’s not an extra tax. Sometimes the best way to tackle is to just accept it, and go do something fun with your time 🙂

      Reply
      1. Post away here, Mark. Lots of good tax strategies for corporation investing but likely a total return vs. dividend investing approach is better for a corporate account – assuming you intend to keep the corporation intact for many investing years and what that corporation income to snowball a bit.

        I love dividends too but if I invest inside my corporation, IF, then I might go with Horizons ETFs for simplicity – HXS or HXT or something like that.

        https://www.myownadvisor.ca/tax-efficient-investing-horizons-etfs/

        Mark

        Reply
    2. I think your income and plan is outstanding, Brad.

      I know Mark McGrath can’t offer detailed investment advice but I would think one way to lower taxation is buying lower yielding dividend paying stocks like CNR, CP, WCN and even moreso, going with corporate class funds like the Horizons ETFs. Not advice of course or how to change anything in your portfolio but it all depends on your investing goals first – then taxation is an important consideration as well.

      Don’t be in a rush to fix what isn’t broken for you! You’ve done exceptionally well!! 🙂

      Mark

      Reply
  9. Hi Mark: Pertaining to a different topic I see in the Streetwise newsletter of the Globe and Mail that Sandpiper, the owners of AX.UN, have won a court decision for an earlier proxy vote meeting with unitholders of First Capital REIT. They want to remove four trustees including the CEO and add their own to the nine trustees of the company.

    Reply
  10. Hi Mark: A wealthy problem to have indeed, but it wouldn’t seem so bad if it was in the 29% bracket instead of the 33% bracket like it was before Justin changed it when first elected. This topic is apropos as I have just received two tax slips.

    Reply
  11. Hi Mark: With the withholding tax I get the Federal Foreign Tax Credit from T2209. It is a pain to figure out but every little bit helps. Last year I paid a little over $75000.00 including the OAS and had to pay a little over $73000.00 so I thought I would get a refund of $2200.00 but Revenue Canada said I made a math error and instead I got a refund of $4400.00. A lot of cash out and if not for the dividend tax credit more would have to be paid but I declared over $46000.00 as a dividend tax credit.

    Reply
    1. Yes, our tax system is unquestionnably complex and is confusing/complex for the Chartered Accountants I know who support clients.
      I would vote for any party that commits to major tax system reform. Too much bureaucracy and waste in this system.

      Just me maybe!
      Mark

      Reply
        1. Sadly, no (re: no worthwhile politicians) but I would happily vote for any political party that can simplify this mess. It’s a disaster now.
          Mark

          Reply
  12. Hi Mark: this very interesting reading and easy to follow, but I don’t think it pertains to me although I have thought about incorporation since I pay a lot in taxes and want to squeeze as much out of the system as possible. Its hard though when you are single as there are few deductions to be had. The OAS is a wash and so the basic deduction plus the dividend tax credit and pension credit are about the only ones I get. I also get the withholding tax on T2209 but it is insignificant. My taxes are pretty simple with dividends, interests, pensions, capital gain and other. The Brookfield platforms are all broken down and in Bermuda and US so it is a little harder. This is were I get the withholding tax small that it is. I declare too much to get the medical benefit. My brother say’s I shouldn’t mind paying taxes but I saved many years to make it and don’t like the thought of giving it to the government. I’m not sure if my brother was incorporated when he had his own business. There were four partners and they paid their staff well and then at the end of the year they would split the money four ways leaving some to start over the next year. He worked the golden triangle from Brockville to Peterborough to Ottawa, ha!, ha!. I stopped contributing to the CPP when I was laid off at 43 so I sure don’t get $66,600. Like I said my taxes are simple just large.

    Reply
    1. If you don’t have much withholding tax, that’s good.
      I’ve always felt that paying your “fair share” of taxes is a wealthy problem to have. Annoying, but blessed and fortunate. I will probably always feel that way 🙂
      Mark

      Reply
  13. Thanks for the wrap on investing through a ccpc, I like reading about this because sometimes things change and it’s very good to challenge what I thought I knew. As a physician incorporated in Qc since 2007 and as yourself being “my own advisor”, I’d say the complexity is worth the savings. One thing that seems not to be considered in the cibc paper presented here is the fact that when the company will distribute earnings to personal self, the personal tax bracket could (and probably will) be lower. So the investment advantage of keeping funds in your ccpc (in Qc at least) is higher in reality than presented here. In Qc it is not mandatory to see an accountant or lawyer everytime the ccpc distributes a dividend from the CDA (or any dividend in fact) as long as you file the proper paperwork to provincial and federal governments, so the cost of doing so is zero except the time to do it. In my humble experience, once you have paid your personnal debts (unless your ROI is more than about twice your personnal debt service cost), maxed out a TFSA, RRSP and now FHSA for those who never bought a house, the simple thing is the more you leave in the ccpc, the better it is.

    Reply
    1. Your Own Advisor is the best advisor – but kidding aside JF, I think having some professional (tax) advice is usually very smart for complex scenarios.

      I would have to agree with you….”once you have paid your personnal debts (unless your ROI is more than about twice your personnal debt service cost), maxed out a TFSA, RRSP and now FHSA for those who never bought a house, the simple thing is the more you leave in the ccpc, the better it is.”

      Yup, and I would add, slowly take it out for the reasons of tax integration vs. massive/lumpy tax hits.

      Thanks for reading,
      Mark

      Reply
    2. Thanks for the insight JF. I don’t have a lot of experience with QC, and as I’m sure you know QC tends to have a lot of different rules compared to the rest of the country.

      You’re right you don’t need to see an accountant to file a CDA election if you’re comfortable doing it yourself. As you mentioned, just need to file the T2054 with CRA.

      And I agree, generally speaking if you can retain earnings in the corporation and defer that tax into the future – especially into a lower tax bracket – you’ll be better off.

      Reply
  14. Thanks for this article. I am retired and wonder what the best way is to retrieve money from my corporation. I’ll need to talk with my financial accountant and his tax department again I think. This discussion was easy to understand, so thanks for that Mark and Mark.

    Reply
    1. I think talking to your accountant is wise but I know my accountant basically said: “Mark, unless you are growing your corporation well into 6-figures, etc. don’t bother investing. Treat the Corp. as a larger emergency fund, pay yourself a dividend if/when you need the money and enjoy your life.”

      Simple but effective and I would happen to agree with him.

      Do you have a specific question, Jan?

      What do you mean about “to retieve money” from your corporation? Do share and I or Mark can chime in on some general information (not advice).

      Reply
    2. Hey Jan – definitely chat with your accountant about this, as the right way to pay out funds from the corporation will depend on many factors including your other sources of income, the amount of general rate income pool (GRIP) balance you have, any capital dividend account balances, refundable tax balances, etc.

      There are other more complex ways to access funds from the company that we didn’t discuss here, so again – chat with your accountant.

      Glad you enjoyed the article!

      Reply
  15. I buy VGRO (80/20) in my Corporation rather than use Horizon funds. Is this a bad strategy?!!

    I know the bonds are tax inefficient compared to GICs. Am I messing up my corporation by using VGRO?

    Reply
    1. Melvin, I don’t think there is any (BIG) issue with VGRO vs. HGRO as a key example, in that, there is likely more taxation you are paying now while assets are invested inside the corporation with VGRO vs. HGRO or some other corporate-class funds – that are by design more tax efficient.

      Mark McGrath might have a different take but depending on your long-term objectives with the corporate and investments inside the corporation, amongst other assets (RRSP, TFSA, etc.) it might not make too much sense to “upend the apple cart” per se. If your long-term time horizon is >5 or 10 years within your corporation, then certainly a strong consideration is the Horizons ETFs corporate class funds. That is their primary design for taxable investing.

      Thoughts?
      Mark

      Reply
      1. I agree Mark – there’s nothing wrong with VGRO at all. Sure, you may be paying slightly more tax compared to something like HGRO or the other Horizons ETFs, but that’s not likely the difference between meeting your goals and not.

        Something to consider – if you’re still retaining earnings in your company, you could invest any new money into the Horizons ETFs and leave VGRO where it is. But without more information, I don’t want to provide any info that might be misconstrued as investment advice for your specific situation.

        Thanks Melvin!

        Reply
        1. Thanks for replying to me!

          I have VGRO in all my accounts – TFSA, RRSP, personal taxable and corporate accounts.

          I have seven figures of VGRO in my corporate account by now.

          I figure it minimizes my work since I DIY to hold the same ETF in all my accounts.

          As long as I am not doing something that will derail my financial plan by holding VGRO, I am okay to do this.

          A “good enough” plan that I can follow is what I want/need.

          Reply
          1. Often times simplicity trumps complexity. If a one-fund ETF allows you to meet your goals and keeps you disciplined, that alone may outweigh the marginal tax benefits of using a different investment strategy.

            Sounds like you’re doing great, keep it up!

            Reply
  16. Deane Hennigar (RBull) · Edit

    Well done gentlemen. I have not had an incorporated business for about 14 years now but this brings back memories of the complexities and why its smart to get good professional advice.

    Reply
  17. Thank you, both. This was a very informative interview. I need to read more about the rules in QC as I am considering incorporating. Also, it feels conflicting on how much to pay yourself to make room for RRSP. Definitely needs a lot of planning (Aka headache).

    Reply
    1. Most welcome. On a personal level, if not making * LOTS * of income inside corporation AND you need some income to cover living expenses, I think it makes sense to consider a dividend to yourself. That said, there are many considerations as this article covered but it’s important ot remember it’s all about tax integration in the end.

      Thanks for your comment and readership, Dreamer!
      Mark

      Reply
    2. You’re welcome!

      Working with a good accountant will help make these decisions a lot easier.
      When it comes to compensation, something to consider is paying yourself at least enough salary to get the maximum CPP. That’s $66,600 for 2023. You’ll get 18% of that as contribution room for your RRSP, or $11,988.

      I’m not familiar with QC rules, unfortunately, since all of the rules in QC seem to be different than the rest of Canada 😉

      Reply

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