Your Corporation – What You Need To Know (If You Don’t Understand Your Accountant)
Do you own a business?
If yes, then you’ll love my latest video and podcast episode. I cover the few things that you really need to know about corporations.
You’ll learn:
- When should you incorporate.
- If you should get a holding company.
- Whether you should pay yourself a salary or dividend.
- Common mistakes by business owners.
- If you should invest in a corporation, RRSP or TFSA.
I hope you enjoy it!
Ed
Planning With Ed
Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax accountant, expert in many tax & investment strategies, and a popular and passionate blogger.
Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.
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Great video as usual Ed. I have a question about the small business discount and investment income. Is it worth it to invest funds in a holding company to generate investment income, even though any investment income over $50,000 will be taxed and will grind down the small business discount for a corporation (and anything above $150,000 the small business discount would be almost zero, ie an additional 6% corporate tax). And yes, the investments would be invested in more equities than a fixed income product to try to maximize the potential investment income. Just wondering your thoughts on this topic.
Hi Akip,
Yes, you are exactly right that it might. It depends on a lot of things, such as how many kids you have and their ages, plus what your actual income is (or what you can make it be).
I have a post on the topic of the Canada Child Benefit (CCB) and how the clawback is essentially a “tax on parents” (https://edrempel.com/new-tax-on-parents-and-8-ways-you-can-benefit/ ).
You are right that the clawback is based on the grossed-up dividend. If it is your own corporation, that’s usually only a 15% gross-up, but the CCB clawback is based on this 15% higher figure.
There are tables of marginal tax brackets, but your real marginal tax bracket is how much more tax (including clawbacks) you pay for $1 more the type of income you have.
Most people get a tax refund by taking an inelible dividend from their own corporation and contributing it to their RRSP. However, the refund is not large. The tax on the clawback may well be more.
The answer to your question depends on a bunch of factors, but is worth looking at to see what is the lowest tax option for you.
Ed
Hi Ed,
There are a lot of creative strategies involving investments in a corporation and RRSP. They can save you tax, split tax, or get you more government pensions (such as avoiding the clawbacks on OAS or GIS). The creative options are huge.
For exmple, the GIS is a program for low-income people, but we have helped people with multi-million portfolios live comfortably while collecting the full GIS. (This article gives you an idea of how creativity can work: https://edrempel.com/make-your-retirement-comfortable-with-the-8-year-gis-strategy/ ).
Your strategy of removing some RRSP in your early 60s to possibly keep your future RRIF withdrawals in lower tax brackets may or may not work. You are prepaying some tax, but could be avoid higher tax later. The tax you prepay could be money that remains invested. It takes some math and thinking it through to figure out which is best.
Corporations do have the benefit of not ever having mandatory withdrawals. You probably will want to withdraw in the future as part of your retirement lifestyle, but the amount you withdraw is entirely up to you.
My comment in the video is generally true, but there are lots of exceptions. If you withdraw from your corporation to contribute to your RRSP, you probably will save some tax that year. The RRSP deduction is usually more than the tax on an ineligle dividend (from your own corporaton) of the same amount. You could also contribute to a spousal RRSP. The tax you save can be money you leave in investments inside your corporation.
There are a lot of exceptions where creative strategies may mean a different choice is better for you. Our team loves being creative and thinking through all the what-ifs to figure out which option results in the least tax.
Ed
Hi Akip,
I have a detailed article on the CCB and strategies to avoid having it clawed back here: https://edrempel.com/new-tax-on-parents-and-8-ways-you-can-benefit/ .
Ed
Hi Ed,
Your question is complex and would require doing the math on various options. There isn’t a general answer.
Ed
Hi Ed,
If one has a corporation but also kids at home, does that tip the scales one way or the other with regards to taking salary vs dividends as they relate to the Canada Child Benefit payments? As I understand it, the CCB is based on your grossed-up dividend amount – so could be negatively affected? I never see this mentioned anywhere – perhaps it doesn’t matter?
Great Video Ed, as always.
One question I have is you mention RRSP use over keeping money in Corporation (20:30 or so in video). Does that also apply when you are retired and in your early 60’s where we are trying to remove money from RRSP in an attempt to keep mandatory RRIF withdrawals lower later on to reduce the potential for CPP clawbacks?