Using Your Corporation As Your Retirement Fund
Can you fund your retirement from your corporation?
That’s the question I answer in my latest video and podcast episode specifically for business owners.
This is part # 2 of the video I did last week, where I go deeper into tax-efficient investment strategies when owning a corporation.
It may seem complicated (if you’re talking to your accountant), but this video breaks down basic and advanced principles, to make it easy for you to plan your retirement.
Watch it to find out:
- Why you should invest inside your corporation.
- Is investing inside your corporation better than RRSP or TFSA?
- How investment income is taxed in a corporation.
- Simple rules for tax-efficient investing.
- Advanced investment strategies.
- Common mistakes by business owners.
- Retirement planning for business owners.
I hope you enjoy it!
Ed
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A follow up to the NE vs E dividends. I guess I now can understand/guess why you said that investment dividends are of different type than active income. For active income small corporations are paying smaller taxes for the income like 15%. But the income from investments is more taxed (as normal capital gains). So the corpo side pre-payed more for E than NE dividends. So the personal side has more credit for E to compensate for this.
Sounds OK? Thanks!
Thank you Ed.
Let’s say that the case is that all personal income is $100K dividends from small business, that in a given year, has 0 active income, but only investments income. I have assumed that these are non-eligible. But you say that they are eligible. NE has 9% tax credit, E 15% tax credit. Would that mean that if I’m taking 100k from my small corp I pay less taxes if the corpo has non-active (investment) income only? (vs 100% active income case)
But you imply that having passive income makes bigger (slightly more?) taxes?
“If you have $10,000 investment income in your corp, then you get a $90,000 ineligible dividend and a $10,000 eligible dividend. It’s only slightly more tax.”
Hello Ed!
Great video as always 🙂
– Once the Small Business owner retires, how long can the Corporation be left open?
I understand that you probably would still have to file business taxes and maintain the business registration.
Wondering if there is some sort of deadline to close the business and get your investment money out.
– If the Corporation is not earning active income (retired owner) and is left open just for the passive income (investments) does the company type need to updated from Consulting for example to Investments?
– I understand the cap is $50,000 in passive income yearly otherwise you start losing the small business deduction. If you are investing for capital gains, does this become $100,000 since only 50% is taxable?
– When you earn passive income ($10,000 for example) and pay it out that same year via dividend, the small business pays around 19.5% tax after the refund you mentioned. Does the small business get to count this dividend payment as an expense so they can reduce the active income earned that year. Like with a salary, you get to count it as an expense. I guess I am asking, where is the advantage? You earn $10K in passive income, company pays around 19.5% tax then the person pays personal tax on top on the same $10K when they pay it out that same year. Or is the advantage that the company has more money to invest from day 1 and this 19.5% tax makes up for that later on.
Ed, just adding my rough understanding for the prev. post case B.
The X is distributed to me as dividend. And this would be non-eligible dividend.
The I get 15% gross up for the X. Then I can tax credits for the non-eligible dividend as for 2023:
9.03% fed, 1.96% BC of the dividend value as the tax credits.
I guess same applies to the case A.
I hope that that’s t the case.
Hi Ed, thank you for the provided reasoning. Seems like I don’t fully understand this.
I get that leaving (and investing) $ in a corpo is better tax wise, and this is what have been doing. Just move $ to personal as little as possible. But the small $6000 (now changed) does not change that much in the picture, was my thinking.
Maybe I don’t understand the differences for 2 cases:
A. Have substantial active income, and pay yourself e.g. 20% of it, say $X. X comes from the active income. Rest is invested in the corpo.
B. The corpo has no active income, and the X comes from the corporate investments.
What are the consequences for taxing, on personal side? Person for B pays more taxes?
Thanks!
Hi Bogdan,
If you have to take a higher dividend to contribute to your TFSA, then it probably is not worthwhile. You have to pay tax on that dividend, which gives you less to invest in your TFSA.
Normally, it is better to leave the higher amount invested inside your corporation, since you have more invested.
If you have active income inside your corporation and are withdrawing some of it for personal income in dividends, the investments in the corporation are taxed almost like a TFSA. This requires some explanation and understanding the full transaction.
The high passive income tax on corporations does not apply if you pay out all the taxable income to yourself in dividends. The investment income inside your corporation is likely a lot less than the dividend you are paying yourself, so the amount of the investment just means an eligible dividend instead of an ineligible dividend for that amount.
For example, you have $200,000 income in your corp and you are paying yourself a dividend of $100,000/year. The $100,000 is taxed to you as an ineligible dividend. If you have $10,000 investment income in your corp, then you get a $90,000 ineligible dividend and a $10,000 eligible dividend. It’s only slightly more tax.
In short, leaving the money in your corp leaves you a higher amount of investments and still quite low tax on any investment income.
Ed
Thanks Ed. This is what I have been doing. Still I think it is good to fill the TFSA. It might grow a lot over time without taxes later.
Hi Darren,
Yes. Leaving money inside your corporation is a decent tax deferral typically about 30%. There isn’t a limit, like with RRSPs. Investments inside a corporation are taxed at the highest rate about 50% or more, unless you pay out the investment income to your self (and lose the tax deferral on that part).
Therefore, it’s quite beneficial to invest tax-efficiently inside your corporation to avoid the high tax rate and be able to leave your money inside your corporation without having taxable income you need to pay out to yourself.
The optimal strategy is to let your investments grow inside your corporation with little or no tax, and then withdraw it bit-by-bit as you need after you retire as part of your retirement income.
Ed
Ed, I appreciate your thoughts on IPPs.
Given the advantage of unlimited savings and partial tax deferral within a Corp, I suppose that’s why you emphasize to invest very tax efficiently with Corp class funds (or maybe Total Return ETFs). Particularly in those preretirement years where you don’t want lumpy investment income from your corporation to throw your personal tax picture out of wack.
Hey Darren,
Glad you find my content useful.
This video discusses the advantages of investing inside your corporation and having a holding corporation. It allows you to defer tax on corporate income. You pay the low corporate tax about 12%, but defer the personal tax about 30% by leaving your money inside your corp.
In my next video & blog post, I ask for topics to talk about next. I have leterally hundreds of topics in my head and I want to talk about topics relevant to my listeners.
I may not talk about IPPs, though, since not that many people would be interested, so I’ll give you the short answer here. I’m also not a fan of IPPs.
IPPs can work for regular people, but not for growth-focused people. IPPs are marketed that they give you more contribution room than RRSPs, but growth-focused people that invest in equities should get higher returns over time and they run into the IPP limits. For equity investors, IPPs give you less contribution room than RRSPs.
IPPs can allow you to defer tax by leaving it in your company and getting a tax deduction for contibutions, are good for estate planning, etc., but there are annual costs and actuarial audits every 3 years. The main factor, though, has always been amount of contribution room. It works for conservative, balanced investors, but not growth-focused equity investors.
Ed
Hey Ed, love your blog content! Very informative and great to see someone who gives advice from a “what I would do” rather than the typical “cover my behind” perspective.
With the new changes to substantive control around CCPCs and taxing non-CCPC private corp investment income at the punitive CCPC rates, is a holding corp still a decent option? Or should business owners start looking at IPPs or other options?
Would love to see a video on this topic!